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Principles for carbon offsetting

Many net zero commitments made by companies either implicitly or explicitly rely on carbon ‘offsetting’. We outline our principles on when companies should use carbon offsets and explore our engagement with businesses, especially in high impact sectors.
April 2022
Joe Horrocks-Taylor

Joe Horrocks-Taylor

Senior Associate, Responsible Investment

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There has been increasing pressure on corporates to reduce their greenhouse gas emissions to limit global warming to 1.5 degrees, including from investors through engagement. This has led to many companies committing to achieve net zero emissions. While reducing emissions is an evident priority to limit warming to 1.5 degrees, often eliminating residual corporate emissions is either expensive or not yet technologically feasible. Thus, many net zero commitments either implicitly or explicitly rely on carbon ‘offsetting’: where carbon emitters purchase verified units of greenhouse gas emission reduction or removal to compensate for remaining emissions. Emitters are increasingly turning to the voluntary carbon market to source these carbon offset credits, or developing offset projects themselves, particularly through Nature Based Solutions (NBS).

The voluntary carbon market is growing quickly to meet this increasing demand. Over $1bn worth of carbon credits were transacted on the market for the first time in 2021, a three-fold increase on 2020. However, with this rapid expansion has come considerable growing pain. Critiques of the market focus on the legitimacy of the claims made by both credit sellers and credit buyers. Some projects which sell credits have been criticised for failing to have the additional and long-term climate impact they claim, and for generating negative environmental and social side effects. Credit buyers can be embroiled in project level controversies and can also be accused of greenwashing if they conduct profligate purchasing of offset credits with limited efforts to decarbonise. Even legitimate offset buyers and sellers face reputational risks due to the current lack of consensus on what constitutes credible offsetting.

We have a strong history of active engagement with the companies we hold and those we engage with on behalf of our Reo clients. Here we aim to communicate our perspective on when companies should use offsets, which offsets they should be using, and how companies should use and disclose on their use of offsets. Our principles build on the established quality standards already in the market but aim to raise the level of expectation. Our intention is that we will revisit and revise these principles as the voluntary carbon market evolves.

Interested in learning more? We explore how nature can be a powerful ally in the fight against climate change. Download the full viewpoint to discover more.

Risk Disclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Joe Horrocks-Taylor

Get to know the author

Joe Horrocks-Taylor, Senior Associate, Responsible Investment

Joe joined the Responsible Investment team in 2021 and is focusing on climate change and biodiversity. Before joining us, Joe worked as a sustainability consultant with a range of private and public sector clients. Outside work he enjoys playing sport, hiking and birdwatching.

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