CRE Companies Need to Be Wary of Carbon Offsets

Carbon credits—not a technical term but one broadly used—are popular among companies as a way of showing action on the environment part of ESG. They’re supposed to be a bridge while a business finds ways to fundamentally reduce its carbon footprint.

But some recent stories show why the carbon offset approach can be a shell game for corporations, claiming to show benefits while actually doing nothing clearly demonstrable other than taking fees for nebulous actions. Even when the names in question are large.

There are several requirements for a coherent and effective carbon offset program:

1. Additionality—carbon reduction would have to be something that wouldn’t have happened in any case, for example, electric vehicles that wouldn’t have had carbon emissions selling credits to another company because there isn’t an actual net reduction of emissions.
2. Leakage—offsets in one location cannot be reversed in another, like converting one field to forest but then cutting down another to plant instead, because again there is no net reduction.
3. Permanence—understanding how long a taken action will last. Will that new forest be cut in 10 years or 25 or never/? What is reasonable?

Carbon cap and trade systems, a more developed and defined form of carbon credits, typically are imposed in a geographic area. Carbon credits can be traded, but the total amount of carbon has to shrink every year, making credits harder to get and more expensive, thus creating incentives for companies to improve their footprint in organic ways.

Granted, there are valid approaches of various types that have worked. But there are also times where critics claim a given scheme doesn’t do much at all.

That happened in January when the results of a nine-month investigation by the Guardian, the German weekly Die Zeit, and the investigative group SourceMaterial “found [climate standards non-profit] Verra rainforest credits used by Disney, Shell, Gucci and other big corporations were largely worthless, often based on stopping the destruction of rainforests that were not threatened, according to independent studies. It also found evidence of forced evictions at a flagship scheme co-operated by Conservation International in Peru.”

Strong language that was repudiated by company CEO David Antonioli in January, who claimed that the materials were “sensationalist articles using outlandish claims about the value of the REDD credits we have issued based on simplistic extrapolations of research that uses old, outlier statistical models.”

“Not all scientists agree, of course, but we do strongly believe that one-sided reporting, with an exclusive focus on a few cherry-picked studies, does not do justice to the realities on the ground and the wide range of opinions on this topic – including those of scientists who recognize that these projects are collectively protecting forests under threat and therefore keeping massive amounts of carbon emissions out of the atmosphere,” he wrote.

He wrote that not all scientists agree because there has been significant criticism by scientists in environment and climate fields. A letter in the journal Science signed by multiple experts said “there is considerable evidence that those methods [used by carbon credit issuers] substantially overestimate the degree to which projects are changing outcomes (i.e., their ‘additionality’).”

Who’s right and wrong/? Hard to tell at a distance. Antonioli said on LinkedIn a few days ago that he was stepping down. In two separate pieces, the Guardian said that Verra was phasing out its rainforest offset scheme by 2025 and that in the U.K., advertisements making carbon neutral claims through the offsetting were facing a ban. According to the Guardian, Gucci “removed a carbon neutrality claim from its website that heavily relied on Verra’s carbon credits.”

The business problem here for a company goes beyond whether a system isn’t what it claims or if news outlets are wrongly characterizing the results. The concern comes down to what investors, tenants, and regulators believe and whether there could be a negative impact on a company. It means that a CRE firm or fund needs to do serious research to be sure that a path to building ESG action and trust doesn’t backfire.