Industry

Carbon Experts Welcome SEC Rules on Offsets 

Disclosure requirements to shed light on rising costs, but observers also warn of an ‘alphabet soup’ of offset accounting frameworks.  

The US Securities and Exchange Commission’s (SEC) climate disclosure requirements will bring much-needed transparency on the costs of carbon credits incurred by companies, industry experts have said.  

This month, three of the five SEC commissioners voted in favour of adopting rules to enhance and standardise climate-related disclosures by corporates in the US, putting an end to extensive market speculation. 

Many criticised the SEC for scaling back its initial proposal, most notably in excluding Scope 3 emissions, but it remains a landmark ruling which requires the use of carbon credits to be integrated into financial reporting for the first time in the US.  

Kristina Wyatt, who served as a Senior Counsel for Climate and ESG to the SEC until 2022 and was involved in creating its climate rule, told ESG Investor that its guidance on carbon credits was an important move. 

Under the SEC rules, companies need to report any carbon credits or renewable energy certificates (RECs) which are material to achieving decarbonisation targets. Disclosures must include the amount of CO2 avoided, the nature of credits; specifically, if they avoid, reduce or remove CO2, the standard under which the credit was issued, and the location and description of the projects underlying the credit.

Wyatt, now a Counsel at carbon accounting firm Persefoni, said the disclosures would illuminate for investors the financial impact of the use of carbon offsets to meet decarbonisation goals.   

“It is likely some companies are going to have to offset each and every year and the costs associated don’t go away,” she said, adding that high quality offsets would likely be in increasing demand with costs that could rise.  

Substantive reporting  

The SEC is not the first regulator to require information on carbon credits as part of disclosure rules. But along with recent Californian law AB 1305 on voluntary carbon market (VCM) disclosures, its new rule is the must substantive, according to Ben Rattenbury, VP Policy at carbon data platform Sylvera. 

“Because they are among the newest, there’s been more time to reflect on this new focus on carbon credits,” he said. “For example, the SEC includes an expectation that companies consider the potential for future changes of supply and demand in the voluntary carbon markets and how these affect their financial position. That’s not been required elsewhere before and it will help sharpen thinking within companies about their use of carbon credits.” 

He added: “There’s historically been an assumption that carbon credits have been relatively cheap, and they will always be cheap, but we’re finding that particularly high-quality carbon credits are attracting a price premium.” 

According to carbon ratings firm BeZero, higher quality carbon credits in the VCMs are commanding price premiums of around 200%. 

Europe’s Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB) also have disclosure requirements on carbon offsets. In addition, voluntary guidance on corporate climate disclosure of offsets includes the SBTi’s Beyond Value Chain Mitigation guidance and the Oxford Offsetting Principles. The Voluntary Carbon Markets Integrity Initiative (VCMI) has proposed guidelines on companies’ claims around the voluntary purchase of carbon credits to assure investors on their commitment to net zero or carbon neutral pledges.  

Alexia Kelly, Managing Director of Carbon Policy and Markets Initiative at the High Tide Foundation, said the VCMI guidelines had raised the bar significantly and were even more detailed than SEC regulations in terms of offset vintage, quantities, location, source, and issuer or project developer. “Those pieces really form a comprehensive best practice benchmark around disclosure and transparency,” she said. 

But the plethora of voluntary and regulated requirements on carbon offset disclosure gives rise to concerns of a confusing alphabet soup, according to Simon Puleston Jones, Founder of Emral Carbon. 

The UK Transition Plan Taskforce (TPT) Disclosure Framework includes a specific module related to carbon offsets in transition plans and the World Economic Forum has issued best practice guidelines on carbon removals. There is also guidance coming out from China and other parts of Asia and Australia.   

“Part of the challenge is that there’s just a huge amount of stuff out there,” said Puleston Jones. “Part of the challenge for anyone in this market is that there’s a lot of industry best practice that has been published. There is an increasing amount of regulation that’s being published, at state level or national level or jurisdictional level like the EU. There are also biodiversity credits emerging. So, there is a volume of stuff to get through when advising a client.” 

The SEC’s requirements come as disquiet remains about the credibility of the VCMs as a channel for emissions reduction. But recent research by Ecosystem Marketplace’s Forest Trends indicates that companies which purchase carbon credits are reducing their emissions more rapidly than their peers: for example, they are investing three times more in emissions reductions within their own value chains. 

Teresa Hartmann, Chief Ratings Officer at BeZero, said companies typically look to offset their emissions as a result of having tried to understand their Scope 1, 2 and 3 emissions. 

“The moment you start tracking your emissions, as a company, you realise  ‘we are ordering too much catering, or we have the lights on too much’. It’s natural that once you start tracking, you would try to reduce your emissions. One of the natural side effects is that it is bound to increase the ambition of corporates. They’re now exposed to public scrutiny by NGOs, by the media and by the consumer, because they are disclosing what they’re buying and what they’re retiring.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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