Back in December, Bloomberg published a sweeping expose that raised serious questions about the ESG investing craze sweeping the world. In the piece, Bloomberg detailed how the Nature Conservancy, the world's biggest environmental group and a prominent seller of carbon offsets, had sold "worthless" credits to JPMorgan, Disney and BlackRock as the corporations sought to finance the protection of carbon-absorbing forest land to absolve them of their sins tied to fossil fuel usage.
Carbon credits and so-called "green" bonds are some of the most popular ESG-focused products that are being purchased by corporations, or ESG investment funds. But as Bill Blain pointed out in his Morning Porridge a couple of weeks back, it looks like the ESG craze is already becoming too 'woke' for its own good, as companies and institutional investors are chiefly concerned with virtue signaling, and less concerned with whether the products they're buying are actually making a difference in the fight against climate change.
Fast forward to Monday, and Bloomberg is reporting that the Nature Conservancy is launching an investigation into its procedures for selling carbon credits to try and address the criticisms raised by Bloomberg.
The self-examination follows a Bloomberg Green investigation last year that found the world’s largest environmental group taking credit for preserving trees in no danger of destruction. The internal review is a sign that it’s at least questioning some practices that have become widespread in the environmental world, and could carry implications for the broader market for carbon credits.
While the Nature Conservancy declined to answer specific questions about the review, it said in a statement that it aims to meet the highest standards with its carbon projects and that the inquiry will be led by scientists and a “team of experts with deep project knowledge."
Selling credits for well-protected trees potentially undermines the sustainability efforts of some of the world’s biggest companies. Each carbon offset is supposed to represent the reduction of one ton of planet-warming emissions that would have otherwise spewed into the atmosphere without intervention. Around the world, a wide variety of offset projects do everything from protect mangrove forests to destroy heat-trapping gases from landfills and coal mines. But offset payments channeled to already safe ecosystems don’t fundamentally change the amount of carbon dioxide in the atmosphere.
Considering the investing public's growing interest in ESG, with talk of an ESG boom driving EV stocks higher (while companies like Deliveroo flop on concerns about governance issues and the outlook for more restrictive labor laws for "gig economy" firms), the details about the market for carbon offsets aren't well understood. As Bloomberg explains, every carbon offset project is measured against a "baseline scenario", an estimate of what would have happened if preservation efforts weren't undertaken. When the project involves a forest, the manager of the project calculates the difference between the existing 'preserved' trees, and the "baseline scenario", and uses that to determine the amount of carbon credits that can be sold.
Since there's virtually no oversight or review of these calculations by a third party, carbon-credit producers have carte blanche to make up the rules as they go along. Project developers can make unlikely claims about the huge numbers of well-protected trees that were supposed to be cut down, and in that way produce a surfeit of credits.
In this case, the Conservancy claims the forest land it protects would have been aggressively harvested if it weren't for carbon payments. But while this allows the nonprofit to earn more money by selling more credits, those credits aren't actually offsetting pollution. "In a sense, you're giving a polluter a license to emit a very large quantity of pollution based on these things," says Charles Canham, a forest ecologist at the Cary Institute of Ecosystem Studies and a longtime board member of a local chapter of the Conservancy who has acted as a whistleblower, repeatedly and publicly criticizing the Conservancy's tactics, telling BBG that "the way the Nature Conservancy has gone about this is unconscionable."
For its part, the Conservancy claims its projects have been vetted by third parties and comply with nonprofit registries that supervise offsets. "As our understanding of climate change science and policy evolves, changes, and grows, we strive to ensure our projects do the same so we can achieve our goals for a low-carbon future," the group said.
Since megacorps like Amazon, Google-owner Alphabet and Microsoft (along with some of the West's biggest banks, like JP Morgan, have vowed to achieve "net zero" emissions within a few decades. To accomplish this, carbon credits will be essential (because not even the most dedicated uranium bull expects the US to go all-in on nuclear power in the foreseeable future). In 2020, carbon offset sales increased by roughly one-third vs. the prior year.
Carbon offsets have become an increasingly popular method way for corporations looking to reduce their emissions, as some aim to achieve "net zero" emissions in the not-too-distant future.
In 2020, companies purchased more than 93 million carbon credits, equivalent to the pollution from 20 million cars in a year. That’s a 33% increase over 2019, according to clean-energy research firm BloombergNEF. The market is poised to grow sharply in the coming years as heavy emitters such as Royal Dutch Shell Plc, Delta Air Lines Inc., and JetBlue Airways have vowed to negate pollution by acquiring more carbon offsets. Mark Carney, the former Bank of England governor who is an organizer of this year's COP26 climate talks in Glasgow, Scotland, has said that the global market for carbon offsets can be expected to grow to $100 billion in the decades ahead.
But the biggest problem facing governments, regulators etc. seeking to ensure carbon credits have the intended environmental impact is this: they must ensure that the activities that carbon projects take credit for weren't already occurring. The biggest sin committed by the Conservancy is it essentially sells too many credits backed by the same patches of "preserved" forestland - although the organization has protected more than 125M acres since it was founded 70 years ago, before carbon credits were even a twinkle in the eye of environmental activists.
"Carbon offsets are not a donation to a nonprofit group, it’s a purchase of a product," says Eli Mitchell-Larson, a University of Oxford climate researcher and co-author of the Oxford Offsetting Principles, which provides guidance for how offsets should be used by companies with zero-emission targets. "The purchaser is getting the ability to say they’ve neutralized one ton of their emissions."
While Mitchell-Larson applauds conservation groups for protecting and restoring lands, he says they hinder the world’s response to climate change when they sell offsets on land that was going to be preserved anyway. "One of my frustrations is the slowness of some conservation groups to take seriously the credibility of carbon claims they are making," he says.
To be sure, the Conservancy isn't the only well-known environmental group selling carbon credits against land that was already set to be preserved. Bloomberg cited some examples of the National Audubon Society using similar tactics.
The Conservancy isn’t the only environmental group selling offsets from acreage it didn’t intend to harvest. For instance, in the swampy tidal region of South Carolina, the National Audubon Society has been preserving an ancient forest since 1970. Some of the towering cypress trees have stood for more than 1,000 years. On its website for the sanctuary, known as Beidler Forest, Audubon describes a "pristine ecosystem untouched for millennia."
In 2013, Audubon began selling carbon credits from this natural sanctuary, with the project’s documents describing a rapacious baseline scenario of "clearcuts and thins." The majority of its trees would have been felled within 25 years in the absence of carbon payments, stated the documents.
In reality, nothing of the sort would have happened, according to Norman Brunswig, who helped launch the carbon project and managed the sanctuary for Audubon for decades before retiring a few years ago. "We never intended to cut that forest," he says.
Retrofitting American infrastructure with more emissions-friendly materials and technologies is a major theme from President Biden's "American Jobs Plan". Biden and his team have set a goal for the US to reach "net zero" emissions by 2050. Part of the plan will harness the largess of the federal budget is to build charging ports for electric vehicles, electric heat pumps for residential heating and advanced nuclear reactors. But there's little doubt that, for most companies and governments, achieving "net zero" will be impossible without the purchase of offsetting credits. Expect scrutiny of the space to intensify in the coming years.