New Ceres guidance aims to help investors cut through the confusion about corporate net-zero commitments and carbon credits

As net-zero commitments both grow in popularity as well as come under increasing scrutiny, Ceres has released critical guidance to help investors assess the integrity of corporate net-zero commitments and companies’ use of carbon credits to deliver on those commitments. 

The global attention to the net-zero concept has mobilized companies to make commitments, with 34% of the world’s 2,000 largest publicly traded companies having made net zero commitments, according to February 2022 data from the Net Zero Tracker. 

Despite this progress, current projections for global emissions reductions are not enough to avoid the worst impacts of climate change. This week, the IPCC released a stunning new report warning that, unless there are deeper and faster cuts to atmospheric carbon, the unprecedented costs to people, economies and the environment will be worse than any seen so far. In this urgent scenario, the integrity of net zero commitments and carbon credits, and their ability to significantly reduce atmospheric carbon, is vital to avoiding systematic climate risk.

Ceres’ guidance, Evaluating the Use of Carbon Credits, arms investors with cutting edge research and best-in-class practices that allow them to navigate the risks involved with commitments and make better, more informed investment decisions. It includes clear guidance for investors on the definition of net zero and details the guardrails for using carbon credits that help ensure the validity of corporate net-zero commitments. 

“All corporate net-zero commitments are not made equal,” 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.” 

The guide builds on The Role of Natural Climate Solutions in Corporate Climate Commitments, an investor brief released by Ceres last year that highlights the clear but limited role that natural climate solutions can play in corporate climate strategies and encourages financial institutions to engage companies on improving climate disclosures. This new guidance focuses on the risks associated with relying on carbon credits to offset their emissions, and instead, urges companies to prioritize decarbonizing their value chain emissions. 

Evaluating the Use of Carbon Credits specifically asks companies to disclose: 

  • A net zero target for 2040, or 2050 at the latest, that is aligned with 1.5 *C pathways 
  • Interim (short- and medium-term) science-based targets that cover the entire value chain (scope 1, 2, and 3) 
  • A transition plan for achieving those targets 

Furthermore, to determine that the use of carbon credits is appropriate, Ceres’ guidance asks companies to disclose: 

  • Short-, medium-, and long-term emission reduction targets aligned with 1.5 °C and their progress against those targets 
  • A credible transition plan for achieving targets  
  • Their anticipated residual emissions and the percentage they plan to neutralize with carbon dioxide removals 
  • The volume of carbon credits purchased to counterbalance emissions and support climate change mitigation outside of their value chain 

Seeking these disclosures are key points of engagement for investors, as they look to guide usage of natural carbon credits in corporate climate strategies.  

“Over 600 companies have made commitments to reduce net emissions to zero by midcentury,” said Julie Gorte, Senior Vice President of Sustainable Investing at Impax Asset Management. “To get there, most—or all—of them will probably need to consider using nature-based solutions or carbon credits, after reducing their own emissions as much as feasible.  It will be essential for them to distinguish good credits capable of removing GHG from the atmosphere.  Thanks to Ceres, we now have a much better guidebook for them to use.” 

“Investors need to navigate a minefield of complexity around net zero commitments and carbon offsetting,” said Hans Mehn, partner at Generation Investment Management. “This guidance from Ceres, with an emphasis on reducing emissions first and the complementary use of high-quality carbon credits, helps investors cut through the confusion to support making informed decisions for their portfolios.” 

The guide argues that central to the integrity of carbon credits are their social impacts. Carbon credit projects that are designed appropriately and with full participation of local communities are more likely to be sustained and meaningfully contribute to emission reductions and carbon sequestration over the long term, according to Ceres. Safeguards that help strengthen community participation, improve the distribution of benefits and burdens, and enhance cultural and political recognition are critical to project success.  

“Companies should use carbon credits in a way that raises and complements the ambition of their climate commitments, while also supporting sustainable communities and resilient ecosystems,” said Julie Nash, director of food and forests at Ceres. “Carbon credit projects that are designed appropriately and with full participation of communities are more likely to be sustained and meaningfully contribute to emission reductions and carbon sequestration over the long term. 

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