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Norway’s $1.4 trillion wealth fund advises against carbon offsets for climate goals

© Shutterstock / g0d4atherFinancial data and Norwegian flag.

Norway’s sovereign wealth fund, the global stock market’s largest asset owner has said companies should prioritise operational and value chain emissions reduction to reach interim CO2 goals, and raised concern about the use of carbon credits.

  • Norges Bank Investment Management (NBIM) has published guidelines on the use of voluntary carbon market credits in reaching near term corporate climate targets.  
  • Portfolio companies, including Apple, Microsoft, Alphabet and Amazon, are expected to align their climate strategies with the fund’s guidance.
  • This announcement reflects industry-wide concerns about the use of inflated, unreliable and opaque carbon credits and pushes for concrete emissions reductions instead

As controversy continues to beset the VCM the world’s largest sovereign wealth fund has said that carbon offsets should not be used to support near term corporate net zero targets, but rather should be used to signal higher long term ambition.

Norway’s sovereign wealth fund is looking to effective transition

NBIM is part of the Central Bank of Norway and manages the Norwegian Oil Fund or the  Government Pension Fund Global (GPFG). It has published detailed guidance on the transition and the use of the VCM by corporates in achieving its net zero targets. Given that the fund owns nearly 1.5% of all shares in the world’s listed companies, including global giants such as  Nestle and Samsung, this is a significant indication of investor expectations.

Lead investment stewardship manager Tim Smith said: “Many companies now need to move on from disclosures and target setting to the execution phase. They need to show investors credible transition plans and explain how they will ensure delivery.”

The VCM guidance is part of a wider positioning on how to effectively manage climate risk, covering corporate climate strategy,  ambition and target setting,  transition plans, and delivery and transparency. The guidelines are in line with international standards such as the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct.  

The release of the guidelines follows the publication of the fund’s Climate Action Plan, which it released in 2022, followed by a warning in 2023 that it would vote against the re-election of board members that failed to engage with the management of climate risk.  

There are significant challenges for the VCM

NBIM acknowledged that for some companies, reducing emissions to zero can be unfeasible (especially in sectors which are reliant on carbon intensive supply chains) and thus rely on carbon removals for offsets or supplementing what?. Moreover, carbon credits traded in  transparent and credible markets can help finance much-needed mitigation and sequestration opportunities globally. 

However, it raises concerns about whether real, legitimate and durable emissions reductions are generated with carbon offsets, and whether it may distract from company efforts to reduce emissions in a concrete and long-term manner by investing in emissions-reducing technology and processes. 

NBIM also highlighted the challenges faced by investors in evaluating the credibility and progress of companies’ climate commitments when they use voluntary carbon credits. Companies may not be transparent in their disclosures as well, sometimes through misrepresentation but more often through a lack of understanding. 

As the VCM matures it is coming under increasing scrutiny.

A report in January 2023 found that many of the REDD+ (Reducing Emissions from Deforestation and Forest Degradation) avoided deforestation credits certified using Verra’s  Verified Carbon Standard, could be highly inflated and represent only a fraction of the emissions reductions claims.

Then a new investigation published in September 2023 by the Guardian and researchers from non-profit corporate watchdog Corporate Accountability, analysed the credits issues by the top 50 emissions projects – those that have sold the most carbon credits globally. The research categorised 78% as ‘junk’ or ‘worthless’ due to a ‘fundamental failing that undermines its promised emissions cuts’. Basically that is when there was “compelling evidence, claims or high risk that it cannot guarantee additional, permanent greenhouse gas cuts.”

Verra responded in detail to the first analysis and said it was concerned about the Guardian’s approach to the VCM and the credits market.

Verra said: “There is compelling evidence proving the effectiveness of REDD+ projects. A September 2022 study by the University of Cambridge of 40 REDD+ projects found that, in the first five years of implementation, deforestation within project areas was reduced by 47%, and degradation rates were 58% lower.

“The study concluded that incentivizing forest conservation through voluntary site-based projects can slow tropical deforestation. In addition, an August 2023 peer-reviewed study by the University of Chicago demonstrated that carbon markets are one of the most effective tools available to prevent deforestation.”

Margaret Kim, chief executive of certification body Gold Standard said: “Carbon markets, despite reaching only a $2 billion cap last year, are a vital tool in our climate and sustainable development arsenal. They demand constant learning from evolving science and technology, and a significant part of the carbon markets community is dedicated to ensuring its rigour.”

It is important to remember that the VCM is about driving voluntary action on climate change, it is not part of any mandatory or legally binding framework. It is one of many instruments and, as Kim points out, many other financial avenues ‘lack the same level of monitoring and verification.’

Carbon credits should be additional to action

Nonetheless, given the lack of certainty around the VCM, the NBIM guidance suggests that companies should prioritise reducing their own emissions in their operations and value chains before relying on carbon credits for interim goals.

It also draws attention to non-permanence risk, the risk that any stored carbon will be released back into the atmosphere – especially with reference to nature-based projects. Over time, companies should see its carbon credits generated from carbon removal projects, those linked to durable removal of CO2 from the atmosphere, as a priority.

Not only should any offsets purchased represent emission reductions verified by a recognised standard-setting body, they should be additional. Simply put, according to the NBIM approach, that means credits should be purchased from projects or activities that would not have taken place without the additional finance generated from carbon credits – including, for example, a forest conservation project. 

Finally, they emphasise the benefit of transparency on companies’ use of carbon credits and their cost for investors. They encourage disclosure of price range of carbon credits, volume, certification standard used and a description of mitigation activity according to a disclosure template.  

SGV Take 

The increasing scrutiny on the opacity, extent of loopholes and lack of credibility associated with  some carbon credits sold in the VCM is now being reflected in global industry concern and action: one of the most prominent sovereign wealth funds in the world has emphasised that it is best to use credits for ‘contribution’ rather than offset. 

This reflects increasing pressure on businesses to optimise their operations for sustainability to create real emissions reductions, instead of continuing with certain polluting technologies and pay to offset them in a non-transparent carbon credit market. 

What is of concern is the continued focus on the $2 billion voluntary carbon markets, when governments increased their fossil fuel subsidies to $7 trillion in 2022.

There are problems to be fixed in the VCM and integrity is critical to accounting – but what is necessary is encouraging more concrete long-term investments in sustainable operations and technology among businesses to reduce emissions across the board.

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