Four Corporate Due Diligence Trends In The Maturing Voluntary Carbon Market

Four Corporate Due Diligence Trends In The Maturing Voluntary Carbon Market - Carbon Herald
Sam Fleming, co-founder and Head of Customer Success at Earth Blox

by Sam Fleming, Co-founder and Head of Customer Success at Earth Blox

The world is waking up to reality. There is a growing recognition that humanity cannot keep destroying the Earth’s climate and biodiversity. As leading corporations recognise the impossibility of preventing climate catastrophe without protecting and restoring nature, they are directing finance to nature-based climate solutions via the voluntary carbon market (VCM).

COP28 showed a clear commitment from market leaders to bolster the integrity of corporate climate claims. To achieve these ends, the need for transparent due diligence is indisputable and buyers of carbon credits are increasingly aware of their reporting responsibilities.

As the VCM matures, new due diligence trends are emerging. With greater access to satellite data, many leading companies are opting to carry out due diligence in-house. Teams of geospatial scientists verify the impact of nature-based climate solutions, while commercial teams analyse potential projects using purpose-built, user-friendly software. Such technological advancements have shifted due diligence away from documentation reviews and are enabling corporates to make better investment decisions, faster.

The maturing market

The past year has presented some challenges for the VCM. Yet, despite rising media criticism and a shrinking of the market, there have been positive developments. Integrity initiatives, such as the Voluntary Carbon Markets Integrity Initiative (VCMI) and the Integrity Council for Voluntary Carbon Markets (ICVCM), show how the VCM is maturing and professionalising. Indeed, both the ICVCM and the VCMI were among the organisations to unite over the development of an end-to-end integrity framework for effective decarbonisation. As these initiatives are established and confidence grows, the market is poised and ready for a second take-off – a VCM 2.0, as some are calling it.

It is not only these establishing integrity initiatives which are boosting investor interest in the market. It is also increasingly apparent that successful climate action requires private finance at an unprecedented scale. Every year, the world needs to direct up to US $366 billion of additional funding to climate adaptation efforts if we are to avoid the worst impacts of climate change. Furthermore, there is a US $4.1 trillion gap between the finance currently directed to nature and the levels required by 2050.

Eligibility assessment for the Tumring REDD+ project in Cambodia on Earth Blox. Image: Earth Blox

This funding cannot be purely provided by governments. With their large global influences, many multinational corporations realise they can successfully deliver these urgently needed funds to nature-based climate solutions via the VCM to help ensure a climate-stable future. 

At S&P’s recent Global Carbon Markets Conference, there was widespread support for an international unification over the VCM standards to help guide corporate climate action. While many consider a shift towards a compliance carbon market an inevitability, engaging with a pre-compliance voluntary market remains essential. They are not only leading the way on climate action but are also future-proofing themselves for a time of mandatory compliance.

Buyer behaviour

Although media attention has, in some ways, accelerated these changes, there were moves to improve quality and integrity long before the voluntary carbon market came under scrutiny. As a natural consequence of a maturing market, stakeholders have been continuously adapting their behaviour so as to operate optimally in an ever-changing voluntary landscape. 

Transparency is now a market priority. Carbon credit buyers want to know that their investment is not only making a difference but also that its impact can be reliably and credibly verified. Amid this rising demand for and commitment to transparency, a trend is emerging – the voluntary carbon market is seeing a rise of in-house due diligence.

Traditionally, due diligence referred to a company’s independent review of a carbon project’s documents while deciding whether to purchase its carbon credits. However, technological advancements and greater accessibility of satellite data are opening new due diligence possibilities for corporate stakeholders entering the VCM. For leading corporates, due diligence is no longer about reading papers; it’s also about mapping and satellite imagery. 

Early-stage funding in measuring, reporting and verification (MRV) technology has risen from $53.4 million in 2018 to $305.5 million in 2022. It is now easier and more viable to verify a project’s claims independently. This verification is extremely trustworthy because satellite data cannot be faked. It accurately records tree cover and land use, even in remote corners of the earth. In this way, satellite data enables transparent, independent due diligence – both highly desirable and beneficial for a company’s environmental reporting. 

  1. Due diligence as a safeguard

Following media criticism, corporate buyers don’t want the rug to be pulled from under their feet if it transpires that a project’s verification has been inadequate. Furthermore, corporates must also prepare themselves for independent audits. This is particularly pertinent to those purchasing large volumes of credits. 

Companies need confidence. They need to feel sure that the carbon credits they buy are representative of a genuine, positive impact on the climate, nature and local people. Therefore, if a project has been validated with independently verifiable satellite data, the buyers of its carbon credits will be better able to defend themselves against accusations of greenwashing if they do find themselves under the media microscope.

  1. Due diligence to differentiate

As the market matures, intermediaries want to position themselves as having higher quality credits than others. One way to boost credit value is to add stringency to the due diligence process, and analysing satellite imagery is an effective way to do so. It is a form of product differentiation and quality assurance that enables credits to be sold at higher prices. Where satellite and field data can demonstrate a strong biodiversity component in projects, their value is even greater.

  1. Due diligence for scale

Traditionally, a company’s geospatial team might have considered every potential carbon project on the market. However, new geospatial technologies are now enabling less technically able team members to carry out initial checks. If they can immediately rule out non-starters, it saves work for the often-overstretched geospatial teams. 

Without ‘no-go’ projects to consider, geospatial teams can double the amount of time they spend assessing the most promising nature-based projects. As well as bringing additional rigour to quality assessments, this helps companies to scale their investments faster.

  1. Due diligence for transparency

Nature-based projects often operate in remote locations, unimaginable to many of a business’s customers and board members. This creates challenges for sustainability departments who often want to share the project’s stories.

In-house due diligence can help overcome these issues of communication and transparency. Maps are highly effective for visualising the impact for board members, customers, and the general public. Even if people have never visited these places, due diligence can prove the work is being done and that it is creating positive impacts on climate and nature.

Following the first Global Stocktake, nature and biodiversity were recognised as key to achieving the goals of the Paris Agreement during COP28. High-level discussions focused on implementing nature-based solutions and numerous break-out sessions highlighted the need to enhance the integrity and transparency of these projects. In light of this growing momentum, one thing is clear. The corporates who have already incorporated satellite data into their due diligence processes are the best prepared to transition to a regulated, nature-based market. 

Sam Fleming is an experienced Earth observation specialist with a focus on ecosystems mapping and protection. He guides Earth Blox customers to progress their sustainability goals through the utilisation of the platform.

Earth Blox provides climate and nature analytics from satellite imagery to help businesses accelerate their sustainability transition. The software enables users to map and analyse in-house key metrics for biodiversity, water and carbon across forestry, agriculture, and financed and insured assets worldwide.

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