Carbon credits: knowing how to pick the right investments

CARBON credits haven’t always had the best reputation. In addition to criticisms that they help some to mask their true carbon footprint, the bigger concern is with poorly-run projects – the ones that not only fail to deliver on their environmental promises, but may also be detrimental to the communities within which they are sited.

With many of them sitting alongside well-run projects, it can be tough for some investors, particularly those who are newer to the game, to know which is which. A well-meaning purchase of carbon credits to set off the emissions of one’s air travel, for example, could end up causing more harm than good.

The Business Times spoke to project managers whose enterprises span various causes and geographical regions to get a better sense of the work that’s done on the ground, and for a firmer grasp of the attributes of good-quality projects.

A crucial differentiator

A significant development in this space was the recent release of a much-anticipated global benchmark for carbon credit quality: the Core Carbon Principles (CCP), issued by the Integrity Council for the Voluntary Carbon Market (ICVCM).

“Application of CCP labels in the VCM (voluntary carbon market) would effectively bifurcate the market between high and low grade credits, between companies that are publicly accountable for their climate-neutral commitments and those that are not,” says Ken Newcombe, chief executive officer (CEO) of C-Quest Capital, a global carbon project developer that aims to transform the lives of families in vulnerable communities around the world.

“(The CCP) would define quality at the highest level and provide some assurance to those wanting to be assured that the credits they buy for offsetting their climate impact have an acceptable measure of atmospheric integrity as well as contribute to sustainable development,” Newcombe added.

Carbon Growth Partners, which provides investment management services in global carbon markets, believes the CCP will not only raise the bar and standardise carbon certification standards and project methodologies, but also move the market in a clearer, more transparent, direction.

Rich Gilmore, CEO of Carbon Growth Partners, added: “The supply of good projects in the market is already quite small, and we anticipate that the CCPs will further constrain that supply. With declining supply, prices will rise. Rising prices in the market are important for two reasons; first, they drive additional investments in carbon projects around the world; and, second, the higher price on carbon will also drive corporate behaviour and further incentivise their decarbonisation programmes.”

Mike Korchinsky, founder and CEO of Wildlife Works (WW) – a community-centred wildlife conservation company that implements market-based initiatives to protect the planet’s threatened wilderness – says: “This is the first time the market has seen an approach like this, and the second release of the CCPs will be critical for how developers like us can comply with the principles.”

Vasco van Roosmalen, co-founder of ReSeed, cautioned however that much will depend on how the core principles are applied within the market and the transparency of the information provided on the origin and impacts of the carbon credits certified. ReSeed is a full-service carbon solution provider that brings carbon credits directly from farmers to the market.

Wheat versus chaff

The concern over picking the “right” credits – the ones that deliver the impact that one is paying for – is real.

In Compensate’s recently published white paper Reforming the voluntary carbon market, the Finnish non-profit and impact startup highlighted one of the main shortcomings of carbon markets: low-quality carbon projects have no real positive impact on the climate.

These are projects that do not remove or reduce emissions and might instead have negative effects on biodiversity, local communities, and the environment.

“Take timber plantations for example: In order to maximise growth and profit, plantations will plant fast-growing species like eucalyptus and use chemical fertilisers and pesticides. This contaminates bodies of water, harms biodiversity and pollutes the soil,” Compensate says.

It added that large plantations also have well-recorded negative socioeconomic effects such as lower wages, higher food prices, loss of jobs, evictions, restrictions on land use, and pressure on locals to sell land.

The wrong investment motives contribute to such shortcomings.

Newcombe shared: “Opportunistic investment with short horizons offers no promise of sustained improvements in the life of the poorest and most climate-vulnerable people. (Long-term investment) seeks to build businesses that serve communities and families through long term partnerships that grow and change over time, taking into account the huge uncertainties of a climate-challenged world.”

“In our view, investors looking for low-cost climate mitigation opportunities should focus on projects that are long-term, adaptable, and will prosper in our climate-constrained future. Sadly, the balance seems to be in favour of short-term vested interests at this point.”

Funding the positive

Aiding the right investment approach would be the recognition of the hallmarks of higher quality projects – which the CCP has and will help to flesh out.

A good starting point would be to look at the project’s disclosures, reporting standards used and any independent verification of such information. CGP’s projects, for instance, adhere to certain integrity characteristics – including verifiably aligning with the United Nations Sustainable Development Goals (SDGs); using peer-reviewed, scientific modelling and project design to support carbon benefits; and having independent, third-party verification and validation of scientific integrity within a recognised registry system such as Verra.

Another aspect, which Korchinsky is particularly encouraged about, is the inclusion of sustainable development in the CCP: “(This) ensures that carbon credits not only ensure environmental impact but deliver positive sustainable development impacts, as well.”

Investors also need to understand that an important determinant in projects delivering promised sustainable and beneficial results is how closely project managers work with stakeholders – in particular, the communities that live in and are affected by the projects. “Forests managed by indigenous peoples and local communities (IPLCs) consistently have better outcomes,” Korchinsky says.

Wildlife Works, for its part, involves local governments and indigenous peoples across the life cycle of its projects, from inception to completion, and also hires most of its project staff from local communities.

Investors can also look out for projects that recognise that climate actions taken by local communities and farmers not only fight climate change but also help improve food security and income inequality. van Roosmalen says: “These issues are intrinsically interrelated and, by recognising this fundamental fact from the very beginning, carbon projects can become much more responsive and effective for all stakeholders.”