A carbon credit is a paper security representing one ton of CO2 reduced or removed from the atmosphere, generated by projects like wind farms or planting trees. Buyers can trade the units or use them to offset their own emissions, in which case they must retire the credit to avoid it being used twice.
recent independent scientific analysis of a project’s CO2 reduction claims
often lags behind the issuance of the corresponding carbon credits, leaving
buyers in the $2 billion market exposed to losses.
its regulated equivalent in the compliance market, the voluntary carbon market
lacks oversight, and buyers can find that promises made by sellers don’t always
relying on carbon credits to support their green claims now face “robust and
credible” proof that the vast majority of such securities aren’t fit for
purpose, according to a study published in the journal Science, by a team of researchers from
the Universities of Amsterdam (Netherlands) and Cambridge (UK).
The research, which analyzed 18 carbon-offset projects across Peru, Colombia,
Cambodia, Tanzania and the Democratic Republic of Congo, found that only 5.4
million — or 6% — of a potential 89 million credits were linked to additional
carbon reductions through preserved forests. More than 60 million carbon
credits originated from projects that barely reduced deforestation.
has been a suspicion that these carbon credits lead to greenwashing,” said
Andreas Kontoleon, the study’s senior author and a professor of environmental
economics and public policy at the University of Cambridge. “We now have robust
and credible evidence that offset programs have deficiencies”
A number of major carbon traders are finding that offsets they bought may now
have no value. Trafigura Group, the world’s largest trader of carbon-removal
credits, has suspended a consignment as it awaits the results of a probe into
the forestry project behind the units. The situation has led the company to
replace the offsets in a contract with a corporate client and instead keep the
stranded credits on its own books.
Since the first carbon credit was traded roughly 35 years ago, the market has
been hit by a steady stream of scandals that have led to wild price swings and
even collapsing valuations. That has implications not just for firms trading
such credits, but also for companies that use them to underpin green claims to
customers and regulators.
the projects studied offsets detailed in Science are overseen by the NGO
Verra, which dominates the sector. These programs are part of the
“Reducing Emissions from Deforestation and Forest Degradation”
(REDD+) system, developed by the United Nations but organized by private
institutions. The standard setter said it has “significant concerns” about the
study’s methodology because of the small sample size. Extrapolating the study’s
conclusions to all carbon offset projects is unwarranted when only about one
out of four projects have been examined, Verra said. “We recognize the areas
for improvement in the current system and are committed to fostering that
ongoing evolution,” Verra added in a statement on its website.
The three-year COVID-19 pandemic once sent global asset prices plummeting. However, in terms of the annualized rate of return of the market during the three years, the Dow Jones Sustainability Index (the index was set up in 1999 as the world first to track ESG Enterprise Financial Performance) outperformed the Dow Jones Global Index. The Dow Jones Sustainability Index covers the leading sustainable enterprises around the globe identified by S&P Global and represents the top 10% of the largest 2,500 companies in the S&P Global BMI based on long-term economic, environmental, and social criteria. It achieved a return of approximately +7%, compared to approximately +6% for the Dow Jones Global Index. Therefore, it can be seen that enterprises with a sustainable business model are better at mitigating the impacts of market risks on business and profits, thus improving the resilience of stock prices.
Capital inflow also reflects an increase in investors’ interest in sustainable investments. According to the latest report ‘Global Sustainable Fund Flows: Q2 2023 in Review’ published by Morningstar, despite inflationary pressure, increased interest rates, worries over a global economic recession, and the war in Ukraine, global sustainable funds still registered $18 billion in net capital inflow during the second quarter. Although this reflects a slight decrease from $31 billion in the previous quarter1, developed countries and regions with a leading position in sustainable investment, such as the U.S., Europe and Japan, still reported growth in capital inflow during this period with full of uncertainties. This demonstrates that investors still recognize the importance of ESG investment. Global enterprise management will continue to increase investment in ESG to improve businesses’ ability to handle sudden changes in the economy. By doing so, management can strengthen their positive image and maintain a relatively stable level of medium to long-run enterprise development, thus winning the favour of more investors.
Continued Evolvement of Sustainability Rating
Investors, in general, have difficulty assessing the ESG levels of enterprises objectively and need to rely on ratings issued by reputable organizations. These organizations have been actively revising ESG criteria to provide investors with a simple and direct approach to measure the ESG performance of enterprises.
In March 2016, Morningstar rolled out the Morningstar Sustainability Rating, the first sustainability measure for mutual funds. This rating facilitates investors’ assessments and comparisons between various funds based on the principles of sustainable investment. The Morningstar Sustainability Rating is applied by Morningstar’s sustainability assessment body, Morningstar Sustainalytics, to assess companies based on ESG factors, including the environmental, social and governance. It also takes into account issues that may impact company values, such as climate change, environmental performance, labour policies, and the composition of the board of directors. The rating calculates and rates fund positions and compares their sustainability scores with those of similar funds in Morningstar. Funds are eventually classified into five ratings, with one ‘globe’ representing the fund with the highest ESG risk relative to similar funds, and five ‘globes’ representing the fund with the lowest risk.
Hong Kong is making efforts to catch up in this area. In August 2021, the Hong Kong Securities and Futures Commission (HKSFC) concluded its consultation in respect of amending the Fund Manager Code of Conduct. The amendment requires fund managers responsible for managing collective investment schemes to consider climate-related risks in their investment and risk management processes and make appropriate disclosures to investors. When formulating the relevant rules, HKSFC personnel also considered international regulatory developments and measures, such as those adopted by the European Union and the Task Force on Climate-related Financial Disclosures (TCFD). They outlined the criteria for managing climate-related risks and provided examples of industry practices. The new rules came into effect on August 20, 2022, and local investors can identify green funds certified by the HKSFC. As of August 2023, the number of listed and unlisted ESG funds recognized by the HKSFC has already reached 2002.
Prospects for Sustainable Development as an Important Issue for Global Enterprises
Climate change is the greatest challenge facing by the Earth, and requires to be addressed through transformation towards a low-carbon economy. What sets apart the current developments in climate change from 10 years ago is the increasing participation of policymakers and enterprises. Governments and businesses have implemented policies and made commitments to address climate change. One prominent example is the Paris Agreement signed by world leaders in 2015, which spurred the adoption of national policies aimed at combating global warming. These world leaders agreed to collectively take action to limit global temperature increases to around 2°C compared to pre-industrial levels in the 1800s.
The difference in climate change developments from 10 years ago also lies in the recognition by enterprises of the risks and opportunities associated with climate change. Climate-related investments now less reliant on government support than they did a decade ago, but policy support still plays a crucial role in accelerating climate developments, especially in heavy industries. Without government intervention, decarbonization technologies would not attract enterprise investments due to low economic efficiency, which is not conducive to climate developments. Climate change was not even listed as one of the five major global risks a decade ago. The impacts of global warming on the economy and companies are profound, far-reaching, and significant. Companies that are aware of these threats and actively address them at an early stage, or incorporate climate change-related issues into their solutions, will ultimately emerge as winners.
In summary, with the world working together towards promoting “carbon neutrality” and addressing climate change risks, there will be extensive commercial opportunities for exploration by Hong Kong and global asset management organizations.
Force on Climate-related Financial Disclosures, TCFD）採納的方針，列明在管理氣候相關風險方面應達到的標準，並列舉了一些業界實務運作的例子。有關新規定已於由2022年8月20日起實施。故本地投資者可留意獲證監會認證的綠色基金。截至2023年8月，獲證監會認可的上市及非上市ESG基金已達200項2。