Achieving net zero is well-acknowledged as the single biggest challenge of our generation.
As investment professionals, we are very familiar with the crucial role private capital has to play in funding decarbonisation solutions and how renewables and nascent technologies can create a pathway to a low-emission global economy.
We understand the essential need for continued investment if we ever hope to stave off the effects of climate change. We recognise both the challenge and opportunity that this has presented us, and not a day goes by without news of another big renewables project or new technological innovation receiving funding. Although a lot more needs to be done, we are all invested in playing our part.
But this is just one part of the puzzle. What about the emissions that can’t be removed?
Even with radical innovation and achieving decarbonisation goals, there will always be some level of emissions that we can’t fully eradicate. That’s ultimately the “net” in net zero – making sure we can offset hard-to-remove and truly residual emissions by removing carbon from the atmosphere.
The net zero puzzle
Progress is being made in reducing carbon throughout supply chains and in our daily lives. The primary goal is rightly decarbonisation, and many companies have targets to decarbonise 90% of their emissions. Although daunting and needing scale, this is actually the more straightforward part of the challenge.
The really tough part is the last 10% of emissions which will require carbon offsetting solutions.
Offsetting has a crucial role in the decarbonisation journey. Even with the most optimistic innovation projections, we know that we will not be able to completely decarbonise our supply chains by 2050.
As a society, we have to look beyond decarbonisation as the sole solution. And many have already started.
There are companies going beyond what’s mandated and offsetting their emissions on the way to net zero.
As net zero targets approach, companies are being held to account by their customers, shareholders, and employees. As such, demand from these companies to offset their carbon emissions is growing.
They want to do the right thing for the planet and recognise the value of building a trusted brand. In order to do this, they know they must demonstrate how they will meet net zero. With offsetting as a critical part of this, it is driving demand for carbon removal credits.
Conserving nature
We need to remove carbon from the atmosphere. That can happen through technology or through nature. Nature is the most efficient and lowest cost way to achieve this. And this option has other benefits too – it can help address climate change via promoting biodiversity, for example. This is why natural capital matters.
However, conserving nature and generating carbon credits that deliver as promised is easier said than done. There can be a huge reputational risk attached to getting it wrong, leading to scepticism about the credits market.
Reputational risk of greenwashing
How can companies offset their carbon emissions authentically? In buying the carbon credits generated by a project, companies must be certain they are creating real impact and avoid the reputational risk associated with buying untrustworthy credits.
Unfortunately, this has been a palpable problem in what is a nascent carbon credit market.
Damning analysis by Corporate Accountability and the Guardian in 2023 found that the majority of offset projects are “likely junk or worthless” due to one or more failing.
Yet offsetting remains critical to net zero and the market is looking for solutions.
Getting offsetting right is important to net zero, and it’s important for investors too. And what’s needed is a stronger focus on quality to deliver results. That includes focusing on the transparency of reporting, measurement and verification, additionality, permanence, co-benefits, and community engagement.
Strong investment case
There is latent and growing demand for carbon credits in a market where there is a limited supply of high-quality carbon removals credits.
The number of companies setting net zero targets is growing, increasing the market size for carbon credits.
There’s also a sense of urgency. Carbon removal projects take time to sequestering carbon, so companies can’t push this problem further down the line, they feel they must act now.
These dynamics are creating opportunities for investors, with the price of carbon credits expected to increase given the structural fundamentals of the market.
By backing quality credit-generating projects, investors can capture the growth in the natural capital economy.
Generating trusted carbon credits
So how can carbon offsetting work for both companies and institutional investors? How can the integrity of carbon removal projects be ensured? What does high quality look like?
Approaching carbon credit projects in the right way and taking a conservation-forward strategy can deliver for all stakeholders.
A way forward for natural capital
Society relies on natural assets to function, from forests and rivers, to oceans and soil. Natural Capital applies an economic lens to the world’s stocks of those natural assets. It places a value on the restoration and conservation of nature through units or credits such as carbon or biodiversity credits.
The world of natural capital is nascent. We believe the sector now needs quality investment managers to help capital flow into the sector and into the right projects, under the guidance of Frameworks like SBTI (Science Based Target Initiative), ICVCM (Integrity Council for the Voluntary Carbon Market) and VCMI (Voluntary Carbon Market Initiative), alongside robust diligence at every step of the value chain.
By Alex Godfrey, investment director at Octopus Investments
