Industry

Standards Alignment to Smooth VCM Fractures

In the absence of regulation, market participants welcome clarity on best practice from standards-setters.  

Increased calibration between two voluntary carbon markets (VCMs) standards-setters has been welcomed as a strong first step toward high integrity across supply and demand chains, but further cohesion across all existing guidance is required to bring order. 

To tackle ongoing controversies around the quality, credibility and transparency of VCMs, the demand side-focused Voluntary Carbon Market Integrity Initiative (VCMI) published its Claims Codes of Practice last week for companies looking to credibly and transparently use VCMs as part of their climate action. Within the guidance, VCMI explicitly said that companies must select carbon credits which meet “stringent quality thresholds” in line with the supply side-focused Integrity Council for Voluntary Carbon Markets’ (ICVCM) Core Carbon Principles (CCPs). 

This follows a joint commitment made by the VCMI and ICVCM in June to ensure investors in VCMs can invest confidently in high-integrity credits as part of their climate strategies.  

“It is good to see the ICVCM and VCMI aligning and splitting analysis on credit quality and claims,” Leo Mercer, Policy Analyst at the London School of Economics’ Grantham Research Institute on Climate Change and the Environment (GRI LSE), told ESG Investor, adding that it will be particularly useful, in the absence of regulation, for market participants to have more clarity regarding best practice producing, trading and making claims about carbon credits.  

It is now critical that the ICVCM’s updated guidance outlines “a similar linkage” to the VCMI, noted Roberta Pierfederici, Policy Analyst and Research Advisor at GRI LSE.  

“The ICVCM endorsing the VCMI Claims Code would not only strengthen the alignment between the two initiatives but would also improve the integrity of VCMs both on the supply and demand side.” 

The ICVCM first published its programme-level CCPs in March, outlining the overarching attributes of a high integrity carbon credit. In the coming weeks, the ICVCM will be publishing its category-level assessment rules. It will further be introducing the first batch of CCP-labelled carbon credits to the market later this year.  

However, the success of both the VCMI and ICVCM’s updated industry guidance will depend on buy-in from the market, governments and regulatory bodies who are themselves evaluating VCMs.  

Speaking at the launch event of the VCMI Claims Code, Rachel Kyte, Co-Chair of VCMI’s Steering Committee, said there is appetite for the VCMI and ICVCM’s work to bring about clarity and “provide a runway for regulation”.  

In late June, the VCMI announced it had joined the Paris Agreement Article 6 Implementation Partnership. It was launched by Japan to better facilitate an understanding of the Paris Agreement’s Article 6 rules and to share best practice across mutual learnings, methodologies, and tool developments.  

Criteria mismatch 

GRI LSE’s Pierfederici emphasised the importance of alignment between the two bodies going “beyond the VCMI and ICVCM principles”, noting that there is a “wide range” of organisations in the market also setting criteria and principles to improve the integrity of VCMs.  

“[These] criteria are not always matching,” she said.  

The VCMI’s foundational criteria does draw on guidance developed by the Science Based Targets initiative (SBTi) and the UN-led Race to Zero (RtZ) campaign, but only encourages – rather than requires – companies to halve emissions by 2030 or to produce a transition plan, which is a divergence from SBTi and RtZ, Pierfederici pointed out.  

“Other actors in the markets, like crediting agencies, are also playing a role in setting standards for VCM integrity, but different criteria coming from different organisations could lead to mismatching assessments of the quality of credits as well as their use,” she added.  

“Multiple criteria and standards risk worsening the fragmentation in the market, which increases uncertainty and therefore discourages investments in the VCM.  

“It is crucial to find a way to support integration in the market across the different entities that are promoting integrity principles.” 

Carolyn Ching, Senior Manager of Food and Forest at sustainability non-profit Ceres, said the VCMI’s guidance aligns with guide rails that the organisation introduced for investors and companies last year.  

The VCM market reached US$2 billion in 2022, and around 500 million carbon credits traded, highlighting the degree to which companies are interacting with markets to offset a portion of their emissions. However, VCM participants across the value chain have come under increasing pressure to improve transparency, due both to concerns over the social and environmental benefits they achieve, greenwashing risks, and opacity over costs.  

Sticking points  

The VCMI’s Claims Code of Practice outlines four steps companies must undertake to make a VCMI claim. 

The company will need to meet the VCMI’s foundational criteria, select which VCMI Claim to make (Platinum, Gold or Silver), identify carbon credits which are in line with the ICVCM CCPs, and disclose information to support its claim, while procuring independent validation and assurance in line with the VCMI measurement, reporting and assurance framework, due to be published in November.  

For a company to be in the Platinum tier, it must buy and retire carbon credits to account for 100% of its remaining emissions. The Gold tier requires offsetting at least 60% of carbon emissions and Silver at least 20%. 

Pierfederici said the VCMI’s criterion of demonstrating a company is on track to meet a near term decarbonisation target is “crucial” for ensuring accountability and transparency, adding that this should be “backed up by a requirement to publicly disclose a transition plan outlining how the company is planning to meet the emissions reduction targets both in the near and long term, detailing the actions that will be undertaken within specific timeframes”.   

Guy Turner, CEO of specialist data, analysis and advisory firm Trove Research, told ESG Investor that the VCMI has set the bar for making a claim “relatively high, to the point that less than 5% of firms currently using carbon credits would meet its criteria”.  

He also argued that the VCMI’s requirement for a net zero by 2050 target and a regular demonstration of progress in meeting near-term targets will be difficult for many firms to achieve. 

Additionally, the VCMI Claims Code noted a “lack of clarity” around claims by corporates about ‘carbon neutral’ operations, products and services, arguing that there is often insufficient transparency about corporate climate performance, and inconsistent use of terminology, thus risking undermining confidence in VCM integrity. 

“Significant shift”

Maria Kolos, Carbon Research Analyst at London Stock Exchange Group (LSEG), said this acknowledgement is “a pretty significant shift, given that a lot of entities have structured their objectives around a somewhat unstructured definition of carbon neutrality”.  

The Claims Code does allow for the use of reduction and removals carbon credits, with or without a corresponding adjustment – a move which Trove’s Turner has said represents “neutral and inclusive positions for the VCMI to take on two regularly debated topics”. 

Turner added: “There is also a risk that the new Claims Code is not achievable for SMEs, companies in developing countries, and companies with low profit margins. These firms may lack the capacity to meet all the requirements of the VCMI’s criteria.”  

The VCMI has acknowledged these risks, noting that it will explore possible “special provisions” to promote accessibility of the Claims Code for these companies and other non-state actors.  

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