Industry Insights: Asset Managers Double Down on the Carbon Market

Asset managers are ramping up exposure to the carbon market, drawn by strong returns, rising demand and a shifting regulatory backdrop, but greater trading activity is raising the stakes on partner selection. This piece unpacks what's driving institutional appetite for carbon credits and offsets, the compliance and integrity challenges reshaping the market, and why a strong escrow partner is essential to executing carbon trades securely and compliantly. 

Asset managers are ramping up their exposure to the carbon market, drawn by strong returns, rising investor demand and a shifting regulatory backdrop. But as the market becomes more widely traded, they need to get their choice of partner right.  

Carbon Credits vs Carbon Offsets Decoded 

At their core, both tradable instruments represent a tonne of CO2 either avoided or removed, but the mechanisms behind them differ.  

Carbon offsets are generated by specific climate projects such as reforestation, which generate removal credits, or renewable energy schemes, which generate avoidance or reduction credits, and are typically bought on a voluntary basis by companies looking to compensate for emissions they can’t yet cut.   

Carbon credits, in contrast, are issued under a compliance scheme, such as the EU or UK Emissions Trading Scheme, which sets a hard cap on how much a regulated company is allowed to emit.  

Whether a company then needs to buy or sell credits depends on whether it sits under or over that cap, and it is this supply and demand dynamic, tied to a fixed regulatory limit, that creates a tradable market for investors.1

Why Asset Managers are Buying into Carbon 

Although Environment, Social, Governance (ESG) funds had seen significant outflows over the previous 12 to 18 months, investor demand for climate-linked strategies remains more nuanced than the headline numbers suggest. According to LSEG Lipper Alpha Insight, UK sustainable fund flows continue to show selective support for environmental themes, even as investors become more discriminating2. Against that backdrop, institutional demand for the carbon market, particularly carbon credits, is trending upwards as allocators look for scalable sustainability exposures with clearer return potential.  

According to MSCI, $22 billion was committed and deployed to the carbon credit market in 2025, a 72% jump from 2024, and more than five times what was allocated in 20213, underscoring just how quickly this once-niche sustainability tool is moving into the mainstream. market potentially reaching $250 billion by 20504. 

Asset managers are certainly bullish about the carbon market’s potential, with 81% of venture capital investors telling a survey by law firm Pinsent Masons that carbon credits will have a critical role to play in helping corporates meet their net zero obligations5.    

As companies increasingly look to reduce their CO2 footprints, with 41% of the top 2000 corporates now setting themselves net zero targets across their entire value chains, up from 27% in 20216,  the carbon market is becoming more scalable, creating a deeper pool of investment opportunities for yield-hungry allocators.  

Eager for better and uncorrelated returns, institutional investors are pushing managers to bump up their exposures to the carbon market. This chimes with a recent Morgan Stanley survey showing that 86% of institutional investors expect the proportion of sustainable assets in their portfolios to rise over the next two years7. As more allocators incorporate sustainability criteria into their investment mandates, asset manager activity in the carbon market will only grow.  

Over the last few years, the EU has introduced a succession of regulations focused on sustainability and ESG, including the Sustainable Finance Disclosure Regulation (SFDR), now itself under an overhaul, with a SFDR 2.0 proposal working through the EU legislative process that would replace the current fund categories with a new three-tier classification system, a reminder that the compliance goalposts keep moving.   

With global regulators continuing to prioritise sustainability, managers who get ahead of these changes now will be better placed than those scrambling to catch up later.  

Carbon Markets Feel the Heat 

When investing in carbon markets, asset managers do need to take certain nuances into consideration. 

Although compliance carbon markets such as the EU and UK ETS are tightly regulated, their rules are not always fully aligned. For example, the EU and UK take different approaches to emissions-reduction timelines8. 

These regulatory divergences increase operational complexity and the costs of compliance for asset managers, all at a time when the industry is already dealing with spiralling overheads.  

Voluntary carbon markets face even more acute challenges. This is because unlike the compliance carbon market, the voluntary carbon market is not regulated. As a result, a lack of transparency and bad behaviour has been allowed to proliferate in some corners of the market, resulting in lower quality projects and even outright fraud.  

Efforts to remedy these shortcomings, however, are underway, with groups such as the Integrity Council for the Voluntary Carbon Market working on initiatives to deliver better transparency and standards in the sector9. An example of the shift towards greater market infrastructure is in November 2025, when UG Group announced that it will list an initial 200,000 tonnes of its FSA-registered Carbon Plant exchange, a blockchain-enabled platform offering up to 10-year forward contracts for evidenced credits10. 

The Partner That Can Make or Break the Trade 

The carbon market is a rapidly growing and evolving asset class, and one that is on the radar of asset managers and investors.  

If asset managers entering the carbon market are to gain a real edge, they will need to engage with best-in-class escrow providers who can support their bespoke transaction requirements.  

Registries underpin carbon market integrity by recording issuance, ownership, transfer and retirement, improving traceability and supporting secondary trading. Tokenisation may further streamline execution, including competitive auctions, but only where backed by robust registry infrastructure, verification standards and disciplined transaction oversight. 

In practice, this support can take several forms. In a competitive sale of carbon credits, escrow can operate on a delivery-versus-payment basis: the provider holds the buyer's funds, completes source-of-wealth and anti-money laundering checks, and only instructs the registry to release the credits once those checks are satisfied, with funds released to the seller at the same moment. For longer-dated transactions, where there is an extended gap between commitment and settlement, an upfront deposit held in escrow gives both sides comfort, without exposing a bank to an unfamiliar counterparty's ongoing KYC obligations or a law firm to client-money regulation. 

A high-calibre escrow provider can help asset managers fulfil their regulatory compliance obligations, namely ensuring that transactions adhere to the Payment Services Directive 2’s (PSD2) provisions.  Escrow also plays an invaluable role in reducing financial and legal risk during complex transactions, as well as streamlining processes by facilitating timely, accurate and secure transaction closes.  

For managers looking to navigate the carbon market with confidence, escrow deserves a seat at the table early in the transaction process, not as an afterthought.   

Get the fundamentals right, and doubling down on carbon becomes a calculated position rather than a leap of faith. 

1 Carbon Credits vs. Carbon Offsets - Carbon Credits

2 Everything Green Flows, UK: H1 2026 | Lipper Alpha Insights | LSEG

3 MSCI – May 14, 2026 – USD 22 billion points to future carbon market demand

4 MSCI – January 6, 2025 – Frozen carbon credit market may thaw as 2030 gets closer

6 Pinsent Masons – June 2, 2026 – Carbon credits could be a net zero silver bullet but challenges remain

6 Accenture – Destination Net Zero 2025 

7 Morgan Stanley – November 20, 2025 – Most institutional investors maintain a positive outlook for sustainable investments

8 Energy Advice Hub – December 16, 2025 – The UK ETS: Frequently asked Questions

9 Robeco – Carbon offsetting share classes

10 Carbon Capture Journal