Fast reading
- New UN standards for international carbon markets agreed at COP29 to boost credibility.
- Due diligence is critical for assessing the quality of nature-based carbon offset projects.
- While high-quality projects often require more significant investment and longer timeframes, they are essential to ensure a meaningful climate impact.
In the first article in this series we looked at how nature-based carbon offsets work, and identified some of the challenges and risks that they pose for companies relying on them as part of their decarbonisation strategies. Media reports have questioned the credibility of carbon offset projects1 prompting some big brand names to say they would wind down their use.
For investors to feel comfortable with companies using carbon offsets as part of their climate transition plans, a more credible market must be created. That requires robust policy and regulatory frameworks to ensure that outcomes are measurable and verifiable. Stringent standards for transparency and accountability must be implemented, to ensure that all market participants adhere to consistent reporting and auditing practices.
To address concerns about credibility, new UN standards for carbon markets were agreed at COP29. Clear guidelines were established for emissions reduction projects, and third-party verification was mandated. Addressing issues such as double counting, and ensuring the permanence and additionality of projects should also strengthen market integrity.
Bridging the credibility gap
The recent controversy over carbon offset projects cast doubt on the integrity of carbon credits, and raised uncomfortable questions for companies. With increasing scrutiny and growing investor expectations, the importance of high-quality, large-scale nature-based carbon offsetting projects that can justify the cost of robust due diligence cannot be overstated.
While due diligence is critical for assessing quality, requiring every company to perform this scrutiny can be impractical. The process requires a thorough examination of commercial, reputational, regulatory, and operational risks, which can be resource-intensive and complex. However, while high-quality projects often require more significant investment and longer timeframes to bear fruit, they are essential to ensure that there is a meaningful climate impact. The focus should not be solely on the cost of the credits, but on the value and integrity that they provide.
Our engagement expectations
- Decarbonisation strategy
Companies should develop and implement comprehensive strategies to achieve net-zero emissions, integrating carbon offsetting only where necessary. Short, medium and long-term emissions reduction targets should be aligned with 1.5°C.
- Carbon emissions reductions
Companies should prioritise direct emissions reductions through operational efficiencies and renewable energy adoption before resorting to offsets. They should establish a credible climate transition plan for achieving their reduction targets, and disclose the percentage of emissions reductions achieved through nature-based carbon offsetting projects and purchasing credits.
- Governance and accountability
Companies must establish robust governance structures to oversee these carbon offset projects, ensuring accountability and alignment with their sustainability goals.
- High-quality projects with verification
Companies should invest in projects that meet high standards of verification, ensuring the credibility and effectiveness of offsets. They should disclose the greenhouse gas crediting programmes they have used, their suppliers, and the projects from which the carbon credits are sourced.
- Environmental and social issues
Indigenous peoples and local communities should be involved to ensure prior and informed consent for the siting of carbon offset projects. Projects should deliver positive impacts beyond carbon reduction, with equitable revenue-sharing agreements to fairly compensate and engage local communities.
- Due diligence
Companies should conduct due diligence to evaluate the commercial, reputational, regulatory, and operational risks associated with their nature-based carbon offset projects. This should include addressing data gaps via field visits and stakeholder interviews, to ensure comprehensive risk assessments are undertaken.
- Transparency and disclosure
The measurement, reporting and verification of data will be critical for assessing how well projects are performing. This will provide transparency for stakeholders and help them to evaluate the project’s impact, ensuring that companies can demonstrate real-world benefits.
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1 https://www.theguardian.com/environment/article/2024/may/30/corporate-carbon-offsets-credits
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