Show me the value: Investing in carbon removal, part three

Read this article to understand:

• The role of carbon removal strategies in institutional portfolios
• The investment approach of Aviva Investors’ Carbon Removal Fund
• The financial and sustainability objectives of the strategy

It is widely recognised that reducing carbon emissions will not be enough to limit the global temperature rise to the Paris Agreement target of 1.5 degrees Celsius, and that, as a consequence, we will need to concurrently remove carbon dioxide from the atmosphere.

The UN Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report (April 2022) states that “the deployment of carbon dioxide removals to counterbalance hard-to-abate residual emissions is unavoidable if net zero emissions are to be achieved”.¹

For those investors with net zero ambitions, delivering on them means identifying and participating in high-quality strategies that remove carbon. These might involve investments in projects designed to improve nature’s capacity to absorb CO₂, such as afforestation schemes, or in technological carbon removal. Both types of project can produce high-quality carbon removal credits (see part two),² which certify the removals and can be subsequently bought and sold on credit markets, or used by institutions to offset their emissions.

For instance, along with a focus on decarbonisation, Aviva anticipates the need to offset residual emissions with carbon removal credits as part of its net zero ambitions. The firm’s latest Transition Plan made clear that waiting until its net zero deadline to start thinking about a solution would be too late.³ As such, it is working to support an increase in high-quality carbon removal at scale.

High-quality carbon removal credits also appeal to universal owners such as pension funds. These institutions are being attracted by carbon removal strategies partly because they stand to perform strongly under climate scenarios in which the carbon price is predicted to increase. In this sense, an investment rationale can be made that points to investments in carbon removal strategies bolstering portfolio resilience, providing additional transition risk hedging for the rest of a pension fund’s portfolio.

When creating the Aviva Investors Carbon Removal Fund (CRF), we wanted to structure a solution that offers real world impacts – decarbonisation and other sustainability-related outcomes like biodiversity gain and a positive social impact. But first and foremost, we wanted to create a strategy that makes sound investment sense.

Through investing into nature-based and technological carbon capture solutions, the CRF aims to offer value in two distinct ways. The “dual optionality” of the fund means investors can purchase high-quality carbon removal credits to meet net zero obligations, or hold onto them and sell them at a later date at a potential premium.

The carbon credit market

Increasing demand, expectations of quality, and limited unit supply costs all stand to contribute to making high-quality carbon removal credits scarce and expensive.⁴

Over the past five years, carbon removal credit prices – particularly in the voluntary carbon market – have seen a significant increase, especially for high-quality and nature-based removal projects.⁵ A 2025 report from the World Bank found buyers were willing to pay more for removal credits over avoidance or reduction credits, especially when they were nature-based or have strong co-benefits, such as positive impacts on biodiversity or local communities.

While the overall carbon credit market has seen some softening over the past 12 months, a trend that is attributed to oversupply in other credit types, demand for carbon removal credits has remained relatively resilient.⁶

According to the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), projections as at 2021 suggested that by 2030, the market could reach one-to-five gigatons of CO₂e, with approximately two-thirds (around 66 per cent) of that supply coming from nature-based projects.⁷ Whether an investor retires the credits to support their own net zero targets or holds them as downside portfolio protection to protect against climate risk and carbon pricing, they could therefore benefit from potential price appreciation.

In addition to this, it is worth remembering that not all carbon credits are created equal. Early investors can gain access to innovation pipelines and influence the future of the carbon market by providing financing for emerging technologies, such as direct air capture or ocean carbon removal. Buying now secures access ahead of an expected increase in competition for these assets.

How the CRF can help investors meet net zero obligations

At the point of subscribing to the CRF, investors can opt to realise the value of their investment by taking the carbon credit itself and retiring it at maturity (taking it out of circulation) as part of their own net-zero pledge. 

This could be useful for those investors with long-term net-zero targets, as the price of carbon, and therefore the cost of offsetting emissions, is expected to appreciate over time. Even with a concerted push to decarbonise economies, some residual emissions (those that cannot be eliminated by other means) will remain, and this should ultimately incentivise greater demand for carbon credits as an offset.   

It is not just Aviva that is taking this approach. We are seeing several global companies come forward with pledges to remove emissions: for example, Microsoft has promised to reduce its emissions by half, and remove the rest, as part of its ambition to become a carbon-negative company by 2030. Additionally, the firm has also committed to remove an amount equivalent to its total historical emissions by 2050.⁸

Portfolio resilience and transition risk hedging

As an alternative to retiring carbon credits, investors in the CRF can opt for an alternative strategy whereby, at maturity, they realise the value of their carbon credits by selling them in the market via a third-party broker. 

Motivations behind this approach are wide-ranging. For pension funds, this strategy may make sense as a hedge to investments elsewhere in the portfolio, whose value may be negatively impacted by rising carbon prices. The CRF is positioned to perform in a climate scenario that predicts future carbon price increases. In addition to the value of carbon credits themselves, the CRF also aims to capture other revenue streams. For example, investing in sustainably managed timberland assets will enable the fund’s investors to access another source of returns. 

Investing in natural capital can also enhance portfolio resilience through the diversification benefits it offers. Because the value of timber, for example, is related to the growth of trees, and not the fluctuations of global markets, these returns should be uncorrelated to traditional financial assets.

Whilst not included as part of the fund’s return target, further maturation of the carbon credit market more generally, and the expected emergence of biodiversity markets (based on biodiversity credits generated by conservation projects), may further boost demand for high-integrity carbon credits.

Investing for impact

Through its investments in nature, the CRF seeks to bring about broader benefits. It is now widely recognised that preserving natural capital assets, and preventing further biodiversity loss, secures economic value. After all, a healthy natural environment provides things that are essential to human societies and economies, such as drinking water, energy, food, medicines, flood control and disease regulation (see part one).⁹

In the case of pension schemes, there is increasing acknowledgement that safeguarding a member’s standard of living in retirement cannot be purely about financial returns, that the systemic impacts of further natural capital depletion have the potential to compromise this, and that real impacts matter.

The CRF will focus on maximising carbon yields; however, biodiversity and social considerations are at the heart of the projects in which it invests.¹⁰ The fund will explore habitat creation through both restoration and afforestation activities, seek to enhance soil and water quality (as well as potentially reduce flood risk in project areas), and collect biodiversity data, to be in a position to take advantage of biodiversity credits once this market is more established. The CRF also aims to deliver social benefits to communities, such as through creating jobs in both developed and emerging markets, stimulating local economies, and enhancing on-site facilities and public access.

It is our conviction that a well-designed carbon removal strategy can represent a sensible approach to generating value within a blended portfolio, whilst simultaneously making a direct contribution to net zero targets and social and biodiversity objectives. Learn more about the Carbon Removal Fund here.