Carbon offsets shunned in major new ‘Net Zero’ guidelines for investors

Carbon offsets are not a credible tool for creating ‘Net Zero’ portfolios or companies, according to major new guidelines developed by a group of investors including PIMCO, Legal & General, Brunel Pension Partnership and AXA Investment Managers.

Europe’s Institutional Investors Group on Climate Change (IIGCC), which represents investors with €35trn in combined assets, made the comments in the appendix of the group’s Net Zero Investment Framework, published today. The framework, which has been under development since last year, outlines strategies for how asset owners and investment managers can fulfil their pledges to make their portfolios Net Zero by 2050 or earlier. 

A draft version of the report, put out to consultation in August, warned against the use of purchased carbon offsets, adding that investors should also be wary of the way companies use them in their corporate decarbonisation plans. The final framework has retained that position, highlighting the “finite availability of offsets” and the “need to rapidly decarbonise all activities within sectors” as reasons why investors should not allow assets in their portfolios use them “as a significant long-term strategy” to meet emission goals. 

The only caveat is for companies in sectors that have no other “technologically or financially viable solution” for decarbonisation, like the steel sector. IIGCC adds that it plans to undertake further work on the “appropriate use of offsetting” as part of the second stage of the project. 

There have been efforts to strengthen the credibility of the voluntary carbon markets over the past 12 months, as investors and companies look more closely at the role of carbon credits in the formalisation of their Net Zero plans. Mark Carney, former Governor of the Bank of England and respected climate leader, is overseeing a taskforce launched last year to create principles to govern the sector. This week, information provider IHS Markit launched a global registry to provide better tracking of carbon credits. The ‘Carbon Meta-Registry’ will connect independent carbon markets and registries around the world in a bid to reduce the risk of double-counting. Its initial members will include the Global Carbon Council, Gold Standard, UK Woodland Carbon Code, UK Peatland Code and Verra.

On “avoided emissions”, the IIGCC's framework also retains its position that investors “should not offset emissions in one part of their portfolio through accounting for avoided emissions in another part”. 

Last month, Carney sparked accusations of greenwashing when he appeared to claim that his new employer, Brookfield Asset Management, was Net Zero because of emissions avoided as a result of its renewable holdings. 

The IIGCC has today also published findings of a pilot that saw five major European investors – APG, Brunel Pension Partnership, the Church of England Pensions Board, PKA and Phoenix Group – test the impact of the new Net-Zero Framework on the performance of their ‘real-world’ portfolios.

The exercise found that the “costs of aligning [with net zero] can be manageable, irrespective of what climate policies are pursued in future”.

“Investors were able to align their portfolios in ways that did not affect risk-adjusted returns, even in a scenario where there is no further climate action beyond current policies”, the report states.

Craig Mackenzie, Head of Strategic Asset Allocation at Aberdeen Standard Investments described the exercise as “pretty intensive” in a briefing yesterday with journalists. Aberdeen Standard manages more than £100bn for UK insurer Phoenix Group, a participant in the study. Mackenzie said the pilot showed the insurer could reduce carbon intensity by around 50% and double its climate solutions allocation “while leaving the tracking of the portfolio only around 20 basis points higher than a standard benchmark” – a conclusion he described as “very positive”. 

To coincide with the launch of the IIGCC’s framework and pilot report, a further 21 asset owners, representing $1.2trn in assets, have also undertaken the Net Zero Asset Owner Commitment, taking the number of investors using the IIGCC’s framework to 35. Among those investors are: New York State Common Retirement Fund, the PensionDanmark, Environment Agency Pension Fund and AP2. 

IIGCC has also announced that its Paris Aligned Investing Initiative is going global as a result of partnerships with regional non-profits. US based Ceres, the Asia Investor Group on Climate Change and Australia’s Investor Group on Climate Change will now encourage investors to make Net Zero commitments using the framework.