The short answer: when three things are already in place before the bond is sold. A creditworthy buyer has signed a long-term offtake for the credits the equipment will produce. The credits themselves are durable and registry-verifiable, so “delivered” is a fact a third party can check. And the bond’s structure lets investors keep their principal while staking only their return on delivery. Citi’s $72 million Carbon Removal-Linked Note for Applied Carbon, closed this month, is the worked example — the first outcome bond Citi has tied to verified carbon removals.

The deal, in one pass

Citi issued a $72 million, 3.5-year, principal-protected note whose proceeds finance Applied Carbon’s mobile biochar deployment across Texas farmland. There are no conventional coupons. Investors receive payments linked to the generation, verification, and delivery of carbon removal credits the project produces — if the credits are not issued and delivered, the payments tied to them do not flow.

Applied Carbon’s equipment is the reason the financing has to arrive first. Its mobile pyrolysis units process crop residue directly in the field, converting agricultural waste into biochar in a single pass and applying it to the soil, where the carbon stays stored for hundreds of years. The machines have to be built and deployed before a single credit exists. That ordering — equipment, then credits, then revenue — is the whole problem the note is designed to solve.

Nuveen participated as a primary buyer, citing the note’s relative value, its impact reporting, and the credit backing of the project’s off-taker. Microsoft holds a long-term carbon credit purchase agreement with Applied Carbon, signed in 2022, covering a portion of the project’s credits. Sonia Battikh, Citi’s Global Head of Carbon Offsets Trading, framed the gap the structure fills: “The voluntary carbon market requires new financial structures to bridge the gap between investor capital and the long-term funding needs of carbon removal projects.”

The timing mismatch is the market’s core problem

Carbon removal projects spend money in the opposite order from the one lenders prefer. Conventional debt wants a revenue history; a removal project has a purchase contract and a field. Venture capital will fund the early stage, but it prices for equity upside and exits, not for fleets of field equipment that pay back over years of credit deliveries.

The World Bank named this exact mismatch when it issued its own credit-linked outcome bond for a Vietnam water-purifier project: projects need up-front financing for capital and operating costs, and the carbon credits arrive a year or more later, after verification. Its answer was the same shape as Citi’s — channel capital-market money in at the start, and link what investors earn to credits actually issued. The Citi note applies that development-finance pattern to a commercial removal developer, at commercial scale, with a corporate offtake standing behind the revenue instead of a donor.

How the structure re-slices the risk

Principal protection removes the risk institutional fixed income cannot hold. A pension-grade buyer cannot put client principal on whether a Texas biochar fleet hits its production plan. Protecting the principal takes that question off the table. What remains at risk is the return — and the return is allowed to depend on delivery, because that is the part the buyer is being paid to underwrite.

Delivery-linked payments keep the outcome incentive inside the security. In a conventional bond, the issuer owes the coupon whether or not anything is removed from the atmosphere. Here the payments exist only when verified credits are generated and delivered. The investor’s upside and the project’s environmental output are the same event, which is what “outcome bond” means when the label is earned.

The anchor offtake turns a delivered credit into a receivable. A verified credit with no buyer is inventory. A verified credit under a long-term purchase agreement with Microsoft is contracted revenue. The offtake is what lets a structurer model the cash flows, what lets Nuveen describe the note as credit-backed, and what separates this financing from a bet on future spot prices in the voluntary market.

What the offtake does — and what it does not do

The Microsoft agreement was signed in 2022, four years before this note. The bond did not create that demand; it borrowed against its credibility. That sequence matters for anyone hoping to copy the structure: the financing was possible because the revenue anchor predated it, not the other way around.

The limits deserve equal weight. The offtake covers a portion of the project’s credits, not all of them. The full credit volume, the delivery schedule, the price per credit, and the note’s exact return formula have not been disclosed publicly. An anchor offtake makes a project financeable; it does not, by itself, underwrite every tonne the equipment could produce, and no reader of this deal’s public record can verify the coverage ratio.

There is a second question the headline number cannot answer. In the World Bank’s $100 million plastic waste outcome bond — a deal Citi itself lead-managed — about $14 million of the headline was the up-front financing the projects actually received. Outcome-bond headlines describe the note, not the project capital. How much of this note’s $72 million reaches Applied Carbon as deployment capital, and on what schedule, is not in the public record either. It is the first question a diligence process should ask of any deal built this way.

When this shape works

The credits are durable and verifiable. The structure prices delivery, so delivery has to be measurable by an independent registry on a schedule the note’s term can contain. Biochar’s multi-century storage and established verification pathways fit; a credit class with contested permanence would not.

A creditworthy anchor buyer signed before the financing. The offtake is the revenue story the structurer sells to the bond buyer. Without it, there is nothing to link payments to except hope and spot prices.

Equipment is the bottleneck, not demand. This shape funds machines that produce contracted output. It does not fix a project whose problem is finding buyers.

The developer can survive the verification lag. Payments follow issued credits, and issuance trails production. A developer without the balance sheet — or the structurer’s up-front allocation — to bridge that gap will stall between making biochar and getting paid for it.

Applied Carbon’s founder and CEO, Jason Aramburu, described the ambition plainly: projects like his “can be structured and financed like any other asset.” This note is evidence for a narrower and more useful claim. A removal project can be financed like an asset when a named buyer has already agreed to purchase its output, the output can be verified by someone other than the seller, and the financing is honest about which risks sit with the principal and which sit with the return. Where any one of those three is missing, the outcome bond is not a shortcut. It is a label.

Deal coverage: ESG News, ESG Post, Carbon Herald, and CarbonCredits.com, October 2026 — terms consistent across all four. Outcome-bond precedent: World Bank outcome bond program materials, including its Emission Reduction-Linked Bond and Plastic Waste Reduction-Linked Bond documentation. Undisclosed items are noted in the text where they occur.

A carbon credit is a tradable certificate representing one metric tonne of carbon dioxide equivalent that was either removed from the atmosphere or prevented from being emitted. A project generates credits by demonstrating — under a standard, verified by a third party — that its activity reduced emissions beyond what would have happened anyway. A buyer purchases credits and retires them, claiming the reduction against its own footprint. The GHG Protocol is the accounting framework that defines the footprint in the first place.

The GHG Protocol tells a company how to count its emissions. The credit market sells instruments companies use against that count. Confusion between the ledger and the instruments is where most of the trouble — honest and otherwise — begins.

What Is the GHG Protocol and What Does It Count?

The GHG Protocol is the most widely used international standard for measuring and reporting greenhouse gas emissions, developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). Its Corporate Standard sorts a company’s emissions into three scopes: direct emissions from sources it owns or controls, indirect emissions from the energy it purchases, and all other indirect emissions across its value chain, upstream and downstream.

The scopes, translated:

Scope 1 is what you burn yourself: fuel in your furnaces, your fleet’s diesel, refrigerant leaks from your equipment. If the emission leaves a stack, tailpipe, or valve you control, it is Scope 1.

Scope 2 is the energy you buy: electricity, steam, heating, cooling generated by someone else. The emissions happen at the power plant, but the protocol assigns them to you because your demand caused them.

Scope 3 is everything else in the value chain: emissions embedded in purchased goods, business travel, employee commuting, product transport, and what happens to products after sale. For most companies Scope 3 is the largest category and the hardest to measure, because it depends on data from suppliers who may not measure it themselves.

The protocol’s contribution is comparability: two companies using it produce inventories built on the same definitions, which is what makes reporting, targets, and — eventually — credit purchases meaningful. A footprint figure with no stated methodology behind it is a marketing number. A footprint built on the Corporate Standard is an account that can be audited.

How Does a Carbon Credit Get Created and Retired?

A carbon credit is created when a project developer carries out an emissions-reduction activity — protecting a forest at risk of clearing, capturing methane from a landfill, distributing cleaner cookstoves — and has the reduction quantified and verified under a carbon standard, after which a registry issues credits with unique serial numbers into the developer’s account. Credits move between accounts as they are sold, and a credit’s environmental claim is consumed when a buyer retires it in the registry, permanently, in their own name.

Three mechanisms in that chain carry the integrity of the whole market:

Additionality. The reduction must be additional — it would not have happened without the credit revenue. A forest nobody intended to cut, a renewable plant that was already profitable: reductions there may be real in a physical sense but were not caused by the credit, so selling them lets a buyer claim progress that the purchase did not create.

Verification and the registry. Independent auditors check projects against the issuing standard’s methodology, and registries track each credit’s serial number to prevent double-selling. The registry is the market’s land title office: if a tonne appears in two accounts, the market has failed at its most basic job.

Retirement. A purchased credit sitting in an account is an asset, not a claim. Only retirement — permanent removal from circulation, recorded publicly — converts it into the buyer’s offset claim. Credits resold onward carry their claim with them; retired credits are spent and gone.

Where Do the Scams Live?

The scams in carbon markets live in the gap between the claim and the atmosphere: credits issued for reductions that never happened or would have happened anyway, credits counted twice, and credits marketed to buyers who do not understand — or prefer not to understand — what they purchased. Investigative reporting and academic reviews have repeatedly found categories of credits, particularly some older forestry credits, that likely represented little real reduction.

The recurring failure patterns, stated factually:

Phantom reductions. Baseline inflation is the classic: a project claims it prevented emissions against a hypothetical scenario — deforestation that was asserted but implausible — and is credited for the difference. The credits are real certificates backed by an imaginary counterfactual.

Double counting. The same reduction claimed by the project developer, the host country toward its national targets, and the purchasing company toward its own. Standards and registries exist largely to prevent this; it persists at the seams between systems.

Permanence failure. A forest credit represents carbon stored in trees. Trees burn. If the stored carbon returns to the atmosphere in a wildfire twenty years later and no buffer or insurance mechanism replaces it, the buyer’s claim evaporated with the forest.

Retail fog. At the consumer end, credits and offsets are marketed with language — “carbon neutral flight,” “net-zero product” — that implies a precision the underlying instruments do not have. Regulators have begun treating unsupported neutrality claims as a consumer-protection issue, which moves this category from embarrassment risk to legal risk.

The proportionate response for a buyer is not to abandon the market but to buy like an auditor: favor credits with conservative baselines, strong registries, buffer pools against reversal, and transparent project documentation — and make public claims that match what the instruments can actually support. Count honestly under the GHG Protocol, reduce what you can directly, and let credits carry only the weight they can bear.

The GHG Protocol, given its full weight

The GHG Protocol is the accounting system underneath nearly every emissions number in this field. Launched by the World Resources Institute and the World Business Council for Sustainable Development — its Corporate Accounting and Reporting Standard first published in 2001 and revised in 2004 — it defines how an organization draws its boundary (equity share or control approaches), what it counts, and how the counting is reported. Its architecture is the three scopes: Scope 1, direct emissions from owned or controlled sources; Scope 2, the emissions of purchased energy; Scope 3, everything else in the value chain, upstream and downstream. The Scope 2 Guidance added dual reporting — every company reports location-based (the grid it physically draws from) and market-based (the energy it contractually buys) figures side by side. The Scope 3 Standard divides the value chain into fifteen categories, from purchased goods to investments, which is why Scope 3 is both the largest number most companies report and the one with the widest estimation error. This site’s carbon accounting guide teaches the working method; this page’s point is institutional: when a law, a customer, or a credit registry says “emissions,” the Protocol is usually the dictionary being quoted.

Credit quality: the five tests that separate an asset from a story

Additionality: would the reduction or removal have happened anyway, without the credit revenue? If yes, the credit financed nothing. Permanence: how long is the carbon stored, and what happens when the forest burns or the project lapses — is there a buffer pool, insurance, or a replacement obligation? Leakage: did the activity simply move — the logging shifted to the next valley, the emissions outsourced across the fence? Double counting: is the same tonne claimed by the project, the host country, and the buyer simultaneously? The Paris Agreement’s corresponding-adjustment machinery exists to police exactly this. Verification: was the project audited by an accredited third party against a recognized standard, with the registry entry to prove retirement in the buyer’s name? A credit that cannot answer all five is not necessarily worthless — but it is a donation with a certificate attached, and should be priced and described as one.

Where credits belong in a credible program

Last, and in the open. The hierarchy this site applies — measure honestly, reduce operationally, then use credits for the residual — is the same sequence embedded in the net zero standard: credits finance climate action beyond the fence line; they do not retire the obligation inside it. Companies get in trouble in both directions: buying cheap credits against unreduced emissions (the greenwashing pattern regulators now pursue), and refusing credits entirely while their genuinely residual emissions go unaddressed. The defensible position is boring and documentable: publish the footprint, publish the reductions, publish the credits with their registries and vintages, and let the proportions speak.

Frequently asked questions

What is the GHG Protocol?

The most widely used greenhouse gas accounting framework in the world, published by the World Resources Institute and the World Business Council for Sustainable Development. Its Corporate Standard defines organizational boundaries and the three scopes — direct emissions, purchased-energy emissions, and value-chain emissions — that nearly all reporting regimes build on.

What are the 15 categories of Scope 3?

The Scope 3 Standard divides value-chain emissions into eight upstream categories (including purchased goods and services, capital goods, and business travel) and seven downstream ones (including use of sold products, end-of-life treatment, and investments). Companies screen all fifteen and report the material ones.

What makes a carbon credit high quality?

Five tests: additionality (the reduction would not have happened anyway), permanence (durable storage with a remedy for reversal), no leakage (emissions not merely displaced), no double counting, and accredited third-party verification with a registry retirement in the buyer’s name.

Do carbon credits count toward net zero?

Only in a narrow role: neutralization of genuinely residual emissions after deep reductions, and then with removals rather than avoidance credits. Credits bought instead of reducing are a contribution to climate finance — legitimate to report, not legitimate to call neutralization.

Updated October 6, 2026.

ESG in banking and investment means integrating environmental, social, and governance factors into credit risk, underwriting, lending, and portfolio construction, and disclosing those exposures under frameworks such as the ISSB’s IFRS S1/S2, the EU’s CSRD/ESRS and SFDR, and the Basel Committee’s voluntary climate-risk disclosure framework. The practice is now being reshaped by two opposing forces in 2025-2026: regulatory consolidation around the ISSB baseline globally, and a sharp US “anti-ESG” retreat that drove every major Wall Street bank out of the Net-Zero Banking Alliance (NZBA) between December 2024 and January 2025 and prompted the SEC to abandon and then move to rescind its 2024 climate-disclosure rules.

What does ESG actually mean for a bank or asset manager?

For financial institutions, ESG is not a marketing layer; it is a set of risk factors and a disclosure regime. On the banking side, ESG enters through credit risk: climate transition risk (stranded assets, carbon-pricing exposure), physical risk (flood, wildfire, and heat damage to collateral), and governance and reputational risk in counterparties. On the investment side, ESG enters portfolio management through screening, integration, thematic allocation, stewardship, and impact strategies. Both sides converge on one hard requirement: comparable, decision-useful disclosure. The dominant theme of 2025-2026 is that disclosure rules are simultaneously converging on the ISSB global baseline and being scaled back in scope, especially in the United States and the European Union.

How is ESG used in credit risk, underwriting, and lending?

Banks integrate ESG into underwriting primarily as a forward-looking risk overlay rather than a values screen. Climate transition risk can impair the creditworthiness of carbon-intensive borrowers as carbon costs rise and demand shifts; physical risk can destroy or devalue real-estate and infrastructure collateral. Supervisors increasingly expect banks to run climate scenario analysis, identify concentrations, and reflect material climate risk in their internal capital adequacy assessment. The European Central Bank, the Bank of England, and the US Federal Reserve have all run climate scenario exercises, though none currently impose an explicit climate capital add-on. In practice, ESG factors most often affect pricing, covenants, and concentration limits rather than the binary decision to lend.

What are ESG-linked loans and sustainability-linked bonds?

Two instrument families dominate sustainable finance, and they work differently:

• Use-of-proceeds instruments (green/social/sustainability bonds and loans): capital is ring-fenced for defined eligible projects (renewables, clean transport, affordable housing). Green bonds remained the largest single category, at roughly 53-57% of labeled issuance through 2024-2025.
• Sustainability-linked instruments (SLLs and SLBs): proceeds are general-purpose, but the coupon or margin steps up or down based on the borrower hitting predefined sustainability performance targets (KPIs/SPTs). These face the most greenwashing scrutiny because weak targets produce a label with little substance.

The labeled bond market hit roughly USD 1 trillion to 1.1 trillion in 2024 (World Bank and Climate Bonds Initiative data), with cumulative labeled issuance reaching about USD 6.2 trillion by December 2024. The sustainability-linked segment has cooled markedly: S&P Global forecast only about USD 35 billion of SLB issuance for 2025, far below the 2021-2023 peak, and labeled loan volumes fell roughly 52% from H1 2024 to H1 2025 as borrowers dropped labels whose pricing benefit (often just a few basis points of margin step-down) no longer justified the verification burden. On 26 March 2025, the loan-market trade associations (LMA/LSTA/APLMA) tightened the Sustainability-Linked Loan Principles, making post-signing verification by a qualified external reviewer mandatory (“shall” rather than “should”).

How do investment and asset-management firms integrate ESG?

Asset managers deploy a spectrum of approaches, often within the same firm: negative/exclusionary screening (e.g., excluding controversial weapons or thermal coal), positive/best-in-class screening, full ESG integration into financial analysis, thematic and impact investing, and active ownership through proxy voting and engagement. Post-2023, the industry has shifted language from “ESG investing” toward “sustainable investing,” “transition finance,” and “responsible investing,” partly to sidestep US political controversy and partly to comply with tighter fund-naming rules. Stewardship and engagement remain widely practiced even where firms have muted public ESG branding.

Which disclosure frameworks apply to financial institutions?

A bank or asset manager operating across major markets faces an overlapping stack of frameworks. The single most important shift is that the ISSB’s IFRS S1 and S2 have become the global baseline, formally consolidating the legacy TCFD recommendations (the IFRS Foundation took over TCFD monitoring in 2024).

What changed with the EU’s CSRD “Omnibus” package?

In 2025 the EU enacted an “Omnibus” simplification that dramatically narrowed the Corporate Sustainability Reporting Directive. The final deal raised the mandatory threshold to EU companies with more than 1,000 employees and over EUR 450 million in net turnover, cutting the in-scope population by an estimated ~90% versus the original 250-employee threshold. EFRAG delivered simplified ESRS that reduce mandatory data points by roughly 60-70% (from about 1,073 to around 320). The Commission is expected to adopt the revised ESRS by delegated act around mid-2026, with effect potentially from FY2027. Large EU banks and insurers remain in scope, but value-chain data requests from smaller counterparties are now capped.

How do SFDR’s Article 6, 8, and 9 categories work, and what is “SFDR 2.0”?

The EU Sustainable Finance Disclosure Regulation (SFDR) was designed as a disclosure regime but was used by the market as a labeling system. Almost half of EU assets under management sit in Article 8 or Article 9 products.

In November 2025 the European Commission proposed “SFDR 2.0,” replacing the Article 8/9 regime with three formal product categories – broadly Sustainable, Transition, and ESG (collection/basics) – each anchored by a roughly 70% portfolio threshold, common exclusions, and short-form disclosures. The legislative process is expected to run through 2026-2027, with application unlikely before 2028. Until then, the Article 6/8/9 framework remains in force.

What do fund-naming and greenwashing rules require?

Two regimes police the gap between a fund’s name and its holdings. In the EU, ESMA’s fund-naming guidelines took effect in 2024 with a compliance deadline of May 2025: funds using ESG, “sustainable,” “impact,” or environmental terms such as “green” must invest at least 80% of assets in line with the relevant characteristics and apply Paris-Aligned Benchmark exclusions. The effect was immediate – per an ESMA study of 924 funds, about 64% changed their names ahead of the deadline, with many simply dropping ESG terminology rather than greening portfolios.

In the United States, the SEC’s amended Names Rule (adopted September 2023) extended the longstanding “80% investment policy” to fund names suggesting “particular characteristics,” explicitly capturing ESG and sustainability funds: a fund whose name implies an ESG focus must hold at least 80% of assets consistent with that focus. The SEC began reviewing the rule’s application to ESG names in 2026, leaving its long-term future uncertain.

What is the “anti-ESG” backlash, and what did it actually change?

The 2024-2026 US backlash combined state-level legislation, litigation threats, and political pressure that materially changed institutional behavior even where the underlying risk analysis did not change. The clearest signal was the collapse of the Net-Zero Banking Alliance (NZBA): between December 2024 and January 2025, Goldman Sachs, Wells Fargo, Citigroup, Bank of America, Morgan Stanley, and finally JPMorgan Chase (7 January 2025) all exited, and the alliance subsequently paused operations and moved to restructure into a looser framework body. Major US asset managers similarly stepped back from net-zero investor coalitions such as Climate Action 100+ and the Net Zero Asset Managers initiative, which suspended activities in early 2025.

Crucially, most institutions framed these as departures from coalitions and public commitments, not from risk management. Banks continued climate scenario analysis, transition-risk modeling, and sustainable-finance underwriting where commercially driven. The same period saw regulators retreat on mandates: the SEC stopped defending its climate rules in March 2025 and proposed full rescission; the Basel Committee downgraded its bank climate-disclosure framework to voluntary in June 2025 after US pressure, dropping the requirement to disclose financed and facilitated emissions regardless of materiality. The net effect is a bifurcated world: a tighter, ISSB-anchored disclosure regime maturing across the UK, EU, and Asia-Pacific, and a deregulatory, depoliticized posture in the United States.

Frequently asked questions

Is ESG investing legally required for US banks?

No. There is no US federal mandate requiring banks or asset managers to “do ESG.” US disclosure of climate risk via the SEC’s 2024 rules was stayed and is being rescinded. ESG-relevant obligations for US firms now flow mainly from fiduciary duty, the Names Rule for fund branding, and exposure to EU rules when operating in Europe.

What replaced the TCFD framework?

The ISSB’s IFRS S2 absorbed and superseded the TCFD recommendations. The Task Force on Climate-related Financial Disclosures was disbanded in 2023, and the IFRS Foundation took over monitoring climate-related disclosure progress in 2024. National rules built on TCFD are migrating to the IFRS S1/S2 baseline.

Did banks abandon climate risk management when they left the NZBA?

Generally no. Leaving the Net-Zero Banking Alliance removed a public coalition commitment but did not switch off internal climate-risk analysis, scenario testing, or sustainable-finance lending, which banks largely retained as commercial and prudential disciplines.

What is the difference between a green bond and a sustainability-linked bond?

A green bond ring-fences proceeds for specific eligible green projects, so its “greenness” is in how the money is spent. A sustainability-linked bond can fund anything, but its coupon adjusts based on whether the issuer meets predefined sustainability targets, so its integrity depends entirely on how ambitious those targets are.

Does a fund called “sustainable” have to hold a minimum percentage of sustainable assets?

Yes, in both major markets. Under ESMA’s EU guidelines, ESG/sustainability-named funds must hold at least 80% of assets aligned with those characteristics and apply benchmark exclusions. Under the SEC Names Rule, an ESG-named US fund must keep at least 80% of assets consistent with the name.

Is the EU still requiring CSRD reporting after the Omnibus changes?

Yes, but for far fewer companies. The 2025 Omnibus package raised the mandatory threshold to roughly 1,000 employees and EUR 450 million in net turnover, cutting in-scope entities by an estimated 90% and reducing required ESRS data points by 60-70%. Large EU banks and insurers remain in scope.

Is the Basel climate-disclosure framework mandatory for banks?

No. The Basel Committee published its climate-related financial-risk disclosure framework on 13 June 2025 as a voluntary standard outside the Pillar 3 mandatory requirements, leaving adoption to individual national regulators.

Sources & further reading

• IFRS Foundation – Use of IFRS Sustainability Disclosure Standards by jurisdiction
• Basel Committee on Banking Supervision – Disclosure of climate-related financial risks (June 2025)
• US SEC – Proposed rescission of climate-related disclosure rules
• Norton Rose Fulbright – European Commission proposes SFDR product categories (SFDR 2.0)
• ESMA – Impact of the guidelines on ESG/sustainability terms in fund names
• Climate Bonds Initiative – Sustainable bond market reaches new highs
• ESG Dive – Major US banks exit the Net-Zero Banking Alliance
• Gibson Dunn – Omnibus simplification of EU sustainability rules (CSRD/CSDDD)

More in Green Finance and About BC ESG.

Related reading: the lender climate-continuity evidence pack, GRESB scoring levers for property managers, and the Restoration Carbon Protocol. Sister hubs: Restoration Intel, Healthcare Facility Hub, Continuity Hub, Risk Coverage Hub, and Tygart Media.