On paper, a September report by MSCI Carbon Markets provides a grim verdict of the state of the voluntary carbon market (VCM) from over 4,000 projects worldwide.
One of the section headers in the 41-page report puts it bluntly: “Low-integrity projects are prevalent, but integrity is slowly improving.”
MSCI graded these projects on six criteria, which broadly answer two questions: How much carbon dioxide was reduced or removed, and how did the project accomplish that? Across more than 4,000 projects, not one received the top AAA rating or a score of between 4.5 and 5 points.
Some 7% of the projects analysed are rated in AA or A, while at the other end of the scale, 47% of projects are rated in the lowest two bands (B and CCC), “demonstrating that many low-integrity projects do remain in the market”, according to MSCI.
“Integrity has long been a significant issue in the global carbon credit market, though some high-quality projects do exist,” reads MSCI’s report.
See also: Are carbon credits credible?
Following a bombshell report by The Guardian in January 2023 that claimed the majority of carbon credits were bogus, media scrutiny has continued, says MSCI. “Recent academic papers and news articles have claimed significant integrity concerns exist with some types of carbon credits, adding to buyers’ and investors’ scepticism and hesitancy.”
However, the researchers behind the State of Integrity in the Global Carbon Credit Market report are “very, very optimistic” about VCMs. Laura Nishikawa, MSCI’s head of ESG and climate R&D, says she “read it and worked on it with great optimism”.
“The truth is it is a new market; it is a frontier market in its own way, and the market infrastructure that will lead to higher integrity is just emerging,” says Nishikawa to The Edge Singapore. “So, it makes sense to us that in the early stage of the market, there’s a wide disparity in integrity and quality in the market.”
See also: MSCI chief research officer touts AI revolution, transparency in private markets
The results were not entirely surprising to the researchers. Nishikawa, a 17-year veteran at MSCI, says it was “almost by design” that no projects attained a AAA rating, as the strict criteria included “multiple dimensions” like co-benefits on local communities, as well as ethical and governance risks.
According to MSCI, the extent of low-integrity credits is driven in part by the mix of project types in the market. For example, nearly 30% of retirements to date are from renewable energy projects, which have the lowest average ratings.
MSCI also assessed the integrity of over 400 pipeline projects, or those still applying to a registry. On average, pipeline projects score better.
Nishikawa says this is “reason for optimism” as methodologies and market standards evolve, and also as buyers of these credits become more demanding.
The first-of-its-kind report also drew a link between integrity and price. Over the last two years, higher-integrity projects (A or above) have traded at a “clear and statistically significant premium” to lower-integrity credits.
See also: MSCI chairman and CEO Henry Fernandez warns of climate risks
After controlling for other factors, such as project type and location, MSCI found that a 1-point improvement in a credit’s overall integrity score (upon 5) is linked to an 8% increase in its spot price.
Nishikawa expects “the market to respond” to these inaugural ratings and MSCI’s coming reports. “A lot of the research around integrity has been very bespoke; buyers have to do a huge amount of due diligence on these projects… Having ratings and having a common language and a common set of criteria will only help that kind of quality and price discovery happen.”
Nishikawa also co-authored a separate report on the relationship between emissions performance and the use of credits, which was released that same month.
According to the 23-page Corporate Emissions Performance and the Use of Carbon Credits report, constituents of the MSCI ACWI Investable Markets Index that use credits perform better on a range of climate-performance metrics than those that have not.
With the controversy around certain projects in recent years, there is a “misconception” that companies buying credits are doing so “to shirk other responsibilities” or get a “free pass” to pollute. “That has not been our experience when we talk to companies,” says Nishikawa.
That said, credit usage among companies in the Asia Pacific (APAC) lagged other regions, with only 6% of 3,804 companies classified as a material user, or those that have used more than 1,000 tonnes of carbon dioxide equivalent (tCO2e) of credits from 2017 to 2022.
This was below figures from Europe, the Middle East and Africa (29%) and the Americas (14%).
Nishikawa thinks stakeholders in markets like Europe may be exerting “more pressure” on companies to decarbonise, but in APAC, “6% is not a terribly low number either”. “Among those APAC companies that bought carbon credits, they were more likely to have also reduced their emissions… they were more likely to have [net-zero] targets, and they’re more likely to have low-carbon revenues or business lines.”
The finding that material users have reduced emissions more quickly on average than non-users was consistent across regions. This outperformance was most pronounced in APAC, where the median pace of reduction in Scope 1 and 2 emissions was four times faster among material users.
Companies that voluntarily buy credits are also those leading their industries, and this relationship caused some debate among the report’s authors, says Nishikawa. “Is it causal? Is it a correlation? I tend to think it’s a correlation, where we see leading companies also leading the way in this market.”
Photos: Albert Chua/The Edge Singapore
