What investors need to know about carbon credits

By Leanna Tang and Andrew Howell, CFA

High-integrity carbon credits can play an important part in enhancing climate action, but their role in corporate sustainability strategies has come under scrutiny over the last year. News coverage has dug into carbon credit quality, backtracking on offsetting pledges by Nestlé, EasyJet, and others, and a lawsuit against Delta Air Lines over the company’s credits-based carbon neutral claim.

At the same time, there have been significant advancements in the world of carbon credit governance to help establish a high-integrity voluntary carbon market. In particular, the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI) have released much-anticipated guidance on supply- and demand-side integrity in the voluntary carbon market.

High-integrity carbon credits can help accelerate the net zero transition by financing emission reduction and removal activities that are critical to stabilizing the global climate, supporting local livelihoods, and safeguarding biodiversity. Recent research found that companies that incorporate voluntary carbon credits as part of their comprehensive climate strategies are decarbonizing faster, reporting lower gross emissions year-on-year, and investing more in emissions reductions than companies not engaged in carbon markets. These findings underscore that leveraging the voluntary carbon market can go hand-in-hand with engaging deeply across a company’s climate footprint on the path to net zero emissions.

To help the financial community assess the opportunities and challenges around carbon markets, EDF developed a primer on key topics for understanding carbon credits and carbon markets, as well as recommendations on how investors can evaluate portfolio businesses for their alignment with best practices.

What investors need to know

There have recently been active discussions around carbon credits in voluntary carbon markets – in which activities that reduce emissions or sequester carbon are packaged as emissions units that can be tracked and traded. When a buyer removes a credit from the market by retiring it, they can take credit for the emissions impact it represents. High-integrity carbon credits meet criteria established by initiatives such as the Carbon Credit Quality Initiative, ICVCM’s Core Carbon Principles, and the Tropical Forest Credit Integrity Guide to address issues such as permanence, additionality, and social impacts.

For investors with portfolios that include companies using carbon credits within their climate action plans, understanding what high-integrity credits look like – and where the pitfalls lie – is important to assessing their climate performance. Engaging with portfolio companies on the best practices below, as well as those outlined by EDF’s Net Zero Action Accelerator, is a good start.

• Carbon credit use should complement, not replace, direct decarbonization. Companies can use carbon credits to augment their science-aligned decarbonization targets, such as through applying SBTi’s concept of “beyond value chain mitigation” – measures to prevent, reduce, or remove emissions outside a company’s value chain. This embodies a “Yes, and” approach to corporate climate action.
• Carbon credits should be high integrity. Buyers should conduct due diligence to ensure credits have environmental and social integrity and align their purchasing behavior with net zero needs and guidance as they evolve. Useful resources for due diligence include the Carbon Credit Quality Initiative, the Carbon Offset Guide, and the Tropical Forest Credit Integrity Guide.
• Claims linked to crediting should be specific and accurate. Companies should articulate the role credits play in their climate plan. The VCMI Claims Code of Practice has guidance for how companies can make clear and informative claims about their carbon credit usage.
• Disclosures should be transparent and comprehensive. Companies should publicly disclose the quantity of carbon credits they purchase and retire. At the carbon credit level, disclosures should include key characteristics such as the project and/or program, project ID and serial number, host country, issuing year, and any co-benefit certifications.
• Advocate for strong carbon credit policies and standards. Carbon credit buyers are an important voice in increasing the integrity of the voluntary carbon market. Companies should participate in integrity initiatives and advocate for strong standards.

Achieving the promise of voluntary carbon markets

Carbon credits are complex and nuanced, but they can play an important role in enhancing corporate climate action. Aligning voluntary carbon markets around integrity and transparency can build value for investors and companies and pay dividends for the planet.

Download the Slide Deck: Carbon Credits 101 For Investors