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ESG and Carbon Credits: The Conundrum Faced by Companies
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Until a few months ago, pursuing carbon neutrality was a clearly positive goal for businesses committed to achieving net zero emissions by 2050. However, recent controversies surrounding the effectiveness of nature-based carbon credits have led to a decline in prices and trading volumes, raising concerns in the EU. This has prompted some companies to question the reliability of these credits for achieving climate neutrality.
Despite these challenges, there are signs that voluntary carbon markets could still play a role in directing funds to developing countries and incentivizing forest protection. In a speech at Climate Week NYC, US Treasury Secretary Janet Yellen identified high-quality carbon credits as a potential source of funding to limit temperature rise to 1.5C. The Securities and Exchange Commission has also proposed requirements for companies to disclose the quality of carbon credits they have bought, to enhance trust and integrity.
Read on for a story about the conundrum faced by companies when the carbon credits they have purchased are called into question.
A Change in Approach to Net Zero
The suspension of a single carbon credit project has prompted the corporate world to reevaluate its approach to achieving net zero emissions. Companies like McKinsey, Air France, and Bayer have been purchasing carbon credits from the Southern Cardamom project in Cambodia, one of the largest nature restoration projects in the country. However, the project’s permission to issue carbon credits was suspended due to allegations of human rights abuse.
These allegations, which are currently being investigated, add to existing concerns about the quantifiable impact of carbon credits. Critics question whether the methodologies used to reduce emissions through forest preservation are strong enough to justify offsetting companies’ own emissions. The Wildlife Alliance, which operates the project, has not responded to requests for comment.
For sustainability teams, the challenge lies in the fact that buying carbon credits was previously seen as a positive step. Many companies have used the credits from the Southern Cardamom project to cancel out their annual emissions for 2021 or 2022. However, these companies have not disclosed whether human rights issues are sufficient grounds to cancel the offsets and purchase new ones.
As more projects come under scrutiny, companies must decide whether to continue pursuing carbon neutrality through voluntary carbon markets or abandon these goals altogether. Achieving “true” zero emissions in their supply chains is a difficult task for most industries. Yet, there are examples of companies like Apple, which recently unveiled a “carbon neutral” watch despite controversies, who are focused on investing in high-quality projects from the beginning.
Educating companies about the quality of carbon credits and providing training in carbon accounting could help build trust and enable the pursuit of high-quality credits. Emphasizing transparency and due diligence when choosing carbon credits is essential to avoid supporting flawed methodologies or projects associated with human rights issues.
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