From niche to mainstream: National Treasury’s plan to institutionalise carbon credits is positive for investors

By Poobalan Govender

South Africa’s carbon credit market has historically functioned on the fringes of the financial system. Despite the country’s significant potential for decarbonization projects, the market has been stalled by a perfect storm of regulatory ambiguity, high administrative costs, and a lack of liquidity. However, a consultation paper released by the National Treasury, titled ‘Developing the South African Carbon Credit Market’, indicates that this may be changing.

Amongst the paper’s recommendations is a proposal that carbon credits be classified as unlisted securities. This lays the groundwork for the government to elevate these credits from a simple compliance tick-box into a legitimate, tradable asset class.

The National Treasury's proposal is a response to several structural hurdles that have deterred institutional investors. Currently, carbon credits exist in a legally ambiguous grey area - neither fully commodities nor financial instruments - which complicates ownership and enforcement.

A concern has been the barrier to entry for project developers. These are the entities - ranging from renewable energy firms to land restoration specialists - that initiate and manage the physical projects that reduce or remove carbon from the atmosphere. To earn a credit, these developers must prove their project is "additional" (meaning the carbon reduction wouldn't have happened without the project).

Historically, South African developers have had to rely on expensive international validation bodies to certify their work, which significantly raises compliance costs and creates long delays. Treasury's recommendation to empower the South African National Accreditation System (SANAS) to certify local verifiers will be a game-changer, lowering the barrier for smaller, domestic projects, allowing local developers to bring credits to market more efficiently and cost-effectively.

Reforming market architecture to reduce risk

South Africa’s existing Carbon Offset Administration System (COAS) is designed for Department of Electricity and Energy to approve eligible carbon offset projects and carbon offsets, not active trading. This leads to opaque, bilateral transactions where finding a fair price is difficult.

The reclassification of carbon credits as unlisted securities under the Financial Markets Act will provide the rule of law that institutional investors require, ensuring legal certainty required for participants to interact with confidence, knowing they have recourse in cases of insolvency. For asset managers, this reduces execution risk and aligns carbon credits with some of the same infrastructure used for traditional stocks and bonds.

Why it matters for your portfolio

For investors and fund managers, this shift offers a new avenue for capital allocation. As the South African carbon tax regime becomes more stringent from 2026, the demand for high-integrity offsets will increase.

Carbon credits allow for a distinct alternative asset class with returns linked to climate policy and decarbonisation rather than traditional equity cycles. Not only will these assets provide a tangible way for portfolios to meet sustainability mandates, but standardising contracts and registries will allow for regulated over-the-counter (OTC) trading, improving price discovery and liquidity.

The broader ‘green’ landscape

While National Treasury looks to formalise the carbon market, sustainability is becoming embedded across the broader financial services industry. From the cars we drive to the fish we eat, almost everything now carries a rating indicating its environmental impact. In the insurance sector, this "green" transition is taking several forms including providing cover for eco-friendly technologies like electric vehicles (EVs) and residential solar; supporting choices like using sustainable materials to rebuild a home after a claim; and using green behaviour such as energy efficiency or good driving as a factor in underwriting or premium discounts. Insurers, as significant institutional investors, are increasingly integrating Environmental, Social, and Governance (ESG) factors into their portfolios to ensure long-term sustainability.

The potential for growth

Quantifying the "green insurance" market share is complex because sustainability is now woven into the fabric of operations. However, looking at the technologies that generate carbon credits reveals an increasing trend.

In South Africa, new-energy vehicles (including hybrids) made up around 15 000 units in 2024, roughly 3% of total sales. While this is low compared to China (60%) or Europe (25%), the trajectory is upward. Similarly, residential solar adoption in South Africa is currently around 4%, echoing the global average but trailing leaders like Australia at 30%.

These figures suggest significant headroom for growth. While Baby Boomers are often seen as prudent, traditional investors, Millennials – those born between 1981 and 1996 - are leading a shift toward values-based investing. This generation - and those following - increasingly prioritise the impact of their capital on the planet alongside financial returns.

The road ahead

The success of the National Treasury’s proposal hinges on coordination between it, the Department of Forestry, Fisheries, and the Environment, and financial regulators. The goal is to move toward a "zero-trust" style of verification where market integrity is so robust that even the most cautious institutional investor feels secure.

By treating carbon credits as securities, South Africa will not just be honouring its Paris Agreement commitments; it will be creating a sophisticated financial ecosystem that turns environmental responsibility into a viable investment strategy.

** Poobalan Govender is the head of structured solutions at Management Structured Investments.

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

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