Carbon markets play a crucial role in corporate sustainability and Environmental, Social and Governance strategies, but these markets are changing rapidly. In the Sustainability Leaders in 2022 panel from our Carbon Markets Summit, we explored the evolution of carbon markets, their role in modern-day ESG programs, and the influence of disclosure mandates on market behavior. Here are our four key takeaways from this session with Allister Furey (CEO and Co-Founder, Sylvera), Margaret Mistry (VP Carbon Markets, Equinor), Annette Nazareth (Former SEC Commissioner and Chair of the Integrity Council), and Torsten Lichtenau (Senior Partner, Bain & Company).
Watch the full session here:
1. The perception of carbon markets is changing fast
While carbon offsets have previously been the focal point of critics who accuse corporations of trying to buy their way out of the carbon emissions problem, they are playing an increasingly important role in ambitious corporate ESG strategies. Everyone emphasized carbon offsets are secondary to reduction efforts, but are still crucial for mitigating remaining emissions, and accelerating decarbonization efforts.
“[At Equinor] we follow a mitigation hierarchy,” Margaret says. “First we avoid, then we reduce, and we only offset when other measures have been prioritized.”
In the journey to net zero, carbon credits are an essential tool for organizations and their customers to compensate for the emissions produced. They also offer a crucial source of finance for important sustainability projects, and will be necessary for keeping the planet on a 1.5° trajectory.
2. For private organizations, carbon is both an asset and a liability
Sophisticated offset buyers understand that as demand increases, constrained supplies will push prices higher. “The most strategic players are looking at moving upstream in the value chain and trying to secure quality supply ahead of time,” Torsten says. Increasingly, the topic of carbon credits is moving from Chief Sustainability Officer to Chief Finance Officer. “This is important,” Torsten explains, “because carbon credits are an asset, and should be treated as such on the balance sheet.”
At the same time, mature buyers are becoming aware of carbon as a liability that needs to be managed. Since the volume of credits required to achieve net zero naturally grows over time, and costs are growing rapidly, carbon can easily become a liability for firms with ambitious climate commitments. “The most progressive players probably have a balanced view,” Torsten says, “managing liability but also investing in a growing asset that is needed for the world to decarbonize.”
3. Disclosure mandates and enhanced scrutiny will improve offset quality
As corporate offsets come under increasing scrutiny, the need to meet minimum quality thresholds will accelerate. In the same way we currently rate the creditworthiness of organizations, we will also begin to rate the quality of an organization’s offsets. “[At Equinor] we fully expect to be scrutinized on the offsets we use, and as such we’ve got very high thresholds for quality in terms of what kind of offsets we will use,” says Margaret. “The thresholds include how the offsets are verified, what type of projects they relate to, whether they’re also addressing community co-benefits, biodiversity and so on.”
There is movement on the disclosure front, including the recent climate disclosure rule proposal by the SEC, which would (for the first time) allow for consistent evaluation of how individual companies are tracking towards net zero. Annette notes that it is interesting to see carbon credits appear in two sections of the SEC’s proposal. Issuers will be required to describe the role that carbon credits play in their strategy to reduce GHGs, and disclose significant information about particular offsets — including the amount of carbon reduction represented by the offsets, the source of the offsets, project descriptions, location, cost, and how the credits are authenticated. Such comprehensive disclosure requirements are bound to improve offset quality filters on the purchasing side.
4. Tools and data will drive disclosures and decision-making
It’s not just improvements in governance that will raise the quality of carbon credits; technology will also play a part. “One of the great tools we have for creating greater transparency is technology,” Margaret explains. Companies and tools that improve the acceptability and quality assurance of carbon offset projects — such as satellite technology, remote sensing, and real-time monitoring of above-ground carbon — will increase transparency and lead to greater trust in carbon markets.
Internally, we’ll see corporations make use of a wide range of best-in-class tools, such as carbon accounting and management software, to help implement their ESG strategies. “Like you have a cost ledger,” says Torsten, “you’ll have a carbon ledger.” Robust carbon ledgers will allow auditors to analyze and approve disclosures accurately and with ease. “Similarly, when you think about the different hedging tools available, you could imagine something similar starting to appear for carbon credits, especially if you have a large offset liability from the climate commitments you’ve made.” Organizations will need to become much more organized in the way they manage their carbon credits and offset programs, and technology will be a key driver of this improved sophistication.
5. The best outcome is a race to the top
Better transparency from both ends of the market will change carbon markets for the better.
“One positive outcome would be a race to the top,” Annette says, “where companies are competing not only for robust disclosure, but robust practices.”
In this scenario, organizations would understand the benefits of investing in higher-quality credits, thereby prioritizing impact and bringing capital to the projects and places that need it most.
The forward thinking organization has little to fear when it comes to rising carbon prices, mandated disclosures, enhanced scrutiny, and the many other changes occurring in carbon markets. In fact, for the organizations committed to strengthening their decarbonization strategy through quality offsets, these changes will only advance their cause.
Learn more about carbon credit quality and how to leverage Sylvera's ratings in your due diligence process here.