Northampton, MA --News Direct-- AllianceBernstein

By Sara Rosner| Director, Environmental Research and Engagement—Responsible Investment and Satyajit Bose| Associate Director—Program in Sustainability Management at Columbia University

Carbon offsets occupy a relatively small space on the spectrum of environmental, social and governance (ESG) issues. But as more countries and companies commit to net-zero carbon emissions goals, they’re steadily gaining attention from investors as a tool to accelerate carbon reductions. Growing demand has fueled record-high prices in some markets.

Companies have relied on offsets to help avoid or reduce emissions for decades. Long associated with the “cap and trade” (compliance) market, they’re traded globally in two ways: as allowances among companies to comply with mandatory emissions caps or as part of various abatement initiatives in the voluntary markets. Offsets are generated through carbon-reduction activities across two broad categories: industrial and nature-based. Solar and wind power, for instance, are examples of industrial initiatives to avoid carbon emissions while tree planting is a nature-based carbon removal initiative (Display).

Currently, 68 compliance markets span the globe, representing about 23% of total greenhouse gas (GHG) emissions. Strong demand now outweighs supply, and prices in some markets have reached new highs. About US$84 billion was collected in global carbon pricing revenue in 2021, compared to US$53 billion the year before. Rapid growth is expected especially in the volunteer market, where companies purchase credits from carbon reduction initiatives that are not necessarily linked to regulatory regimes. In fact, volunteer market offset activity hit US$1 trillion for the first time in 2021, according to the World Bank.

Market Parameters and Rules Are Starting to Gel

Offsets are still evolving as a distinct asset class. The markets are starting to take better shape as regulators and other groups help codify some rules around them.

Pending guidance from the Institutional Investors Group on Climate Change, for example, articulates company engagement and capital allocation best practices. The recent COP26 global climate change conference adjourned with a first-ever multinational agreement for trading standards. They included clearer rules to facilitate arbitrage across developed and emerging-market jurisdictions, which is considered vital to improved legitimacy and global uptake.

In the US, proposed SEC disclosure rules around climate change impacts would mandate offsets reporting in annual statements—a big step toward greater transparency and accountability. The move has sparked such a swarm of interest and debate that the SEC issued a rare extension of the window period for comments.

Investors More Aware of Offsets Role in ESG

Investor interest in offsets is steadily growing too, as the emphasis on corporate commitments to address climate change intensifies and more solutions are placed on the table. Shareholder activism around ESG is expected to soar in the coming years, with considerable pressure on the “E” factor. In this vein, more investors are keenly aware of how offsets can directly impact a company’s cash flow, reputation and legal standing, among other variables (Display). So, when the Carbon Disclosure Project (CDP) reports that just 100 companies are responsible for 71% of world GHG emissions, shareholders are highly motivated to advocate for effective counter measures. We now expect these exchanges on carbon offsets to increasingly feature in proxy votes.

Quality Control Still Has Gaps

New guidelines and growing investor awareness are helping carbon offsets gain traction. But we think it’s important to focus on both quality and quantity. Some offsets are verified by a regulatory body or government-sanctioned certifier, such as the Australian Carbon Farming Initiative or the California Air Resources Board. Other offsets are verified by nonprofit certifiers such as the Gold Standard, Verra, the American Carbon Registry or the Climate Action Reserve.

But for offsets to enter the mainstream, investors will need much more guidance. For instance, can they gauge whether an offset will contribute to real carbon reductions? Or does it just level set a company’s growing emissions output? The world produced a record 37 billion tonnes of CO2 in 2021, the highest in the 64 years it’s been recorded by Hawaii’s Mauna Loa Observatory. Clearly, investors of all types who wish to make an impact using carbon offsets will need reliable yardsticks to determine if they’re solving the problem or not.

In addition, it is important for investors to assess the stakeholder impact of offsets. Carbon reduction activities with local co-benefits (job creation, biodiversity preservation) are likely to be well embraced by local stakeholders. This can lead to greater permanence and legitimacy and help minimize external threats. While such projects may cost more, they might carry less risk.

Some of the new metrics criteria look promising. A handful of ESG data providers are incorporating carbon prices in different temperature scenarios to gauge a company’s transition to net zero. Academia is on board too. This includes the Columbia Climate School, which partners with AllianceBernstein to educate investors and managers on carbon offsets and other climate-related issues. UC Berkeley’s CoolClimate Network shares its comprehensive quality assessment framework (Display). Among the rubric’s red flags is double counting, a common occurrence because of unclear accounting rules. For example, buyers could credit the same offset in different areas of its emissions inventories, or the same credit could be counted multiple times across jurisdictions. But a planned move toward more uniform global administration—another COP26 takeaway—should prevent this.

It will take time before carbon offsets become asset allocation options for the average investor. But better transparency, pricing and other market standards have given them some well-deserved spotlight. We believe they’re worth actively exploring within a broader ESG-investing context. Their global abundance can especially encourage flows of capital to stakeholders in developing countries and help facilitate broader attainment of SDGs. When implemented correctly, offsets play an important supporting role in the fight against global warming, especially when reducing carbon emissions is a battle of increments, not an overnight fix.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.

View additional multimedia and more ESG storytelling from AllianceBernstein on 3blmedia.com

View source version on newsdirect.com: https://newsdirect.com/news/ab-are-carbon-offsets-the-next-esg-investing-frontier-733172083

Integrating ecotrek’s Sustainability Data Mining Technology with EcoVadis Advances the Scope, Speed and Quality of ESG Visibility and Impact Across Global Value Chains

The West Virginia senator retracts his support of clean energy provisions in the Democrats' economic package.

Oft-quoted Penn State University scientist and published author Michael Mann says Sen. Manchin is sinking global climate action by shrinking U.S. role.

Solar energy stocks fell off Friday on news that the latest federal spending package will likely leave out clean energy.

Hydrogen fuel cell maker Plug Power sees 2022 revenue surging 80% year over year to up to $925 million. Is PLUG stock a buy now?

The two incidents occurred in March and June and both required a response from the local fire department.

The Los Angeles company said it will install 2,000 electric vehicle chargers at up to 500 Pilot and Flying J travel centers in 40 states.

Texas' troubled power grid is struggling to meet demand during a prolonged heat wave, forcing the state's industrial customers to make moves to cut electricity demand.

(Bloomberg) -- As searing Texas heat drives power demand to record highs, the state’s grid operator is ordering plants to run at a historic pace, often forcing them to put off maintenance to keep cranking out electricity. That’s helped keep the lights on, for now, but the short-term focus is putting even more stress on a system that’s already stretched near the limit. Most Read from BloombergIvana Trump, First Wife of Former President, Dies At 73Chinese Homebuyers Across 22 Cities Refuse to Pay

One reader says: Current reservoir system has served the West for over 100 years, but the lack of planning for a sustainable future is obviously an error.

WASHINGTON (Reuters) -Senator Joe Manchin's decision to halt support for President Joe Biden's climate legislation after more than a year of negotiations has left Democrats with limited options to tackle climate change, an important goal for the president's base. The West Virginia senator, a conservative Democrat who is the biggest recipient of donations from fossil fuel companies in Congress and who owns a stake in a coal brokerage his son runs, left fellow Democrats seething after he said he could not support new spending on climate measures or tax increases. The latest talks were over $300 billion in tax credits for industries including solar and wind power, carbon capture from power plants and nuclear power which generates virtually emissions-free electricity.

Utah's Great Salt Lake dropped to its lowest recorded level this month amid a two-decade drought, a grim milestone as researchers and politicians point to grave threats to wildlife and people along its receding shores. The nearby metropolis of Salt Lake City is already subject to dust storms that experts fears could get worse. "To save the Great Salt Lake, so that we don't become Dust Lake City, is to make a conscious choice that the lake is valuable and that the lake needs to have water put into it," said atmospheric scientist Kevin Perry, who has biked across dried-out lakebed since 2016 to study its composition.

(Bloomberg) -- President Joe Biden came into office with more aggressive plans to fight what he called the “existential threat” of climate change than any of his predecessors. Three months into his presidency, he vowed to cut the carbon emissions of the world’s second-largest emitter in half by 2030, a pledge that helped re-establish American climate leadership on the global stage. Most Read from BloombergIvana Trump, First Wife of Former President, Dies At 73Chinese Homebuyers Across 22 Cities

Jennifer Rumsey will take on the CEO role in August as the company pursues cleaner alternatives to diesel engines.

West Virginia senator refuses to support funding for climate crisis and says he will not back tax raises for wealthy Americans

Amid seemingly constant heat in Texas, some communities were incredibly grateful to receive rainfall on July 14.

The increase during the period contributed to a whopping 29.7% rise in the combined price of wind and solar contracts, known as power purchase agreements (PPAs), from the previous year, according to a quarterly index by LevelTen Energy that tracks renewable energy deals. Economic, logistical and labor market disruptions during the coronavirus pandemic have worsened since the Russian invasion of Ukraine, reversing a decade of cost declines for the renewable energy sector. LevelTen said it was too soon to say whether U.S. President Joe Biden's decision in early June to waive tariffs on solar panels from the four Asian nations involved in the probe for two years would alleviate some of the cost pressure.

The thick cloud of smoke over the Washburn Fire at Yosemite National Park poses a potential danger.

Following outreach by the activist investor, ConocoPhillips, Devon and Pioneer are joining a U.N.-backed group working to cut methane emissions.

The general contractor for the Toyota lithium battery plan to be built at the Greensboro-Randolph megasite has filed for a building permit for at least a piece of the project. KBD did not return messages from TBJ this week. Kevin Franklin, president of the Randolph County Economic Development Corp., told TBJ that the work permit was filed for the plant's first building.