Climate change board

Carbon offsets can play a key role in enabling companies to meet their net-zero commitments, but Moody’s Investors Service says they come with greenwashing and other risks.

In a new report, the rating agency warned that companies need to be careful when using carbon offsets in their emission reduction plans.

“Ambiguous or exaggerated decarbonization claims, inadequate vetting of carbon credits and excessive reliance on offsets as a transition risk management strategy can leave companies vulnerable to a range of credit risks,” the report said.

While offsets can help finance investments needed to enable net-zero transitions, “their use in corporate carbon transition strategies poses financial and reputational risks if they are not applied as part of a credible, science-based approach,” the rating agency said.

For instance, companies that use offsets to claim that they’ve achieved net-zero targets or carbon neutrality “in ways that are not consistent with science, or that overstate the scaling potential of offsets, face reputational and litigation risks,” Moody’s said.

These risks can be reduced by “prioritizing efforts to cut emissions within their value chain, ensuring that carbon offsets do not replace but rather complement efforts to reduce scope 1, 2 and 3 emissions,” the report said.

Relying too heavily on offsets to meet climate commitments increases companies’ financial risks, too, the report warned.

“The shift to a low-carbon economy and regulations limiting demand for high-carbon products will intensify, whether or not a company invests in carbon credits or carbon removal. Therefore, companies cannot rely on offsets to mitigate market demand risks,” it said.

At the same time, using carbon offsets doesn’t exempt companies from most mandatory carbon-pricing programs, which impose a cost on companies’ carbon emissions, Moody’s said.

“In most cases, these costs cannot be reduced by using offsets,” it noted.

Additionally, emission reduction plans that rely heavily on offsets are also exposed to financial risk due to “the unpredictability of market prices and the continued evolution of standards and regulations.”