by Stuart Leaver, research analyst at BeZero Carbon
“Carbon neutral” products have proliferated across the global economy over the past decade, with everyone from airlines to petrol stations weighing in. A new EU directive is seeking to clamp down on bad practice. If executed properly, this could trigger a tide of climate disclosure, helping boost transparency and credibility in carbon markets.
Managing climate risk is now an intrinsic part of business operations. Companies worldwide are committing to net zero in some form, with the leading standard SBTi reporting that 2,602 have approved science based targets.
In spite of the increase in activity, it is not always clear what impact this is having. An investigation by MSCI found that an overwhelming majority of companies are not delivering ambitious net zero commitments, 81% of which are misaligned to a 1.5C pathway. This is particularly concerning for those looking to invest in climate solutions or companies with decarbonisation strategies, as they may be misled by false or exaggerated claims.
As a result, funding for novel climate solutions, including those associated with carbon credits, is at risk. If carbon credits are to be used effectively within wider decarbonisation strategies, there needs to be greater use of risk frameworks in the market such as carbon credit ratings and insurance products.
Transparency through regulation is one route to solving these problems. If climate data and information are accurately disclosed, it promotes accountability and enables a focus on effective solutions for reducing emissions.
The European Union’s Green Claims Directive is one such measure that has wide reaching implications. The proposal will take effect in 2024 and companies will need to consider disclosing the following: where carbon credits are purchased; whether the credits are removals or reductions; what methodologies are used to verify the integrity of these units; what share of total emissions are addressed through offsetting; and, the verification of carbon neutral statuses.
This type of disclosure regulation will help build trust in the VCM and root out bad actors. Decisions on the use of credits are likely to be better scrutinised for quality, as details will be published and communicated effectively. In turn, this could spur a race to the top as companies vie to be leaders in climate standards.
This legislation complements ongoing trends in the market such as carbon credit ratings. Ratings provide the market with a greater understanding of the carbon efficacy of a credit. Ratings are an important part of the overall climate impact puzzle, and their development should be considered alongside measures like the green claims directive.
The US is contemplating following suit on green claims regulations. Last year, the US Securities and Exchange Commission (SEC) proposed a requirement for companies to disclose extensive information regarding their environmental footprint, including scope 3 emissions. The regulation proposes to include carbon credits within scope, although it does not clarify what information and the proposal has yet to be confirmed in the final draft.
In the UK, the Streamlined Energy and Carbon Reporting (SECR) policy requires companies to report basic information on their energy and carbon emissions. The reporting of offsets is voluntary, but the government’s increasing focus on the Voluntary Carbon Market – including its upcoming consultation – may mean that mandatory disclosure is on the horizon.
If passed, the EU’s Green Claims Directive could be a watershed moment for climate disclosure, setting the standard for jurisdictions the world over.