Sightline: Carbon Offsets and How They Fit into ESG Frameworks (Report 3)

Carbon Offsets in ESG Frameworks: Risks & Opportunities

As introduced in the first Sightline report, ESG refers to Environment, Social and Governance. A variety of ESG tools and frameworks are used by investors and banks to evaluate risks and opportunities associated with a company or sector. While ESG includes a range of factors, climate-related impacts and mitigations are a common priority.  One of the strategies used to mitigate climate risks and one that can improve ESG performance is the use of offsets for a company’s emissions of carbon dioxide (CO₂) or other greenhouse gasses. There are a variety of public and private sector approaches to offsets and projected growth of the offset market is significant.  However, there are also concerns about the quality and integrity of offsets, what types of offsets should be allowed, and their long-term effectiveness as a climate change mitigation strategy. This Sightline report provides an orientation to the terminology, methodologies, impacts, benefits, and current debates around offsets.  

Companies committed to ESG often prioritize the lowering of their greenhouse gas emissions. In the second Sightline report, the concept of Scope 1, 2, and 3 emissions was described. Scope 1 or “direct emissions” include the greenhouse gas emissions created by an organization directly within their operations, fleet, and other activities. To reduce direct emissions, companies may adopt a variety of strategies, including improved energy efficiency, waste reduction and diversion strategies, or increased fuel efficiency or use of electric vehicles (1). Scope 2 are the “indirect emissions” related to the power an organization buys and how that power is generated. Companies can reduce these emissions by reducing energy use and switching to renewable energy sources. Companies may choose to purchase offsets for their direct and indirect emissions when reduction strategies are not available due to operational constraints, affordability, or other factors. Offsets are most commonly utilized for addressing Scope 1 emissions.  

Carbon offsets are tradable “rights” or certificates linked to activities that lower the amount of CO₂ in the atmosphere (2). 

By buying offsets, the purchaser can financially support projects that address climate change, such as tree planting, methane capture technologies, renewable energy projects, and other activities. The amount of “offsets” that are purchased can count towards reducing the impacts of the purchaser’s emissions. If a company reduces emissions and purchases enough offsets, they may be able to achieve “net zero” emission goals. As of 2023, 38% of Fortune Global 500 companies and half of the companies on the Forbes Global 2000 list had set net zero targets. At least 450 organizations have signed the Climate Pledge to achieve net-zero carbon emissions by 2040.  

Forests are a key player in carbon offset markets because of the ability of forests to absorb and store carbon in wood and soils. 

While many forest landowners are seeing positive opportunities in offset markets, conflicts can develop when the contract for providing offsets requires reducing timber harvest or other changes to forestland uses and benefits. These changes may impact traditional uses, recreation access, and other social and cultural values. Changes in how forests are managed also affect the amount and quality of habitat available to support diverse plant and animal species, the condition of water resources, and many other environmental conditions. The potential for conflict around offset markets may increase as offset values increase. In 2023, offset prices for the voluntary market in the US were in the range of $12/ton - $15/ton for most offsets coming from forest projects, and up to $35/ton for some tree planting projects (3). At these rates, a landowner may see income of a few hundred dollars per acre per year for a typical project. 

The basic idea of offsets is simple enough. An emitter pays for climate change benefits and counts it towards achieving their ESG objectives. However, the actual marketplace for offsets and the associated crediting can get complicated and controversial.

There are a couple of key concerns about offsetting: credibility, transparency, and efficacy. Offsetting may not be credible if the project isn’t implemented, doesn’t achieve the predicted impacts, or the estimate of climate benefit is inaccurate. These risks to credibility are heightened when offsetting activities and transactions are not transparent and information is not available about the value of the offsets, project types, and parties involved. The actual efficacy of offsets has also been criticized. Direct emissions reductions are likely the most effective strategy for mitigating climate change in the short and long-term. The market for offsets may contribute to delaying the investments that are needed for direct emission reductions to occur. Additional technical considerations with offsets include needing to address leakage, additionality, and permanence (see glossary). Because of these concepts are complex and not easily understood, they contribute to concerns related to credibility, transparency and efficiency.  

Glossary (4)

Several initiatives have been established to address concerns with offsets. 

• The Voluntary Carbon Markets Initiative (VCMI) addresses the use of offsets in corporate ESG strategies. 

• The Integrity Council for the Voluntary Carbon Market (ICVCM) sets standards for quality offsets. 

• The Science Based Targets initiative (SBTi) assesses and validates companies’ and financial institutions’ net-zero targets.

• The Carbon Credit Quality Initiative provides tools for understanding carbon credits.  

Projections for the growth of the offset market continue to reflect expectations for increasing offset demand. 

The global offset market was estimated at 181 MMtCO2e in 2023 and is projected to expand to 1.2 billion metric tons (GtCO2e) by 2030. The voluntary offset market, driven largely by corporate ESG commitments, is projected to grow from $2 billion in 2020 to $250 billion by 2050 (6).

Offset market growth and ESG commitments may be good news for forest owners seeking additional sources of income from their land.  Forest owners and investors are engaging in offset opportunities to the extent they offer financial reward and align with other values and priorities. Expansion of offset markets could also potentially be good news for biodiversity and sustainable forest management, if the projects balance these benefits with goals for maximizing offsets. Alternatively, reductions in timber harvests and other changes in forest management made to meet offsetting goals could create threats to forest health, forest resilience, and wildlife habitat diversity. 

It is important to be aware of potential impacts of a growing market for offsets, the ESG drivers, and the connection to forests. 

Given the continuing development of these trends, stakeholders can come together to share perspectives, elevate awareness, and integrate critical thinking to address risks or unintended consequences. With a thoughtful approach, there is the potential to develop integrated, multi-dimensional strategies that balance climate change objectives with social and ecological values - which is exactly what ESG is all about. 

An Invitation to Engage

The focus of Sightline is to illuminate and unpack the climate mitigation and sustainability trends in the business community that will affect our world of forests. As the Northeast Climate Hub launches this new initiative, we welcome your engagement. Which topics would you like to see explored? What questions are coming up in your communities and with your partners, stakeholders, customers or suppliers? Please email us at support@newmarchstrategies.com to provide feedback or input that will help us plan the content of this initiative.