Despite arguments for an international price of carbon for tackling climate change, there has been no multilateral agreement. To fill the gap, private financial firms have taken the initiative in creating more transparent carbon markets.
The use of carbon offsets to deliver sustainable international development objectives has existed for just over two decades after the Kyoto Protocol established the Clean Development Mechanism (CDM) in 1992.
A carbon offset simply represents one ton of carbon sequestered or absorbed. The Kyoto Protocol enables developed countries to generate emissions credits by creating offsets projects in developing countries, with the proviso that such projects are not exploitative towards their host countries.
Under this framework, many firms have bought offsets from tree planters of green energy developers. Firms with net zero ambitions can substitute unavoidable emissions with offsets. But firms are not required to report on this process, which is voluntary and unregulated. Therefore, it is not clear what impact, if any, offsets are having on overall emissions targets.
Offsets have, by proxy, become the de facto price of carbon dioxide. But many commentators have argued that a unified global price of carbon is crucial in the fight against climate change. Indeed, when the Ukrainian conflict began in February 2022, the price of carbon collapsed as the market anticipated that governments would need to expand their domestic production to replace imports of Russian oil and liquified natural gas.
Such volatility undermines the legitimacy of carbon offsets as a tool to reduce emissions. However, the price of carbon is expected to increase in the long run as the impact of climate change becomes more pronounced.
There are also ongoing concerns about the quality of carbon offsets. Greta Thunberg walked out of a seminar on voluntary offsets at COP26. Concerns have been further exacerbated by the recent news that the price of Klima’s tokenized offsets was being pushed up by bullish crypto investors. Digital ‘ tokenization’ risks artificially raising the price of offsets.
Issues like these suggest that efforts to fight the climate crisis could be undermined by a fractured and unregulated global market for carbon offsets. Despite this, the Task Force on Scaling Voluntary Carbon Markets, led by former Bank of England governor Mark Carney and Standard Chartered chief executive Bill Winters, has pursued a rapid scaling of the carbon offsets market. Carney predicts the market could have a total value of $100bn by 2030.
Against this complex backdrop, some financial firms have stepped up to facilitate carbon offset markets. Indeed, seven banks – Barclays, JPMorgan, HSBC, Nationwide Building Society, Natwest, Standard Chartered, and Santander – have all been reported as scaling up their involvement in offset markets between October 2021 and May 2022.
Penta has analyzed the response towards private banks regarding their engagement with this issue, evaluating each bank by sentiment and share of voice.
Penta's calculation based on live media monitoring and reputation analysis of millions of content sources uses natural language processing to uncover the sentiment of articles in the media that cover carbon offsetting. Negative sentiment is a proxy for stakeholder opinion, and sentiment is ranked on a scale between -100 and 100 for each piece of content.
Standard Chartered has observed a rise in positive sentiment to a score of 18, due to its participation as a founding member in Project Carbon, a collaboration of global financial institutions designed to reduce barriers for individuals wishing to fund carbon reduction projects in the global south. Standard Chartered also joined the Climate Impact X venture in Singapore, aimed at facilitating trade in offsets.
Santander has achieved a positive sentiment score of 56 for ESG initiatives including the provision of £6.4m to the development of Hawkers Hill Energy Park storage facility in Dorset. The site will be used to store and capture renewable energy, which is an example of one type of offset being developed.
JPMorgan Asset Management explored another direction in carbon offsets by purchasing forest management and timberland Investing company, Campbell Global. However, the practice of using forests under active management to create offsets has been viewed as avoidance and attracts skepticism over the quality of offsets. Overall, JPMorgan has a negative sentiment score of -54, following frequent targeting by climate protesters and denunciation by the non-profit, As You Sow.
Natwest Group achieved a positive sentiment score of 55 as its climate-related disclosures reveal the bank provided £17.5bn in sustainability-linked funding to customers in 2021.
Despite some positivity towards individual ventures, Penta found a negative total sentiment score of -16 for all media content relating to offsets. Articles in the media were generally critical of the effectiveness of offsets, due to their voluntary nature. In Q2 2022 especially, articles questioned whether the “obsession” for scaling up voluntary offset markets should take priority over quality assurance of offsets.
Carbon offsets are not a perfect tool for fighting climate change because they often fall foul of measurement issues and concerns over avoidance. Critics argue that offsets incentivize polluters to pay away their responsibility to invest in reducing emissions.
And yet, we are seeing rapid progress towards market development. There remains wide scope for financial institutions to shape the future of carbon offsets – and if handled carefully, to positively impact their reputations.