Indulge me while I describe a fictional scene. If you’re short on time, jump to ‘The Problem with Carbon Credits’.
You’re the CEO of a MNC and you’ve just been told that your bonus depends on meeting sustainability goals. This is a blow, and you reach for a second vodka martini to steady your nerves while you consider the predicament.
With your bonus on the line, this is too important to get wrong. You can’t rely on actual projects to deliver a net-zero carbon footprint, because doing real-life things is inconvenient and unpredictable. You suddenly remember that advert in CEO magazine and tear through the pages until you find what you’re looking for.
‘Offset your polluting operations with certified carbon credits’ – the answer is simple after all, you just need to buy the credits to offset your own emissions. The costs can no doubt be justified – someone at the carbon trading company will have already built a nice ROI spreadsheet and presentation that you can copy/paste into your pack for your next board meeting. No need to cancel that round of golf after all.
My fictional story is no doubt unfair to many warmhearted MNC CEO’s, but looked at in the wider context of the behaviour and messaging from many of these company’s, and there’s an element of uncomfortable truth to it.
This is an opinion shared by the EU, which is creating a defined taxonomy to tighten what precisely can be described as ESG activity in reaction to high levels of ‘greenwashing’ – i.e. misleading statements from companies about their environmental actions.
The Problem with Carbon Credits
Carbon Credits are a mechanism whereby someone does something environmentally good, e.g. plants a tree, and then is able to sell that positive environmental contribution to someone else who may want it to offset their own CO² production. These credits are earned and awarded by organisations and can then be traded, like stocks.
Originally designed as a way to facilitate environmental policy transition, carbon credits are now big business. Instead of implementing sound environmental practices, which might take years to achieve meaningful results, a company can buy their green credentials, solving the problem overnight. It sounds too good to be true, and of course, it is.
Studies are now being published that show the majority of these credits are bogus. The schemes whereby credits are earned are either ineffective or in some cases, don’t exist at all. There are other ways to mislead as well, for example, carbon offsets may be claimed against forests in which the landholder had no intention of cutting down the trees. So if deforestation was not going to happen in the first place, the carbon credit is essentially bogus.
London-based Sylvera uses machine learning and satellite images to assess whether projects are delivering the climate impact they promise, and the company has just raised $7.8m in total funding to develop their business.
$5.8m of that money came from VC firm Index Ventures, and even has backing the former CEO’s of NYSE, Thomson Reuters, Citybank and IHS. This is sending a clear message – ESG investing is going to be big, and validating those underlying investments is a key part of that story. The remaining $2m was awarded via a research contract with the UK’s Innovate UK.
Almost every week I get a call from a major asset manager saying ‘I want to put €500m or €1bn into reforestation projects — how do I do it? – Sam Gill, co-founder and chief operating officer at Sylvera
As a growing number of companies set targets to zero out their emissions of planet-warming greenhouse gases, many are turning to carbon offsets to lower their climate impact. For example, a chocolate company might buy an offset based on a project that plants trees to absorb CO² and count it against its own footprint.
As the EU considers how to regulate this market to control the high levels of greenwashing that companies are doing, fund managers, institutional investors and others are wondering how they can choose the right companies to back. It is to this market that Sylvera hopes to sell its services.
The company uses machine learning to analyse the data, while also conducting what it describes as “deep analytical work to assess the underlying project quality”. The process is then used to create a standardised rating for a project, so that market investors can make informed decisions.
Turning the unregulated landscape of carbon trading into one that can be trusted and relied upon, will require empirical data. Business’ like Sylvera are needed to shine a much needed light on to this shady practice.