Institutional investors trying to assess the net-zero commitments of the companies they invest in and how they use carbon credits have a new guide to help them.
Released March 1 by sustainability advocacy group Ceres, the brief, Evaluating the Use of Carbon Credits, cuts through "the confusion and controversy" surrounding net-zero commitments, Ceres said in a news release.
Better understanding of corporate net-zero commitments and use of carbon credits will help reduce investors' overall climate risk, Ceres said, while weak commitments or intentions put both companies and investors at risk. The brief focuses on the risks associated with companies relying on carbon credits to offset their emissions, instead of making systemic changes.
To determine whether companies are using carbon credits appropriately in their climate strategies, the guidance suggests investors have companies disclose emissions reduction targets and progress; credible plans to achieve targets; anticipated residual emissions, including the percentage planned for carbon dioxide removal; and the volume of carbon credits purchased to counterbalance emissions and support mitigation beyond their immediate control.
It also urges companies to prioritize decarbonizing their value chain emissions, which are emissions associated with the other entities a with which a company interacts. Ceres' guide also helps investors understand how net-zero is defined and how to ensure the validity of corporate commitments, sharing best practices and comparing existing standards for carbon projects.
According to February data from the Net Zero Tracker, 34% of the world's 2,000 largest publicly traded companies have made net-zero commitments. On Feb. 28, the United Nations' Intergovernmental Panel on Climate Change called climate change "a grave and mounting threat" that will require accelerated commitments.
That makes the integrity of corporate net-zero commitments critical, said Carolyn Ching, senior manager of food and forests at Ceres and lead author of the guide. "Companies that make weak or vague net-zero pledges without a real commitment to decarbonize not only expose financial institutions to material business risks — they also continue to exacerbate the systemic risks of the climate crisis," she said in the release.
Julie Gorte, senior vice president of sustainable investing at Impax Asset Management LLC, said in the release that once the 600 companies committing to net-zero emissions by midcentury have reduced their own emissions, they will likely need to consider carbon credits or nature-based solutions to further increase carbon storage and/or reduce greenhouse gas emissions, such as through forest and land conservation, ecosystem restoration and improved management of timberlands and farmlands.
