Emphasizing Transparency in Carbon Credit Usage

The importance of disclosing carbon credit usage is increasingly recognized by companies and investors alike, although the process is becoming more complex. Gathering and analyzing data requires significant effort, complicated further by the lack of standardized formats and detailed disclosures.

Despite these challenges, there has been significant progress in disclosure practices. Analysis from MSCI Carbon Markets reveals that a majority of companies utilizing carbon credits disclose the quantity they use. This transparency is crucial for stakeholders, enabling them to evaluate the credibility of companies’ claims related to carbon credits, climate targets, transition plans, and broader risk exposures.

Disclosure also helps prevent double-counting of emissions reductions within the same value chain or by investors seeking to offset their portfolios. This issue could become more critical as the use of carbon credits for Scope 3 emissions gains traction. The Science Based Targets initiative (SBTi) is set to explore such scenarios further with a discussion paper expected in July.

Currently, approximately 85% of carbon credits retired since 2018 are directly attributable to the companies using them. While disclosure rates for 2023 are lower due to delays in corporate reporting cycles, it is anticipated that they will match or exceed the levels seen in recent years once reporting is complete.

However, when it comes to disclosing the specifics of the credits used, such as the names or unique IDs of the projects generating them, disclosure rates drop. Only about half of the market provides this level of detail. Accessing comprehensive information about the underlying projects, including location, credit methodology, and third-party verification, often requires consulting crediting registries or platforms like MSCI Carbon Markets.

This depth of disclosure surpasses many other areas of corporate reporting, underscoring its importance in ensuring accountability and transparency in carbon credit utilization.

The landscape of corporate reporting on carbon credits is evolving towards greater transparency and consistency, addressing complexities and regulatory advancements.

Carbon credit registries play a crucial role in disclosure, now mandated by the Integrity Council for the Voluntary Carbon Market’s (ICVCM) Core Carbon Principles (CCPs). These principles require registries to collect information on the entity retiring each credit, a step expected to boost disclosure rates as best practice.

Company reporting, historically voluntary, has increasingly included disclosures on credit usage. Initially absent from the Taskforce on Climate-related Financial Disclosures (TCFD) framework, credit disclosures are now common in newer regulatory and voluntary standards. Jurisdictions are adopting diverse approaches, with the UK integrating standards from the Transition Plan Taskforce (TPT), potentially influencing global norms.

However, navigating these diverse regulations poses challenges for multinational firms, complicating reporting and potentially hampering investor decision-making. Regulators are extending disclosure obligations to investors, compelling them to report on portfolio companies’ credit use to avoid double-counting and assess financed emissions.

In the EU, the Corporate Sustainability Reporting Directive (CSRD) and updates to the Sustainable Finance Disclosure Regulation (SFDR) are set to impact companies and investors, requiring comprehensive disclosures on credit use across supply chains and portfolios. MSCI has launched a CSRD-aligned solution to assist investors in meeting these complex reporting requirements.

Disclosure requirements typically encompass details like credit quantity, type, location, and accreditation standards. However, terminology variations and ambiguous criteria across regulations contribute to complexity. For instance, while some regulations specify current credit use, others seek disclosures on planned usage, challenging companies’ ability to forecast long-term credit retirement.

Beyond quantities, disclosures also focus on project types, locations, and certification integrity, crucial for assessing environmental credibility and other impacts.

The evolving regulatory landscape underscores the need for standardized reporting frameworks and investor support mechanisms to enhance transparency and facilitate informed decision-making in carbon markets.

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