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Keeping you in-the-know on environmental, social and governance developments

Liz blogged a few weeks ago about investors specifically discouraging portfolio companies from using carbon offsets to achieve net zero goals.  As reported in this piece by World Oil, the Nature Conservancy is also launching an internal review of its carbon offset & trading projects and procedures.  Offsets have a long history of controversy, misuse and fraud, yet play an outsized role in corporate Net-Zero pledges and strategies.

This is big news, as WorldOil points out:

The internal review is a sign that it’s [The Nature Conservancy] at least questioning some practices that have become widespread in the environmental world, and could carry implications for the broader market for carbon credits.

Carbon offsets can be a viable tool in corporate greenhouse gas reduction plans. It’s tempting to wave a hand, write a check and not give it much consideration.  Yet offsets carry a large amount of risk in the mid to long term – both on a project-specific basis and in terms of maintaining a credible market.

To be valid, offsets are supposed to be “additional” – meaning that they arise from an activity that would not have occurred otherwise.  As an example, offsets for not cutting trees that were intended to be harvested meets the “additionality” definition. But if those trees were never to be harvested, offsets cannot be claimed for doing nothing. Also, plant-based offsetting assets such as trees can disappear before their “job” is done, meaning the expected – and contracted – carbon uptake is incomplete. Forest fires, droughts, infestations, regulatory changes, nationalization/imminent domain and illegal harvesting are very real threats to their ability to absorb the promised amount of CO2 over the decades typically needed.

The article states that “in 2020, companies purchased more than 93 million carbon credits,” and the emissions trading market is expected to exceed $100 billion in the coming decades. That is a lot of hot air needing global credibility.

What You Can Do

If you’re using carbon offsets as part of your net-zero strategy, it’s good to be aware that they’re not a full solution – and that they’re coming under additional scrutiny right now. It’s not a bad idea to work with your internal risk management group to conduct a risk assessment exercise. Among the potential perils:

  • Reputational risk
  • Contract breach
  • Customer mandate non-conformance
  • Loan and bond covenant breach
  • Regulatory non-compliance
  • Materiality disclosure non-compliance
  • Third-party exposure

Once the risk picture is in focus, you can develop specific mitigation strategies – such as:

  • Risk transfer (such as insurance and contractual terms)
  • Verifying project assumptions, calculations, controls and technologies
  • Direct involvement in project verification, monitoring and auditing
  • Contingency plans for offset losses
  • Rebalancing the mix of tools used to achieve reductions
  • Reconsideration of greenhouse gas commitments or strategy

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile