Climate change is driven by cumulative greenhouse gas (GHG) emissions, this means limiting temperature rise requires staying within a carbon budget.

The International Panel on Climate Change provides guidance on how much carbon can be emitted to limit warming to 1.5°C with probability weightings, shown in the table below. Emissions, including land-use change, are currently over 50GtCO2 per annum.

Table: Probability of Limiting Warming Temperature Limit (2019 onwards)

Source: IPCC AR6 Summary for Policymakers (2021)

Despite 88% of emissions being covered by countries’ net-zero commitments1 and 23% of emissions coming under a carbon pricing mechanism2, global GHGs continue to rise. The chart below shows the size of the challenge. To stay within carbon budgets – the world will require annual decarbonisation rates similar to the emissions impact of Covid-19 lockdowns in 2020. With current climate policies and decarbonisation technology costs this is not presently feasible. Therefore, carbon offsets must be supplemented with ongoing emissions reduction efforts today.

Chart: Historical and future emissions to achieve 1.50C

Source: abrdn, Jones et al. (2023), emissions include land-use change

Moreover, approximately 30% of existing annual emissions come from land-use change3.

One of the levers to reverse this situation is investment in nature-based solutions.

To mobilise capital towards nature-based solutions, investors need to be incentivised to take on project risk but they must also ensure the integrity of claims relating to emissions and nature impact. There are various ways investors can participate in nature-based solutions and the level of participation will also dictate the claims that they can make:

  • Direct investment in nature-based projects

    directing primary capital towards nature-based projects that will produce a climate-positive impact and receive carbon credits (once verified).
  • Purchase of carbon credits

    secondary capital is used to purchase verified carbon credits from projects that have produced a climate-positive impact.

Graphic: Nature-based project delivering a GHG impact

If we assume the nature-based project is high integrity – meeting thresholds on additionality, baselining, monitoring and permanence – then both forms of investor participation are climate positive. In the first method investor capital is enabling a project to take place. The same is true for the investor capital in the second method as well since the project relies on the carbon revenue earned from the sale of carbon credits.

This creates a dilemma for investors about how to navigate emissions impact claims, as double counting emissions claims will negate the real-world positive impact. The solution to this is simple and hinges on who retires the carbon credit.

  • The investor providing primary capital

    to the nature-based project has options – and this is a crucial benefit. The investor can retire the carbon credit (so that it can no longer be bought or sold) to claim an offset against their emissions, or they can sell the carbon credit to receive an investment return. However, even if an investor sells the credit, they should be able to demonstrate the emissions impact they have facilitated – due to the capital they provided and the project risk they took on - but should stop short of claiming an offset.
  • The investor purchasing secondary carbon credits

    must immediately retire the credit in order to make an offset impact claim. This means there is no investment return opportunity for investors in secondary purchases, but they are still key participants in a carbon offset market. These buyers of carbon credits are key in ensuring there is an end-market for nature-based projects to earn carbon revenue. 

Environmental integrity

The environmental integrity of an underlying project must underpin all claims, regardless of whether an investor participates via route 1 or route 2 above. This requires rigorous due diligence to ensure projects are additional, not over-crediting and have a high certainty of permanence. This should be supplemented with detailed project-level reporting, which should include; project name, type, location, carbon programme, vintage, credit ID, credit price, and so on.

Over time we hope to see the maturity of the Integrity Council for the Voluntary Carbon Market (ICVCM) and Voluntary Carbon Market Initiative (VCMI) improve project-level reporting, transparency and overall market integrity.

Investor emissions reporting

It is critical that emissions reporting is always done in gross terms rather than net. Despite the theoretical use of offsets being to ‘net off’ emissions, there needs to be an acceptance that to build a credible high-integrity market, transparency is key. Therefore, to supplement project-level reporting, investors should also report emissions in gross terms.

Offsetting to meet investors’ net-zero targets?

While there appears to be a consensus that investors should become greater participants in nature-based solutions, there is limited guidance on incorporating offsets into investor net-zero commitments. First and foremost, the world needs to see a reduction in emissions, with carbon removal projects from nature-based solutions being complementary to this. This aligns with the concept of a ‘mitigation hierarchy’ (see below), in which emissions reductions are to be prioritised.

Emissions mitigation hierarchy

Graphic: Emissions mitigation hierarchy

We believe that investors must apply the mitigation hierarchy rigorously to their existing portfolios before considering offsets as a way of meeting decarbonisation targets. However, this should not stop investors from mobilising capital for nature-positive projects as long as they are transparent.

Lastly, investors should recognise any co-benefits and the importance of mitigating any ‘do no significant harm’ risks of a project, for example, by considering local land rights issues, initiating local stakeholder engagement, and considering wider social and biodiversity outcomes of each project.

abrdn has outlined a set of seven key principles to ensure high integrity and best practice are applied when directly investing into nature-based solutions. These are listed in our ‘Naturally tackling climate change’ article here.