Climate change board

The voluntary carbon-credit market has recently come under fire for selling “junk” carbon offsets that don’t actually provide additional emissions cuts, have exaggerated claims or inflate baseline calculations. Analysis from U.K.-based The Guardian found that 78% of emission offset projects were “likely junk,” with the rest either “potentially junk” or of undetermined efficacy.

“This type of news is impacting the confidence of investors on anything that has to do with responsible investments,” said Deborah Debas, a responsible investment specialist with Desjardins Wealth Management in Longueuil, Que.

Carbon offsets offer credits to counter carbon emissions ton for ton, and are retired permanently after use. They are one way for a company to become carbon neutral. Investment firms also have used carbon credits to offset their investment portfolio’s carbon footprint.

Carbon credit markets fall into two categories. Mandatory or compliance markets, such as the cap-and-trade programs of Quebec and California, treat tradable carbon credits as a commodity capped at a certain volume per year. The second kind of markets — voluntary — have fewer restrictions.

The stringency of mandatory carbon markets can be a double-edged sword. Mandatory markets have complicated guidelines that often make only larger projects viable due to the administrative effort required, said Olaf Weber, professor and chair, sustainable finance, with York University’s Schulich School of Business.

Furthermore, many mandatory markets work only within their own jurisdiction, whereas credits from voluntary markets can be traded globally, said Eric Cooperström, managing director of impact investing and natural climate solutions, timberland and agriculture, with Manulife Investment Management Ltd.

The voluntary market provides more flexibility, but Weber said it needs to meet more rigid standards to build investor trust.

“The conversation and the scrutiny over the last several years really underscores the importance of having a focus on quality and integrity,” he said.

Independent verification also could increase trust. Forest carbon-offset protocols, which quantify greenhouse-gas emissions reduction by forests, have been around for more than two decades, but became popular only in the past several years, Cooperström said.

One agency that conducts these analyses is the Integrity Council for Voluntary Carbon Markets (ICVCM), an independent organization that designed a set of minimum rules for the voluntary carbon market in 2023. Manulife’s carbon principles are aligned with the ICVCM’s, Cooperström said.

Although voluntary carbon registries have differing project assessment standards across markets, they are beginning to collaborate more closely to adopt uniform guidelines. “I think we’ll see a convergence of standards and practices and, ultimately, a simplification of what has historically been a very fragmented market,” Cooperström said.

The ICVCM’s key criteria include permanence monitoring for at least 40 years, proving that carbon offsets are truly voluntary and additional, and ensuring rigourous baseline setting — ways investors can identify legitimate carbon assets, he said.

Investors also should look for projects that ensure carbon credits are additional — for example, that trees would not have been planted were it not for the project, Debas said. The carbon credits from a project also should be unique, meaning that the credit is permanently retired after use and not double-counted. And projects should not cause displacement, such as deforestation occurring on a site adjacent to the one being preserved.

Carbon credits from high-quality projects should be well-documented and verifiable, Debas said, adding, “We need to be willing to pay for quality [carbon] credits as well.”

Investors could react to revelations of ineffective carbon-mitigation measures in two ways, Weber said. Some investors might not care, as they just want to meet a sustainability requirement, while a group who cares about impact could turn away. “If there’s uncertainty, then there will be less investment in the field,” he said.

And offsets are only a small part of the equation for carbon reduction.

Companies should find opportunities to reduce emissions from their business processes before resorting to carbon credits to compensate for residual unavoidable emissions, such as air travel, Weber said. Those with mostly green investment portfolios could also buy carbon credits to offset the portion of their portfolio in carbon-emitting industries, such as logistics.

“We can’t offset all CO2 emissions. That is just impossible because there’s not enough land to plant trees,” Weber said. “We need to mainly focus on the emissions [themselves instead of] offsets.”

Despite the imperfections, carbon credit markets are still directly linked to climate-change mitigation, Cooperström said: “Waiting for perfection in carbon markets misses the point. I think there has to be dramatic climate action now.”

This article appears in the March issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.