The FT Moral Money Forum is supported by its advisory partners, Diageo, High Meadows Institute, Vontobel and White & Case. They help to fund the reports.

The partners share their business perspectives on the forum advisory board. They discuss topics that the forum should cover but the final decision rests with the editorial director. The reports are written by a Financial Times journalist and are editorially independent.

Our partners feature in the following pages. Each profiles their business and offers a view on carbon markets. Partners’ views stand alone. They are separate from each other, the FT and the FT Moral Money Forum.

Supporting a holistic approach to carbon offsets

Andy Griffiths, head of sustainable procurement, Diageo

A dual crisis of climate and nature

The discourse around carbon credits is often linked to the planting of trees. While forest management is one way to approach carbon management, it’s just one of many. We need to think about carbon credits from a holistic perspective, through the lens of natural ecosystems and at a landscape level.

Protecting and enhancing nature is vital to reducing our exposure to the impact of climate change. Nature is our most precious asset, and it sits at the heart of the world’s food and drinks industry. We need to fundamentally change how we value nature and fund its regeneration if we’re to reverse biodiversity loss, mitigate climate change and continue producing the drinks that our customers love. 

The role of carbon credits in achieving net zero

To avoid global temperatures rising above 1.5C, we need to urgently transition to net zero and companies play a critical role in supporting this. All organisations, regardless of their sector, location or size, need to make a comprehensive assessment of their value chain emissions, including Scope 3, and set out a clear road map to reducing them. Carbon insets (implementing nature-based solutions within your own supply chain to reduce or remove GHG emissions) are a crucial component in reducing an organisation’s footprint. High-quality carbon offsets can credibly address the challenge of residual carbon emissions. 

We cannot risk companies being overly reliant on carbon credits, or using them as a substitute for short-term absolute emissions reductions. High-quality carbon offsets can play a role in reaching net zero, as attested to by world leading climate scientists, such as Johan Rockström. At Diageo, we’re on track to reaching net zero across our own operations by 2030. In terms of our entire value chain, we’ve committed to achieving net zero by 2050. To reach that, we may need to use a small amount of carbon offsets for residual emissions, which we anticipate being no more than 5-10 per cent of our direct operation baseline emissions.

Questions around the credibility and scalability of carbon credits risks disengaging organisations from voluntary carbon markets altogether, slowing down global investment in nature-based solutions when we need them most.

Our call to action

Instead of disengaging, we need the private and public sector to collaborate. We need to create robust frameworks and systems to help develop high-quality carbon insets and offsets, so companies have the confidence to invest. 

An example of this is the Landscape Enterprise Networks, a partnership-based system for organising the buying and selling of nature-based solutions. It focuses on supporting biodiversity and addressing emissions in the landscapes where companies like ours have the greatest impact. This includes delivering tangible value on issues such as security of supply, flood and drought risk, through transactions that are profitable for farmers and landowners. Each LENs is place-based and tailored to the specific challenges and opportunities within any landscape. It brings together organisations and stakeholders that have an interest in making that landscape more resilient. 

We can only future-proof the voluntary markets if we establish frameworks that build trust in the credibility of the system. LENs is one example of how to do that. Voluntary carbon markets, like anything in this space, can and will only succeed if they are created in partnership with communities on the ground and for society as a whole.

The important role for voluntary carbon markets

Chris Pinney, president, High Meadows Institute

At the core of the demand for carbon offsets is the reality that many industries are not transitioning their business models fast enough to reduce their carbon emissions to meet either regulatory demands or the voluntary climate-related commitments they have made in response to stakeholder pressure. 

Carbon offset markets allow businesses, governments and individuals to reduce their carbon emissions either directly, through investing in carbon sequestration (eg forestry) and carbon removal initiatives, or through cap-and-trade models like the EU Emissions Trading System, where they can purchase carbon emission credits from industries that have not used their allocated credits.  

As this report shows, both government-mandated compliance-based carbon credit offset markets under cap-and-trade, as well as voluntary markets, are still in the initial stages of development. Of the two, government-backed compliance markets are currently the most developed and credible when it comes to establishing a price for carbon offsets. At the same time, there is no question that voluntary markets will continue to have a significant role to play as the pressure to reduce carbon emissions grows, creating by some estimates a $1tn carbon offset market by 2050. As several leaders in this report note, voluntary markets give options to companies with ambitious carbon reduction goals that are in sectors or regions not covered by compliance markets. They can generate funding for experimentation in clean technologies and business models while providing, in some instances, the only source of income to preserve and protect intact ecosystems.  

The role of voluntary markets in funding this type of innovation will be particularly important. It is increasingly clear that using only conservation measures such as forest sequestration is insufficient to meet the carbon reduction challenge we face. A 2017 study, led by Bronson Griscom, now at Conservation International, estimated that natural climate solutions, including forest and agricultural sequestration, could lock up about 11bn-15bn tons of CO2 per year or 30 per cent of the CO2 emissions that need to be reduced or offset yearly. In this context, we need to allocate more carbon offset resources to carbon removal technologies and business model innovations that can dramatically reduce both current levels of carbon already in the atmosphere as well as future emissions. It is of note that less than 3 per cent of carbon offsets are currently allocated to this component of the offset market. 

Private sector financial institutions will have a critical role to play in building the infrastructure to support voluntary markets. As the Taskforce on Scaling Voluntary Carbon Markets notes, “given that the largest buyers of voluntary carbon credits are corporates, banks and asset managers have far greater access to and knowledge of potential buyers than project developers. Experienced asset managers, brokers, or trading desks at large banks can help facilitate price discovery and reduce the need for companies to develop specialist ‘in house’ expertise.” In addition, pooling resources from multiple buyers or multiple sellers can create economies of scale and reduce transaction costs on both sides. Asset managers, banks and investment banks can source and originate deals, providing the much-needed capital to scale the market through sophisticated financial instruments, which buyers may not be able to structure themselves.

We also need more financial infrastructure innovations such as Climate Vault, which creates a useful bridge between compliance and voluntary markets. CV buys certified carbon emission permits from regulated markets and locks them away, reducing the amount of CO2 that can be emitted into the market. It then uses the aggregated monetary value of its vaulted permits to fund the purchase of carbon dioxide removal from CDR enterprises on the voluntary markets, allowing these enterprises to innovate and permanently remove atmospheric carbon.

Fighting the good fight: The role of carbon markets

Christel Rendu de Lint, head of investments at Vontobel

At Vontobel, we focus on actively shaping the future of investing. We exist to enable investors to build better futures and, fittingly, future-proofing investing is one of our strategic priorities right now. In the context of the climate challenge, this means standing with the wider investment community to take action on this globally urgent issue. 

As a global investment firm and a corporate citizen, we are committed to helping actively shape this transition to the best of our capabilities and reach. We want to contribute to the realisation of the UN Sustainable Development Goals and we are committed to supporting the Paris Agreement and its goal of limiting the rise in global temperatures to well below 2C, with a target of 1.5C. 

It is not a fight that one sector — let alone one company — can win alone. Indeed, collaboration leads to the actions that are so desperately needed. With few companies on track to deliver the agreed upon 7 per cent per annum reduction on an absolute emissions basis, there is no time to waste. To say addressing carbon emissions is urgent errs on the side of understatement. One way the financial sector is participating in the climate change fight is by enabling market participants to access carbon markets, which have emerged as a helpful mechanism to support companies in meeting ambitious goals for the reduction of greenhouse gas emissions.

The growth of this marketplace has brought the benefit of increased regulatory scrutiny, increased reporting transparency and wider ESG disclosures — factors that, in turn, help to garner further support for, and an acceptance of, carbon markets. Today, 44 per cent of listed companies have set a decarbonisation target. Currently compliance markets are doing the heavy lifting, but voluntary markets will pick up speed as corporate decarbonisation targets edge into the spotlight — and this is where we think a real difference can be made. 

From our perspective as an investment manager, we see carbon markets as an efficient tool: they are agnostic, in the sense that they do not dictate the investment instruments required, and they support the transition towards both a green economy and decarbonisation. However, there are also challenges to be acknowledged. Despite offering a solution, carbon markets are only one tool in the net zero toolbox and one geared towards the management of emissions as opposed to their elimination. And this is where we see some challenges in carbon markets. 

Firstly, the current pricing of carbon credits is a fraction of what is needed if carbon markets are to seriously contribute towards limiting global warming to well below 2C. Yet increasing pricing will ultimately make consumer prices higher, raising the question of how to accurately price a negative externality? Secondly, the risk of greenwashing exists as carbon markets do not represent real emissions reductions. Remember the 2010 reports of chemical plants manipulating their emissions of “super” greenhouse gas HFC-23 (a by-product of HFC-22 production) to gain carbon credits through their elimination? And, additionally, urgency should be factored into the environmental return on investment. For example, while tree planting schemes are required for replenishment, does the time required for a tree’s growth allow a real decarbonisation benefit to occur within the Paris Agreement’s deadline?

Ultimately, the shaping of carbon markets rests largely in the hands of governments and policymakers. Such decision makers set the framework for the use of carbon markets, including their ease of implementation, co-ordination across countries, price levels and the relationship between carbon markets and other carbon-offset mechanics such as carbon tax. Actions such as standardisation measures and auditing would help market efficiency. But, like I said above, it is a fight we need to urgently tackle as a collective. And capital allocators have the opportunity — and I would argue duty as corporate citizens — to play a crucial role in supporting this transition towards decarbonisation.

As an investment manager, we incorporate risks, including ESG and carbon risks, into our active investment decisions to identify opportunities for quality and sustainable investments. Our six Sustainability Commitments were defined last year and form a strategic foundation, setting out how we want to achieve our own transition as a company towards net zero, and how we want to empower our clients with the knowhow, advice and investment solutions they need to realise their sustainability ambitions. We also have the possibility to bring about change within the companies we invest in, by advocating for and motivating them to improve carbon management practices, increase transparency and adopt sustainable business strategies. These are some of the steps we are taking at Vontobel as we focus on future-proofing investing while navigating both the challenges and opportunities inherent in this journey.

VCM will play an essential role in unlocking corporates’ increased climate ambitions, but not without risk

White & Case ESG Team

There has been an exponential increase in climate finance flowing into the voluntary carbon market, with transacted value estimated to have reached more than $1.2bn in 2022, according to Trove Research. McKinsey estimates that demand for carbon credits in the VCM could increase by a factor of 15 or more by 2030, and by a factor of up to 100 by 2050.

Companies are not required to participate in the VCM by law, but do so on a voluntary basis, often in furtherance of their net zero or other form of climate change mitigation targets.

The VCM has been met with controversy in recent years, for two main reasons. Firstly, the environmental integrity of certain types of carbon credits has been called into question. This is due in particular to concerns around permanence, additionality, over-issuance, double-counting and leakage. Issues of this nature cast doubt on whether carbon credits represent the greenhouse gas mitigation benefits that they purport to do. Secondly, certain stakeholders have raised concerns regarding the end-use of carbon credits: they argue that companies may be relying on carbon credits in place of direct GHG reductions within their value chain. Concerns around integrity and end-use increase legal and reputational risk for companies, in particular the risk of greenwashing allegations. 

To mitigate some of these identified risks, companies may wish to consider only purchasing carbon credits that are issued in accordance with reputable, up-to-date methodologies, and that any statements made by companies in their corporate disclosures or marketing materials in reliance on carbon credits are clear, transparent, well-substantiated and supported by the best available scientific evidence.

It is recommended that companies learn to distinguish high-quality from low-quality carbon credits. The level of integrity risk associated with credits traded on the VCM will depend on certain factors, including the jurisdiction, project phase (ie, pilot phase, more mature lifecycle) and type of the underlying carbon offsetting project. Older vintage credits generally present higher integrity risks than newer vintage credits. And, generally speaking, the cheaper the carbon credit, the more likely it is to pose an integrity risk.

As for end-use of carbon credits, companies may wish to consult guidance published by various organisations, which stress that companies should address direct GHG emissions in their value chain as a first order priority and use carbon credits as a secondary means to mitigate GHG emissions.

Finally, companies purchasing carbon credits could exercise caution as to the impact that the underlying projects may have on the environment and human rights. Companies may consider conducting due diligence to ensure that such adverse impacts do not, and have not, taken place, and contractual safeguards may be built into sale and purchase agreements to offer further protections.

The regulation and governance of the VCM is evolving rapidly. The Integrity Council for the Voluntary Carbon Market has published a set of core carbon principles and assessment framework for ensuring the environmental integrity of carbon credits that seeks to bring greater uniformity to standards within the VCM. Several exchanges globally, including the London Stock Exchange, now offer the ability to list and trade carbon credit-related products. And national regulators are considering ways of bringing the VCM within the scope of regulatory frameworks.

Companies purchasing carbon credits are advised to monitor these developments closely to ensure that their approach is in line with international best practice and regulation.