In March, the Securities and Exchange Commission (SEC) released a proposal to mandate companies disclose climate-related risks that could impact their businesses. The proposal is open for a 60-day comment period and will almost certainly face legal scrutiny after. Should it be codified, organizations will be required to disclose the amount of carbon reduction represented by offsets, the source and cost of those offsets, and details on project origin, registry integration, and other authentication methods.
The SEC says this will “help investors assess the effectiveness of the registrant’s plan to achieve its climate-related goals.” However, some worry the SEC motion could have a chilling effect on the use of offsets due to perceived risks related to climate-accounting disclosures. Many companies aren’t sure what should be disclosed, let alone how to be certain disclosure data is trustworthy.
That kind of concern is inevitable as markets evolve, especially at this speed. But this is an opportunity and an on-ramp to what’s next. A company’s ESG strategy should serve as a map through the uncertain terrain ahead. CFOs, in addition, have to be ready to share a coherent decarbonization plan with employees, boards, customers, and regulators.
The Role of Offsets
Often misunderstood, carbon offsets play a vital role in meeting Paris Agreement commitments; they’re used to bridge the gap between existing decarbonization technology and a more sustainable world.
The paths to staying below the 1.5 degrees Celsius threshold are becoming increasingly steep, and industry needs to employ all accountable measures to get us there.
I applaud the SEC's focus on climate disclosures and the use of carbon offsets. A carbon offset represents an increase in carbon storage or an emission reduction of one metric ton of CO2 through a project such as land restoration, renewable energy production, and reforestation. The purchaser of an offset credit can “retire” it to claim the underlying reduction toward their greenhouse gas (GHG) reduction goals.
While carbon offsets alone are not sufficient to mitigate climate change, the paths to staying below the 1.5 degrees Celsius threshold are becoming increasingly steep, and industry needs to employ all accountable measures to get us there. We can’t let well-intentioned claims of “It’s not perfect” be the enemy of immediate, measurable results. Climate change was never going to be solved by a single solution; decisive action means using every tool available.
Critics argue that carbon offsets are a form of greenwashing, allowing businesses to claim progress without doing anything to radically change the way they operate. Of course, companies must prioritize every available avenue for reducing emissions from operations. Unfortunately, a clear path to net-zero doesn’t exist in some hard-to-abate sectors, where the transition will be more challenging and prolonged. Transportation and logistics, for example, rely on trucks, trains, and ships, which aren’t likely to be replaced by clean-energy options any time soon. And we will still need what these sectors deliver — cement, chemicals, steel — in a low-carbon world.
Buying offsets doesn’t mean companies stop pursuing other green initiatives. Carbon offsets offer a risk-management tool akin to buying fire insurance or hedging foreign exchange risk. CFOs purchase cybersecurity insurance, but that doesn’t mean they abandon strong cybersecurity policies, teams, and controls. Similarly, purchasing carbon offsets allows CFOs to reduce their companies' immediate carbon footprints while continuing to advance other long-term strategies for technology innovations and operational improvements that reduce emissions.
The choice for many industries is to do nothing or to offset their carbon footprint while emission-abatement technologies are developed. Between “do nothing” and “do something,” the choice is clear.
Critics of carbon offsets have also pointed to a perceived lack of transparency in the carbon market. In the early days, transparency and standards were less well defined, but the picture is different today. The carbon market has embraced best practices from the energy and commodity sectors. In addition, compliance markets in the European Union and California have established quality controls and features that ensure liquidity, transparency, and credibility.
In early 2021, private-sector initiatives like The Taskforce on Scaling Voluntary Carbon Markets — now The Integrity Council for the Voluntary Carbon Market (ICVCM) — identified gaps in offset-credit quality that must be fixed to enable this vital market to scale.
The result is that original carbon-market inequities have been replaced with a level playing field that can scale to fill the gap between climate commitments and the limits of abatement technology. Carbon-project originators can readily see how similar offsets are valued and adjust pricing as necessary, benefitting from a liquid, transparent market. Companies can also avoid a time-consuming labyrinth by purchasing standardized offsets in bulk without needing a broker or staff.
Most importantly, corporations can purchase validated offsets with measurable integrity, meaning they do what they’re designed to: make the world more sustainable.
Eager for Progress
CFOs must now incorporate ESG and sustainability into their regular business metrics. It’s not easy, but it’s good for the planet, and it’s good for business. New opportunities manifest everywhere for companies able to pivot and embrace every viable path to decarbonization. Offsets are just the first vehicle, and the quality control is getting better as the carbon market matures.
In the third quarter, ICVCM will publish global threshold standards that will set a benchmark for carbon credit quality. I also welcome further regulation in the voluntary carbon market (VCM), bringing more transparency and rules to enhance liquidity and benefit all users. The more corporate interest there is, the more quickly the VCM will scale and make a meaningful impact.
Companies that survive (and thrive) in the new low-carbon economy must have a straightforward story to tell a world eager for progress. Start small, plan ahead, and communicate incremental gains because those who move fast and get in front of this unprecedented wave will reap exceptional rewards.
Suzy Taherian is the CFO of Xpansiv, a global marketplace for ESG commodities.