De-Risking Voluntary Corporate Action on Climate: Board Guidance on Best Practices
As corporations set climate targets to address their carbon footprints, management teams deploy various strategies to work toward their objectives. In recent months, some voluntary actions have been subject to negative media and litigation claims. In particular, questions have arisen on the procurement of carbon credits as part of “net-zero” or “climate neutral” labels.
Even when scrutiny comes from sources with vested interests (e.g., new entrants seeking to differentiate and compete by questioning incumbents’ quality or critics that benefit financially from creating controversy), companies must assess their strategies regarding any existing project stakes and decisions on future engagements.
What can companies do to mitigate these risks while continuing to make progress on their commitments? Guidance on navigating the choices among standards for target-setting (e.g., Science-Based Targets Initiative, Voluntary Carbon Markets Integrity Initiative) is beyond the scope of this article, though it is a key aspect of climate strategies. Below are the best practices boards can share with their CEOs and climate teams to guide procurement of carbon credits and other environmental project units.
- Ensure the Buying Team has a Strong Command of the Asset Class. Terms in this space differ from other products and commodities, impacting financial and legal risks. For example, carbon credits’ life cycle includes components of project origination, issuance, retirement, and recording on a registry. Another set of terms and processes apply to renewable energy. Biodiversity projects are an emerging area with standards that are still being defined. Given the variation across market segments, geographic regions, and providers, it’s advisable to leverage in-depth expertise, via in-house leadership or external resources, to help guide the understanding of variable terms.
- Quality Assurance: Procure Certified Credits Validated by Third Party Standards. As a minimum, boards should ensure any purchases are certified by programs that include third-party auditing with in-person inspection, not just a paper review. All prominent standards organizations adhere to robust governance practices including third-party validation. While stakeholders have differing views about the aspects of certification programs, independent audit is widely considered a core critical element of them.
- Sourcing: Choose Reputable Partners that Comply With Best Banking Practices. Fraud prevention protocols, including Know-Your-Customer and Anti-Money Laundering diligence checks on counterparties, are standard in the banking world. Ensure providers have these controls in place by obtaining a copy of the policy as well as confirmation that all vendors and contractors that are part of a transaction have passed these checks.
- Instrument Choice: Avoid Products with Unclear Legal Status. Project units should be tied 1:1 to an underlying project. For example, a tonne equals a unit in carbon credits. If a seller’s business model has structured in any degree of separation from the underlying asset, that raises risk. There are many novel instruments emerging in environmental commodities seeking to create digital representations, such as tokens. While there may be more clarity on legal status from financial regulators over time, today there are ownership risks ranging from questions about net environmental benefits (or harms) to whether blockchain-based and other alternative products can comply with securities rules.
- Set Portfolio Criteria: Define Selection Parameters. Teams can strengthen their process and outcomes by using disciplined criteria to select partners and projects. Adopting clear parameters empowers staff with a consistent, defensible answer in response to unwieldly volumes of inbound pitches, persistent vendors, and introductions from well- meaning contacts to firms that may not meet the standards of due diligence. When sellers are aware that a company is sourcing, procurement teams often receive significant pressure from inside and outside the company to select certain projects. Objective rules can help lighten this pressure.
It’s unfortunate that voluntary action has gotten caught in the crosshairs of political and stakeholder debates as companies should be commended for taking steps beyond compliance to address their environmental impacts. Nonetheless, regardless of the context, robust management and due diligence on all financial transactions is beneficial. The above best practices can reduce risk for boards and executive teams by adopting smart guardrails for procurement, laying a solid foundation that documents a strategic approach if program activities come under scrutiny.
Amy Bann is an independent board member, former F500 corporate sustainability director, and attorney. She is a recognized leader in climate governance, serving for over a decade as an industry negotiator and advisor shaping global carbon frameworks at the United Nations and in the private sector standard launched by the United Nations’ Special Envoy for Climate Finance. She led carbon offset procurement strategy while at Boeing and served in leadership roles at the largest environmental commodities spot exchange, including carbon and renewable energy.