The International Panel on Climate Change provides guidance on how much carbon can be emitted to limit warming to 1.5°C with probability weightings, shown in the table below. Emissions, including land-use change, are currently over 50GtCO2 per annum.

Source: IPCC AR6 Summary for Policymakers (2021)

Despite 88% of emissions being covered by countries’ net-zero commitments¹ and 23% of emissions coming under a carbon pricing mechanism², global GHGs continue to rise. The chart below shows the size of the challenge. To stay within carbon budgets – the world will require annual decarbonisation rates similar to the emissions impact of Covid-19 lockdowns in 2020. With current climate policies and decarbonisation technology costs this is not presently feasible. Therefore, carbon offsets must be supplemented with ongoing emissions reduction efforts today.

Source: abrdn, Jones et al. (2023), emissions include land-use change

Moreover, approximately 30% of existing annual emissions come from land-use change³.

To mobilize capital towards nature-based solutions, investors need to be incentivised to take on project risk but they must also ensure the integrity of claims relating to emissions and nature impact. There are various ways investors can participate in nature-based solutions and the level of participation will also dictate the claims that they can make:

If we assume the nature-based project is high integrity – meeting thresholds on additionality, baselining, monitoring and permanence – then both forms of investor participation are climate positive. In the first method investor capital is enabling a project to take place. The same is true for the investor capital in the second method as well since the project relies on the carbon revenue earned from the sale of carbon credits.

This creates a dilemma for investors about how to navigate emissions impact claims, as double counting emissions claims will negate the real-world positive impact. The solution to this is simple and hinges on who retires the carbon credit.

Environmental integrity

The environmental integrity of an underlying project must underpin all claims, regardless of whether an investor participates via route 1 or route 2 above. This requires rigorous due diligence to ensure projects are additional, not over-crediting and have a high certainty of permanence. This should be supplemented with detailed project-level reporting, which should include; project name, type, location, carbon programme, vintage, credit ID, credit price, and so on.

Over time we hope to see the maturity of the Integrity Council for the Voluntary Carbon Market (ICVCM) and Voluntary Carbon Market Initiative (VCMI) improve project-level reporting, transparency and overall market integrity.

Investor emissions reporting

It is critical that emissions reporting is always done in gross terms rather than net. Despite the theoretical use of offsets being to ‘net off’ emissions, there needs to be an acceptance that to build a credible high-integrity market, transparency is key. Therefore, to supplement project-level reporting, investors should also report emissions in gross terms.

Offsetting to meet investors’ net-zero targets?

While there appears to be a consensus that investors should become greater participants in nature-based solutions, there is limited guidance on incorporating offsets into investor net-zero commitments. First and foremost, the world needs to see a reduction in emissions, with carbon removal projects from nature-based solutions being complementary to this. This aligns with the concept of a ‘mitigation hierarchy’ (see below), in which emissions reductions are to be prioritised.

Emissions mitigation hierarchy

We believe that investors must apply the mitigation hierarchy rigorously to their existing portfolios before considering offsets as a way of meeting decarbonization targets. However, this should not stop investors from mobilizing capital for nature-positive projects as long as they are transparent.

Lastly, investors should recognise any co-benefits and the importance of mitigating any ‘do no significant harm’ risks of a project, for example, by considering local land rights issues, initiating local stakeholder engagement, and considering wider social and biodiversity outcomes of each project.

abrdn has outlined a set of seven key principles to ensure high integrity and best practice are applied when directly investing into nature-based solutions. These are listed in our ‘Naturally tackling climate change’ article here.

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