ESG: offsets need to be looked at carefully to avoid accusations of greenwashing

Companies are likely to face higher exposure to fraud as well as liability and political risks if their climate strategies involve the use of unreliable carbon offsets.

For instance, the Korean oil firm SK Lubricants has recently been accused of greenwashing for using an unreliable carbon offsetting project. SK Lubricant had said it was offsetting emissions with high-quality carbon credits from a reforestation project in Uruguay. However, carbon credit agency Renoster has said the project is seen as “fundamentally unadditional” since trees were going to be planted regardless. Activist groups are accusing the oil firm of violating the Act on Fair Labelling and Advertising.

Companies are also at risk if carbon credits are put on hold for regulatory reasons, as was the case in Indonesia earlier this year. The issuances of 2021 credits from South Pole were paused, while Verra, one of the global certifier of credits, clarified the Indonesian government’s regulations.

It is important that firms engaging in the voluntary carbon market have an awareness of such potential government intervention. This is particularly important in the context of net-zero pledges coming under greater scrutiny. At COP27, a UN group said that credible net-zero targets must cut greenhouse gases significantly by 2030 rather than delaying until 2050. It also said entities should provide clarity on net-zero pledges and reduce the amount of low-quality offsetting.

In comparison to voluntary markets, compliance carbon markets are regulated by national, regional, or international carbon reduction regimes. This means projects aiming to offer certified emission reduction credits on the market will need to get emissions reductions validated by third-party validators and registered by the Clean Development Mechanism (CDM) Executive Board. It’s worth noting that changes to Article 6 of the Paris Agreement mean a new multilateral mechanism will soon replace the old CDM.

Voluntary markets do not have the same verification requirements and can involve the trading of offsets without any verification at all. However, there have been recent developments – at COP27, the International Organization of Securities Commissions (IOSCO) launched a consultation on enhancing the resilience and integrity of voluntary carbon markets. The World Bank recently launched the Climate Action Data Trust, a global tracking system designed to improve transparency in the carbon credit market.

The UK’s government-mandated Transition Plan Taskforce (TPT) recently launched a disclosure framework for best practice climate transition plans by private sector companies. The framework includes recommendations to develop transition plans and an implementation guide. In the framework, the TPT said that if an entity is using carbon credits it must outline why it is employing carbon credits and what third-party verification schemes the carbon credits are subject to, along with any other significant factors for users to understand the credibility of the carbon credits.

The FCA plans to incorporate the recommendations from the TPT to strengthen its transition plan disclosure expectations of listed and regulated firms. In 2023 the FCA will require these firms to disclose transition plans as part of their TCFD reporting.

As companies embark on an ESG-conscious path that may involve the use of carbon credits, it is vital firms conduct due diligence in-house or use third-party organisations to assess the quality of offsets.

Earlier this year, Howden co-developed a carbon credit invalidation insurance solution to increase confidence in the Voluntary Carbon Market. To learn more about this and our offering within climate risk please contact Victoria Maynard or visit our webpage.