From greenwash to supply squeezes: How COP26 changed the nature-based solutions market

At COP26 earlier this month, the mechanisms on the Paris Agreement rulebook were finally agreed upon, with key aspects on carbon markets defined in unison by world nations. So, will this new and strengthened carbon market assist corporate net-zero targets, particularly through the lens of nature-based solutions?

edie speaks to experts to uncover how the market for NbS is improving to alleviate fears of greenwash

edie speaks to experts to uncover how the market for NbS is improving to alleviate fears of greenwash

Carbon markets can cover solutions ranging from manmade technological solutions to nature-based (NbS) solutions. In the current economic climate, NbS are proving a popular mechanism for corporates looking to accelerate net-zero strategies.

The general consensus from green groups is that climate change exacerbates nature loss and vice-versa, but that well-delivered, nature-based solutions should play a key role in delivering climate adaptation and mitigation. This consensus has been adopted by many national governments and a growing cohort of large businesses – most of which are using nature projects in accounting against their own climate goals.

Among them are hotelier IberostarFMCG giant Procter & Gamblemedia streaming service Netflix and window manufacturer Velux, the latter of which is working with WWF to offset 100% of its carbon emissions in the future and capture the equivalent of its historical carbon footprint by 2041.

And yet concerns persist that corporates are focusing too much on the “net” of their net-zero strategies, leaning too heavily on offsets through NbS and carbon markets rather than detailed decarbonisation plans.

The investor group Climate Action 100+, for example, published research at the start of the year detailing that no company had full disclosed plans to reach net-zero. Only a handful of the world’s largest organisations have since published some sort of roadmap.

As these plans are fleshed out, the short-term fallback seems to be a reliance on offsetting and exploring carbon removal technologies that aren’t commercially viable yet. On offsets, companies invest in NbS and programmes, such as tree planting or restoration to balance their own emissions. However, the current market for these projects has been best with accusations over inconsistent accounting, concerns that they actually fuel climate change and that they enable corporates to “greenwash” their way to net-zero.

With all of this in mind, corporate net-zero targets have been dubbed the “wild west”, where anything goes and not enough scrutiny is placed on claims and actions.

At COP26 earlier this month, the mechanisms on the Paris Agreement rulebook were finally agreed, with key aspects on carbon markets defined in unison by world nations. So, will this new and strengthened carbon market assist corporate net-zero targets?

Edward Rumsey is a managing partner at Permian Global, a business that specialises in the development and management of reforestation, biodiversity and NbS projects. Rumsey is also a member of the of Verified Carbon Standard (VCS) Programme Advisory Group and a member of the Special Advisory Group to the World Bank, Carbon Markets and Innovation team.

According to Rumsey, COP26 was one of the key moments in the development of better standards and metrics for global carbon markets that will likely generate more confidence from nations and corporates regarding the credits they are purchasing and projects they are investing in.

“A lot of improvement [will come to the market] by the commoditisation of reference contracts, fungibility, improved oversight and we've now got rating agencies that are looking through to address the inherent concern of the quality of the underlying units used in carbon offsetting and whether that was really demonstrable of a tonne of CO2 equivalent,” Rumsey told edie.

“Now, with Article Six [of the Paris Agreement] we have robust standards and we're looking at third party oversight. I think buyers are increasingly getting confident that what they're actually buying does have integrity. And that's really important. So corporate demand is bounding forward and which means we’ll see an uptick in pricing, and we’ve already seen in the last 12 months, because there’s far more transparency.”

What is Article 6?

Negotiations on Article 6 of the Paris Agreement – the section pertaining to carbon markets and how emissions reductions under NDCs can and should be accounted for – have been a focus area throughout COP26.

In approving the Glasgow Climate Package, world leaders have also made some key resolutions on Article 6. The final agreement effectively resolves issues regarding paragraphs 2 and 4 of the article, which covers bilateral carbon trades and a centralised accounting hub to replace the Kyoto Protocol’s Clean Development Mechanism (CDM).

After what has been reported as slow progress on this tricky issue throughout COP26, the final text states that “internationally transferred mitigation outcomes” (i.e. carbon offsetting) should rely on “real, verified and additional” emissions removal taking place from 2021 onward. There is a requirement for co-benefits in terms of adaptation and the economy, and for nations to put at least 5% of the proceeds into adaptation.

Plans for a potential two-tier system, and to transfer existing forest credits Into Article 6, were deleted from drafts, in a move most green groups have praised.

While Article 6 is of paramount importance to nations and their ability to reach Nationally Determined Contributions (NDCs) to the Paris Agreement – which need to be updated next year – it is also helping to strengthen the market for corporates and provides them with more certainty that their investments are making a tangible contribution to reaching net-zero.

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) is the organisation set up by former Bank of England Governor Mark Carney late last year, with the aim of taking stock of existing voluntary offsetting schemes and identifying key challenges to scaling them up while ensuring credibility.

In 2020, the Taskforce estimated that the current market for offsets will need to grow by at least 15-fold by 2030 if the private sector is to align with the Paris Agreement’s 1.5C trajectory. By 2050, he warned, it may need to be up to 160 times bigger than in 2020.  But with concerns about greenwashing, double-counting and standards varying between nations and regions persisting, the Taskforce has proposed measures to weed out the sector’s biggest problems as it scales.

A set of ‘Core Carbon Principles’ has therefore been outlined for the new governance body. Principles stipulate that credits must be real; based on realistic and credible baselines; monitored, reported and verified; permanent; additional; minimise leakage; only counted once and not contribute to any other net-harm (e.g. on biodiversity or local communities). The hope is that the Core Carbon Principles can be embedded into legal standards by nations and through international agreements.

Underfunded market

However, as investors and businesses become more aware of the benefits and impacts of NbS, more market challenges emerge.

The State of Finance for Nature report from the UN Environment Programme highlights the massive financial gap facing NbS, which can assist in combatting climate change if sufficiently supported.

The report found that current investment into NbS sits at $133bn – 0.10% of global GDP – the most of which comes from public sources. However, up to $4.1trn is required by 2030, which rises to $8.1trn 2050, a four-fold increase.

The new report echoes findings from the Green Purposes Company (GPC), which recently detailed how a $700bn investment gap into NbS needs to be addressed in order to meet wider net-zero goals and combat the climate crisis.

Rumsey believes that the private sector will be a big driver in addressing this investment gap, provided the quality of the market continues to grow. But aside from pricing, Permian Global’s managing partner Gerry Elias is also warning that corporates will be facing a “supply squeeze” that may require them to revisit short-term steps to reaching net-zero.

“There’s a supply squeeze in the market right now, due to Covid-19 but also the change in the demand, that is probably going to continue for the next 12 to 18 months. So at the moment, we need a sort of physical presence in the actual projects to verify them, and just getting out on to the field has been difficult because of the pandemic.

“So I think, for corporates, they have to consider supply against the competing demands, and what the change in pricing will mean and how that looks in their own net-zero hierarchy. It may incentivise action in other areas and solutions.”

Ownership model

As the market continues to find its feet, both Rumsey and Elias note that many corporates are actively seeking involvement in restoration and NbS projects to alleviate some of the challenges.

Amazon, for example, has unveiled a new agroforestry and restoration programme that will utilise NbS while improving livelihoods for local farmers in the Brazilian Amazonian region.

The benefits of this approach are that the corporate gains better oversight of the deliverables and outcomes of the project, including better measurements on carbon sequestration and reputational boosts from the added social value that these projects can bring.

Indeed, some are advocating that NbS and offsetting mechanisms can be introduced without fears of greenwash, provided it is embedded into a company’s value perspective.

James Cameron acted as an independent advisor to COP26 and also advises the likes of Pollination and the London Sustainable Development Commission.

According to Cameron, NbS are crucial in helping corporates and decision-makers understand the importance of nature in the fight against climate change, but that investment and metrics are again key.

“Businesses should look at both the strengths and weaknesses of the case for valuing carbon, starting with the very obvious proposition that we absolutely must, in one way or another, have a value of carbon,” Cameron told edie.

“Failure to attribute any financial or economic value to forests, or other natural systems, makes them vulnerable, makes them persistently consistently undervalued. Nothing stops you from valuing a natural system spiritually, emotionally, aesthetically, as well. But to date, we've not created sufficient incentives, pathways or conduits for that money to move to those atoms and that's part of what we're doing with Article Six with these other kinds of devices.”

Cameron believes that corporate can advocate for NbS as part of ambitious net-zero strategies that, while they should ultimately focus on decarbonisation, can also rely on offsetting without concerns that it is considered greenwash.

Last month, the Science Based Targets initiative (SBTi) unveiled the world's first standard for corporate net-zero emissions aligned to climate science. The SBTi has clarified that science-based net-zero targets will require companies to achieve deep decarbonisation of 90-95% before 2050. From that point, companies should neutralise unavoidable emissions through offsets and removals. Crucially, the SBTi states that carbon offsetting and removals cannot exceed 5-10% of a company’s emissions, although this is sector dependent.

So, if offsets and nature have key roles to play in helping corporates reach net-zero, how should they be approached? For Cameron, this again comes down to a business's willingness to articulate its purpose.

“There are many different pathways you can go down to reach net-zero. But if you're seriously committing your company to net-zero, you're probably going to fund a transition for yourselves and you may also have to fund effort outside your firm, to help you deliver that on that target,” Cameron adds.

“Effectively, what you're doing is you're committing resources to deliver good, and you should be using your agency as a well-managed company, to deliver that public good. And there should be zero shame in any of that. But you need to be very clear that that is what you're doing. And therefore if you don't, if your money, or your agency, or the person you work does not in fact, deliver the public good, then you are literally wasting time and money. Scrutiny is required, and calling out bad practice is necessary, but now is the time to take that risk that comes with innovation.

“I think Article Six helps because it tells you that the global community has met and thrashed out over many years, a set of rules. These rules are now being put in place and it's up to governments and corporates to shape the market by abiding by them.”

Article Six is a major milestone in an effort to shape carbon markets and trading mechanisms, but it may also deliver a major boost for investors and businesses looking to harness NbS to tackle the climate crisis and ecological breakdown. More finesse is needed in the governance of the these markets, but COP26 may be the start of a truly transparent and transformative approach.

Matt Mace



Tags

bank | Biodiversity | cop26 | investors | nature | net-zero | social value | The Paris Agreement

Topics

Climate change


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