The authors of the 2023 Corporate Climate Responsibility Monitor shared their perspectives on questions related to the analysis, and its implications.

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General summary of the CCRM 2023  What is the Corporate Climate Responsibility Monitor (CCRM)?
The Corporate Climate Responsibility Monitor evaluates the transparency and integrity of companies’ climate pledges. It provides a structured methodology for others to replicate an evaluation on integrity and transparency of companies’ climate leadership. We focus on four main areas of corporate climate action: tracking and disclosure of emissions, setting emission reduction targets, reducing own emissions, and climate contribution strategies and offsetting claims.

Why did you again set out to do this analysis?

With our 2022 edition of the Corporate Climate Responsibility Monitor, we wanted to identify and highlight good practice approaches that can be replicated by other companies, and reveal the extent to which major companies’ climate leadership claims have integrity. With the 2023 edition, we wanted to find out how companies are responding to increased scrutiny and the development of new guidelines.

What are the main findings regarding companies’ targets?

Firstly, the companies’ targets for 2030 are highly insufficient compared to the emission reductions that are necessary to stay below the 1.5°C global warming limit. For the 22 companies with understandable targets for 2030, these targets translate to a median emission reduction commitment of just 15% of full value chain emissions between 2019 and 2030. If we include intensity targets, we find that the targets for 2030 translate to a median emission reduction commitment of 21%. This falls far short of the need to half global emissions between 2019 and 2030.

Second, the 24 companies’ net-zero pledges amount on average to a reduction commitment of just 36%. This demonstrates a huge chasm between what the companies are currently committing to and what is needed to avert the most damaging impacts of climate change. The goal of global net zero emissions requires deep emission reductions in all economic sectors. Net-zero targets that do not reflect deep emission reductions of at least 90-95% are misleading.

How does the report differ from the 2022 CCRM? What has changed and what surprised you when looking at the results?

This second iteration of the CCRM broadly follows the same approach as our inaugural publication in 2022. Although detail has been added to the methodology, the principles against which we have assessed companies remain the same. The 2023 report includes a new selection of 24 major global companies, 10 of which were also included in the 2022 analysis.

We found limited progress in the transparency and integrity of companies’ climate strategies over the past year. Despite several important developments in the guidelines and governance of corporate climate strategies over the past year, such as a new implementation phase of SBTi’s Net Zero Standard, the publication of recommendations from the UN’s High-Level Expert Group (HLEG) on Net Zero and the publication of ISO’s Net Zero Guidelines, we identified only limited signs of improvements for the ten companies that we assessed for the second time. Many key issues that we identified last year for these ten companies remain unaddressed.

While we focused last years’ CCRM on the ambiguity of companies’ headline net zero pledges, we are surprised this year to uncover also a woeful lack of ambition for targets up to 2030. While expert groups and standard-setting initiatives have placed a lot of attention over the past year on improving the quality of ambiguous net-zero targets, this crucial decade of climate action up to 2030 appears to have fallen into the blind spot. We find that the companies’ 2030 targets appear closer to business-as-usual trajectories than to the emission reductions necessary to keep the 1.5°C objective alive.

Another troublesome development over the past year lies in companies’ plans for offsetting emissions. Offsetting is going out of fashion, but it is not going away; rather, it is gaining traction under new guises. While avoiding the terminology offsetting, companies continue to plan extensively on offsetting towards the achievement of their targets, under the terminologies ‘neutralisation’, ‘counterbalancing’, ‘netting-out’, ‘compensating’, or ‘insetting’. In the 2022 CCRM, we warned that the term ‘insetting’ – which several companies were advocating for – was an illegitimate approach that could have the potential to significantly undermine companies’ targets. One year later, this potential is already being realised after companies have successfully lobbied both SBTi and the GHG Protocol to show leniency on this approach to offsetting emissions, albeit under a different terminology (see ‘What is insetting and why is it problematic?’).

Methodology and comparison to other standards

How did you derive the criteria for your assessment?

We based our assessment on guiding principles which we published in the accompanying methodology document, which is an update of the 2022 edition. These principles came from a combination of scientific literature review, previous work of the authors, and the identification of existing good practices. These principles represent our views on the most transparent and constructive approaches to corporate climate responsibility, based on our interpretation of the latest scientific evidence and current developments.

The guiding principles relate to issues where the state of scientific knowledge and debate is rapidly evolving. The goalpost of what constitutes good practice climate action for companies has shifted with the adoption of the Paris Agreement and the increasingly clear scientific evidence that underpins its urgency. With the Paris Agreement, global emissions need to be reduced to almost zero, so companies can only claim to be frontrunners by reducing their own emissions fast and deep. Helping others to reduce was considered viable in the era of the Kyoto Protocol only ten years ago but is no longer sufficient.

Why are the integrity ratings in the Corporate Climate Responsibility Monitor so different from some other ratings, for example the SBTi ratings?

Our analysis is not directly comparable to other ratings as it looks beyond companies’ targets to other aspects of their climate responsibility strategies, including their current actions to decarbonise emissions and their plans for offsetting. That said, our conclusions for the integrity of many companies’ emission reduction and net-zero targets differ from the conclusions drawn by some of the standard-setting initiatives.

We assess companies’ climate pledges in the context of their full value chain emissions: It is not sufficient, in our view, to have 1.5°C aligned targets for selected emission sources only. Given that emissions in all sectors need to decrease substantially, companies that consider themselves climate leaders should set ambitious and specific reduction targets and provide realistic strategies for all of their emission sources. Their reduction commitment and strategies should be ambitious enough to reduce overall emissions to levels deemed necessary by the scientific literature for each sector.

The CCRM does not include a comprehensive analysis of any specific initiatives, such as SBTi. We are also not able to objectively determine why our own assessments differ from SBTi’s ratings, as SBTi does not publish sufficient details on its individual specific company verifications (Annex II of our main report includes full details on how we assessed each company’s targets against the available scientific benchmarks). Nevertheless, we consider the stark differences between our evaluation of companies’ reduction targets and SBTi’s ratings to be a critical issue, especially for targets up to 2030, and we have tried to identify some potential explanations in p. 34-35 of our report. These potential explanations include the legacy issue of SBTi’s continued use of verifications for automobile companies that are based on discontinued methods, and the allowance for companies to offset emissions from the agriculture, forestry, and land use sectors through biological carbon dioxide removals (albeit under different terminologies). We also understand that SBTi’s temperature ratings are in most cases only provided for companies’ scope 1 and 2 targets, for targets up to 2030. Those temperature ratings do not – in most cases – apply to scope 3 targets, although SBTi does require most companies to have scope 3 targets and lists these on their website alongside the temperature rating, in a way that is very likely to lead to the interpretation that they are covered by the temperature rating. For this reason, we understand that a 1.5°C temperature rating from SBTi may in some cases cover only a small fraction of a company’s total footprint, while companies' targets for scope 3 emissions (which account for a large majority of most companies' emission footprints) may not be aligned with sector-specific benchmarks for 1.5°C.

It is the authors’ opinion that there is an important role for initiatives, such as SBTi, to build momentum for corporate climate action and to propose guidelines how to develop science-based targets. However, we observe that companies use SBTi verifications in marketing materials and during legal proceedings to defend strategies that are not aligned with the benchmarks that scientific literature deems necessary to limit global warming to 1.5°C.

Why are the transparency ratings in the Corporate Climate Responsibility Monitor different from some other ratings, such as those from CDP?

Our expectation for transparency is complete, accessible, and consistent public information.

For our assessments, we only consider documentation that is public and accessible, for two reasons. Firstly, we consider that when companies make public announcements on claims to climate leadership, they have a responsibility to make available to the same public audience the information that would be required to understand and appraise those claims. Secondly, we do not consider that there is any accountable commitment associated with any targets or plans that are not made public. We do not consider companies’ CDP responses to be accessible public documentation, on the grounds that the information is only available either behind a paywall, or behind a registration-wall with significant limitations. Even in the case that companies publish the responses to their websites, we still do not consider these documents to be accessible public documentation given the technical nature of CDP response documents and their limited accessibility for a non-expert audience. It is not transparent practice if specific information that is fundamental for an understanding of the meaning or integrity of a company’s climate strategy can only be found in those documents.

We also find that companies misuse CDP certifications to claim the legitimacy of inconsistent and incomplete disclosure. Some companies report more comprehensive data in non-public CDP responses, while presenting a much smaller scope of emissions data in public-facing sustainability reports, alongside the statement that the transparency of disclosure has been verified by CDP. This highly misleading practice calls into question the value of climate transparency certifications for non-public information. We consider it would be more effective for assessments and certifications of transparency to be restricted to public information contained in or attached to companies’ annual reports.

To what extent are companies responsible for emissions upstream and downstream in their value chain? Why did these “scope 3” emissions play such a big role in your assessment?

In many sectors, scope 3 emissions represent the most important emission source for companies to address, to transition their sectors and business models to a 1.5 °C compatible trajectory. Upstream and downstream emissions, referred to as scope 3 emissions, account for over 90% of emissions footprint of most of the companies assessed in this report. These often represent the key emission sources that determine the climate impact of a sector. For example, emissions from the use of vehicles represent the majority of automobile manufacturers’ climate footprint; 1.5 °C compatible trajectories for the transport sector require those manufacturers to phase out internal combustion engine vehicles to eliminate this major emission source. Similarly, emissions from the use of electric appliances, fossil fuels and nitrogen-based fertilisers account for the vast majority of the emission footprints of the companies that manufacture those products. In many cases, those companies are the actors with the greatest degree of influence to decarbonise those emission sources, by manufacturing products with alternative or more efficient technologies.

As such, climate strategies are superficial and misleading without a thorough plan for scope 3 emissions. Installing photovoltaic on the rooftop of a meatpacking facility to reduce or eliminate its scope 1 and 2 emissions is not sufficient to transition the livestock sector to a 1.5 °C compatible trajectory, if upstream scope 3 emissions from rearing livestock account for around 99% of that meat producer’s emissions. Retrofitting oil refineries to be more energy efficient is disingenuous as a measure to address climate change, when it is the oil product itself rather than its means of oil production that represents the main issue for the climate.

For these reasons, there is now a very clearly established consensus that companies should take full responsibility for scope 3 emissions. This position is set out quite consistently, not only for the CCRM methodology, but also by the 2021 SBTi Net Zero Standard, the 2022 ISO Guidelines for Net Zero, and the 2022 Recommendations of the UN High-Level Expert Group on Net Zero. Even most of the companies that we have assessed appear to recognise and accept responsibility for scope 3 emissions, although the reality of their scope 3 commitments often falls far short of what they seem at face value.

Responsibility for scope 3 emissions does not stop when there is uncertainty or indirect influence. Scope 3 emissions can entail a degree of uncertainty, particularly for complex emission sources related to land-use, such as upstream food processing, and downstream emissions associated with consumer behaviour and product use. The decarbonisation of these emissions may also depend partially on actions taken by others. Despite these uncertainties, the inclusion of all mandatory scope 3 emission sources from the GHG Protocol’s Scope 3 Standard in companies’ targets is crucial. This provides a clear incentive for all actors with a potential influence on the decarbonisation of emission sources to better understand those emission sources and take measures to address them. Even in the cases where companies have a lower degree of influence in the reduction of scope 3 emissions, this does not justify their exclusion from targets; the full inclusion of scope 3 emissions in targets can incentivise companies to cooperate with suppliers and consumers to mutually support each other to reduce emissions, including to seek out new solutions where needed.


Company selection

How did you select which companies to look at?

We wanted to gain insights from major companies with climate pledges, spanning a broad range of sectors. The selection was not intended to be a statistically representative sample, but rather we wanted to obtain a broad overview of the different approaches being employed across different sectors.

We assessed the top three global companies of eight sectors, according to their annual revenue in 2021, that have committed to high-profile climate change mitigation pledges under of the main corporate climate action networks and initiatives. The eight sectors we assessed are automotive manufacturers; electronics; fashion retail; food and agriculture; information and communication technology; shipping and aviation; steel and cement, supermarket retail. We excluded state-owned companies due to fundamental differences in management structures and decision-making structures for climate change strategy.

Why did you look at these big corporates only, as opposed to smaller or medium sized companies?

The pledges made by these companies, at the current point of the climate crisis, really matter. The 24 companies covered by this report account for approximately USD 3.16 trillion of revenue in 2021, approximately 10% of revenue from the world’s largest 500 companies. Their total self-reported GHG emission footprints in 2019, including scope 3 emissions, amount to approximately 2.2 GtCO2e, equivalent to roughly 4% of global GHG emissions.

Major companies with bold climate pledges are highly influential. Their share of emissions and market activity make them obvious role models and linchpins for transformation in their respective sectors and geographies. These companies have the capability, and with that the responsibility, to demonstrate unambiguous leadership in sectors they operate in, and the economy as a whole. Global decarbonisation objectives could be made or broken by the integrity of their commitments.

Don’t these companies represent the tip of the iceberg? Isn’t their ambition – albeit not perfect – far greater than most companies without climate pledges?

The notion that the companies with the boldest climate pledges are also the front runners is a misunderstanding, as demonstrated by our findings.

Corporate climate pledges might have been understood as voluntary philanthropy a decade ago, but that is no longer the case. Rather, nearly all major companies (especially consumer facing companies) are making these pledges, because the expectations of their investors and customers require them to do so. By making these ‘voluntary’ pledges, companies also make the case to regulators that regulation is not necessary.

These major companies influence policy, they play a major role in defining the rulebooks for corporate climate responsibility, and they set an example for other companies worldwide. It is essential to understand the integrity of what they are pledging, and - save for a minority of honest examples - we find that their plans are largely insufficient and misleading.


Good and bad practice

Did you find good practices that can be replicated by other actors?

Five of the companies we looked at, Holcim, H&M Group, Maersk, Stellantis and Thyssenkrupp, do what should be obvious for a headline net-zero pledge: they commit to significantly reducing their emissions in the order of at least 90-95%. Maersk’s commitment to reduce emissions across its value chain by at least 90-95% by 2040, appears to be an ambitious target for a sector where deep decarbonisation technologies are not yet sufficiently matured.

Looking at the shorter term, Apple, H&M Group, and Maersk meet 1.5°C-aligned decarbonisation milestones for their respective sectors with their targets for 2030, while ArcelorMittal, Foxconn, Holcim, Stellantis, and Thyssenkrupp come close to meeting them.

Looking at renewable energy procurement structures, Google and Microsoft stand out. These companies aim for a 100% hourly match between consumption and local RE generation by 2030. Google and Microsoft recognise the current mismatch and issues that often arise with renewable energy procurement, but also show ambition and innovation to overcome these.

For setting short- and medium-term targets, Stellantis, for example, provides several targets for 2025 and 2030. These include the share of electric vehicles in certain key markets (downstream scope 3), absolute emission reductions of its operational emissions (scope 1 and 2), and intensity targets for purchased products (upstream scope 3). Stellantis further sets an ambitious overarching 50% absolute emission reduction target by 2030 compared to 2021 levels across all scopes. With these targets, Stellantis meets some of the 1.5°C Paris Agreement-aligned milestones for automobile manufacturers’ downstream scope 3 emissions, especially with its target for 100% electric vehicles in the European Union by 2030.

In terms of transparency around its procurement of carbon credits, Microsoft stands out. Microsoft publishes details on all of the projects from which it procures carbon credits in an interactive web-page, including volume of procured credits and durability of each project. Although the company’s offsetting portfolio today is still heavily focused on biological carbon dioxide removals, it plans to neutralise its emissions in the future with more advanced options that have a reasonable degree of permanence. Although Microsoft is transparent in its approach for carbon credit procurement, we find that the company’s large reliance on offsetting in the future makes its ‘carbon negative by 2030’ pledge somewhat misleading.

Some companies increasingly engage with suppliers to reduce their value chain (scope 3) emissions. Ahold Delhaize, Apple and Walmart call on their suppliers to set ambitious climate targets. Walmart sets up collective PPAs for its suppliers and Apple connects suppliers with RE project developers.

Maersk is the only company that made it to the “reasonable integrity” category. What is the company doing right, that others do not?

Maersk performs especially well compared to other companies on three key elements. First, Maersk does what should be obvious for a headline net-zero pledge: committing to deep emission reductions. The company commits to reduce emissions across its value chain by at least 90% by 2040, which appears to be an ambitious target for a sector where deep decarbonisation technologies are not yet sufficiently matured. Second, Maersk is making considerable investments in emerging technologies to decarbonise many of its major emission sources, including scope 3. The company is pioneering alternative fuels to replace conventional marine fuels, which currently account for approximately 60% of Maersk’s GHG footprint. While there is still room for improvement, Maersk seems to underpin its ambitious targets with credible measures. Third, Maersk’s integrity has not been undermined by contentious carbon neutrality claims delivered through offsetting, and the company is making climate contributions to support carbon dioxide removals. Still, Maersk could considerably improve on other aspects of its climate strategy, in particularly related to renewable electricity procurement, for which we could identify very limited information. Renewable electricity will play an increasingly important role in Maersk’s climate strategy, as the company transitions toward electric and hydrogen-based technologies for shipping and land-based operations.

What issues did you identify that could have the potential to mislead or undermine the integrity of corporate climate strategies?

Half of the 24 companies make no specific emission reduction commitment for the net-zero target year. Five other companies commit to less than 40% emission reductions across the entire value chain. Carrefour and Walmart commit to only 1% and 9% emission reductions respectively by 2050 below 2019 levels, due to scope exclusions.

Fifteen out of 24 companies clearly fall short of meeting 1.5°C-aligned decarbonisation milestones by 2030 for their respective sectors despite being verified by the SBTi in most cases. Mercedes-Benz and Volkswagen, for example, both do not set 1.5°C-aligned phase-out dates for internal combustion engines in line with latest scientific findings.

Companies’ carbon neutrality claims cover on average just 3% of their emissions. Microsoft, Apple and Deutsche Post DHL cover less than 2% of their emissions when they procure carbon credits to tell customers that their business or the service they provide is ‘carbon neutral’.

The offsetting approaches we have seen are rife with contentious practices. 23 out of 24 companies have offsetting plans for the future, mostly though non-permanent removals from biological carbon dioxide removal and storage, at a scale that would outstrip the planet’s resource potential if replicated by others.

Descriptions of emission reduction measures are often lengthy but focus on only marginal changes such as efficiency measures. Companies often use vague terms such as ‘sustainable materials’ or ‘changes in product portfolio’. Clear commitments to deep decarbonisation are a rare find.

Offsetting practices under the guise of insetting is gaining traction. At least two of the companies covered under this analysis, Nestlé and PepsiCo, will depend on ‘insetting’ to realise their net-zero target. The concept of insetting is promoted by some actors as a better alternative to offsetting, mainly for companies with links to agriculture and land-use sectors in their supply chains. Insetting is sometimes described as offsetting within the value chain. In case ‘insetting’ means emission reduction projects in the value chain, the company either rejects responsibility for emission sources or counts emission reduction measures twice. If a company uses ‘insetting’ to describe carbon dioxide removals in the value chain, the same environmental integrity issues apply as for any other carbon dioxide removal offsetting projects. On top of that, a company may not seek independent measurement and verification of the carbon dioxide removals, when claiming to offset their emissions through insetting rather than through carbon crediting standards. As such, insetting is simply a weaker variation of an already non-credible offsetting approach.

What are “quick fixes” for better corporate climate responsibility?

Transparency is key. Companies that make public climate pledges have a responsibility to transparently disclose the information that can back up those declared ambitions. Currently, the quality of disclosures is highly variable; information is often missing, inconsistent or fragmented. Even companies that are doing relatively well are sometimes exaggerating their ambition. Target setting and offsetting claims especially, should be far more transparent. Companies could reformulate their headline pledges to specific and unambiguous emission reduction targets that are not reliant on offsetting or neutralisation of emissions.

Companies need to set clearer and more ambitious emission reduction commitments in the short- to medium-term, for the next 5-10 years. We found that the majority of targets for 2030 lack ambition, and cannot be taken at face value. Long-term visions can provide a useful signal, but only when accompanied with adequately ambitious interim targets within a timeframe that requires immediate action. Specific targets over short- and medium-term periods that require immediate action and accountability are of primary importance and should be the main focus.

With regards to measures for reducing emissions, companies can and should commit to 100% renewable-based energy consumption, but only from high-quality constructs. Most of the companies we looked at already make specific pledges for renewable energy consumption. But approaches like the purchase of renewable energy certificates from existing hydro power plants will not lead to any additional renewable electricity capacity. Only a minority of companies demonstrate high integrity in reaching for higher quality procurement constructs that are likely to have a meaningful impact for emission reductions. We also identified companies that – in stark contrast to their climate leadership claims – did not currently procure any significant amount of renewable energy, nor declare plans to do so in the future. The procurement of high-quality renewable electricity is an accessible measure that should be considered a basic prerequisite for climate ambition.

Companies need to acknowledge the impact they have on climate today. On the one hand, companies should make climate contributions with a sufficient volume of support, to encourage the development high-hanging fruit mitigation actions (see below) and really set about the transition of their sector. On the other hand, they need plans and strategies to obtain technologies and measures that can help the sector they operate in towards deep decarbonisation. We only found limited evidence of transformational measures and strategies among these companies, though we are in a situation that requires all-hands-on-deck to avert the current climate crisis.


Net zero, offsetting and climate contributions

You state that the companies’ net-zero targets commit to reduce emissions by only 36% on average, rather than a commitment to deep decarbonisation suggested by the term “net-zero”. How did you get to this finding?

A key problem with net-zero and carbon neutrality terminology is its ambiguity. The key thing we look for in a target is, whether the company explicitly commits to the reduction of its own value chain emissions. Half of them do, but the extent varies widely. Just five out of the 24 companies – H&M Group, Holcim, Maersk, Stellantis, and Thyssenkrupp – commit to decarbonise their emissions by at least around 90% by their respective net-zero target years. Several others commit to a much lower emission reduction target, or a seemingly high emission reduction target that covers only a fraction of their emission sources. For 12 companies we did not identify a clear emission reduction target alongside its net-zero pledge.

Where specific targets were identified, we looked at the depth of those targets as well as the coverage of emission sources that they apply to, in order to establish the proportion of the company’s full value chain emissions that the company explicitly commits to reduce, by the target year. When we add together the explicit emission reduction commitments made by these 24 companies, we find that they amount to an aggregated commitment to reduce those companies’ combined GHG footprint by a total of 36%, compared to 2019 emission levels. The sample size is low, so this findings is not necessarily representative of all major companies, but it is alarming nonetheless, and is a clear indication that similar pledges from other companies should not necessarily be taken at face value.

Is the terminology “net-zero target” actually helpful to tackle the global climate crisis?

The signal sent by the reference to “zero" is a helpful concept, but the “net” can be problematic. Global emissions need to be reduced to net-zero, so companies need to think about how they can completely eliminate their greenhouse gas emissions. Here the concept of "zero” is helpful because it changes the mindset from “marginal reductions and optimisations here and there” to a “full transformation”. The “net” is not helpful if companies start to employ creative accounting just to claim a neutral balance.

Net-zero emissions is fundamentally a societal goal, not necessarily a goal that is appropriate to transpose onto every individual corporate entity. Not all sectors currently have the technological means to completely decarbonise by mid-century; achieving net-zero emissions at the global level will require carbon dioxide removals. But the potential of carbon dioxide removals is limited. Natural carbon sinks and carbon dioxide removal technologies must be used to neutralise residual emissions from hard-to-abate emission sources.

There may be more merit in encouraging companies to set emission reduction targets that go close to zero without implicitly depending on offsetting and encourage companies to remain transparent and take responsibility for the remaining unabated emissions through climate contributions without neutralisation claims.

Is there a difference between offsetting and neutralisation?

In our view, companies make an offsetting claim when they assert that GHG emissions within their value chain are ‘neutralised’, ‘netted-out’, ‘offset’, ‘inset’ or ‘counterbalanced’ through other emission reduction activities or carbon dioxide removals – inside or outside of their value chain. The practice of claiming to offset emissions is afflicted by controversy and contention due to significant uncertainties in the real impact of offset credit use as well as the suitability of carbon dioxide removals for offsetting emissions. Accordingly, terminology for claiming the offsetting of emissions is highly sensitive and inconsistent. Many actors now avoid the term offsetting entirely; companies and initiatives more often refer to ‘neutralisation’, ‘netting-out’, ‘compensation’, ‘reducing the footprint’, ‘counterbalancing’, or other equivalent terminologies. ‘Insetting’ is also gaining traction as a term to claim the offsetting of emissions through carbon dioxide removals or reductions within a company’s own value chain. Some standards and companies propose the use of multiple terminologies to distinguish between offsetting in different circumstances and at different times. We consider that the complication of this single concept creates additional and unnecessary confusion which may detract from the ability of consumers, investors and regulators to critically assess claims made by companies. The Corporate Climate Responsibility Monitor assesses all claims that unabated GHG emissions within the value chain are offset as offsetting claims, including all synonymous terminologies and project types.

Why is the approach of offsetting companies’ emissions so problematic?

First and foremost, we need to focus on approaches that immediately incentivise companies to make deep reductions to their emissions – within their operations as well as along the value chain. In some circumstances, there is a risk that offsetting can distract from this key objective, relieving the pressure on companies to act and reduce own emissions. Companies may be tempted to skip the first steps of the mitigation hierarchy since offsetting is frequently understood as the most convenient and cheapest option to claim a reduction of emissions. This could potentially lead to delayed action, or even further investment in carbon-intensive technologies and infrastructure causing lock-in effects that are ultimately not compatible with the objective to decarbonise our economies by mid-century.

Beyond this key issue, the quality of available carbon credits is highly contentious. The environmental integrity of carbon credits has always been afflicted by various factors, including but not limited to the contentious additionality of carbon crediting projects, the limited permanence of carbon stored from carbon dioxide removal projects, and the risk of double counting for emission reduction impacts. In addition, several new factors are now of key importance to the integrity of an offsetting claim since the introduction of the Paris Agreement. Most notably, to avoid the perverse incentive of not adopting ambitious mitigation policies because such policies might lower the potential for generating and exporting carbon credits, carbon credits that are being used to claim the offsetting of emissions should only be generated by high-hanging fruit mitigation projects (see below). The credibility of offsetting claims today is fundamentally hampered by the reality that, although the Paris Agreement is already in force, there are currently no carbon credits available from any market that can meet all criteria for robust environmental integrity and transparency. For this reason, some carbon credit providers are moving away from carbon neutrality claims.

On account of the huge surplus of carbon credits available from existing projects and the low market prices for carbon credits, among other factors, many available carbon credits today may represent little-to-no meaningful climate impact. Emission reduction credits generated by existing and more easily accessible projects are generally sold at relatively low prices on both compliance and voluntary markets. Such prices disincentivise companies to make operational changes to further reduce their own scope 1, 2 and 3 emissions. There are currently very few, if any, examples of existing carbon crediting projects that represent the high-hanging fruit of mitigation potential, given that carbon credit markets to date have mainly focused on reaching the most cost-effective mitigation potential.

What are high-hanging fruit mitigation projects?

The high-hanging fruit of mitigation potential refers to the technologies and measures to decarbonise emission sources that remain otherwise entirely inaccessible to host country governments in the near- and mid-term future because of high costs or other insurmountable barriers to adoption. Up to the present day, very few conceptualised examples are known that fulfil all necessary criteria of a high-hanging fruit of mitigation potential. One reason for this may be that the abatement costs of such projects potentially go beyond EUR 100 / tCO2e. which demonstrates a significant shift from current prices at the voluntary carbon market. To shed some light on the unfolded potential of high-hanging fruits projects and develop guidelines for a truly additional alternative, further analysis is currently being undertaken for publication in 2023.

Why is it inappropriate for companies to claim the neutralisation of their emissions through carbon dioxide removals in forestry and land-use projects? Don’t the IPCC guidelines for national greenhouse gas inventories allow countries to aggregate net changes in land-use related carbon fluxes with other emissions in the AFOLU sector?

The 2006 and 2019 IPCC guidelines for GHG inventories are designed for national level GHG inventories. While many aspects of these guidelines may also form the basis for the GHG accounting of non-state actors such as companies, there are important differences between nation states and companies, which mean that not all aspects of such guidance can be automatically applicable to companies. Two key limitations related to the suitability of using carbon dioxide removals to claim the offsetting of companies’ emissions are non-permanence and scarcity.

The permanence of a carbon dioxide removal outcome refers to the degree of certainty that the sequestered carbon will not be released at a later point in time. The release of previously sequestered carbon negates any accrued benefits of the sequestration. The use of non-permanent carbon dioxide removals to offset emissions will lead to an increase in atmospheric concentration of CO2 in the longer term. The permanent storage of carbon removed from the atmosphere through forestry and other land use related projects cannot be guaranteed. Natural weather events such as fire, flooding, droughts, etc. or anthropogenic influences can at any point in the future cause the degradation or razing of forests, mangroves, soils, or savannas. When such damages occur, this leads to the re-release of captured carbon, potentially nullifying any accumulated emission removal impact that might have occurred through the protection or restoration of that land in the past. IPCC guidelines for national GHG accounting address this issue – albeit still with a large degree of uncertainty – by requiring that measures are taken by national governments to monitor the duration of storage and to regularly account for changes through and between ‘commitment periods’. Companies, carbon crediting standards, and the latest draft of the GHG Protocol guidance for the land use sector have proposed that the same approach can be applied to companies. The spotlight section 4.4.2 in our report – Is it possible to mitigate the non-permanence of climate impacts from biological carbon dioxide removals? – explains how the proposed methods for companies are based on implausible assumptions, and that there is currently no plausible logic nor mechanism under which it is possible for companies to ensure the permanence of the carbon dioxide removal measures over the necessary period, which the draft of the GHG Protocol guidance defines as millennia.

Scarcity, in this context, refers to the limited technical potential of the natural resource base available for carbon dioxide removals. Future use of scarce carbon dioxide removal options must be consistent with achieving net-zero and eventually net-negative emissions at the global level, which is required to avoid the most damaging effects of climate change over the coming decades. To align with 1.5°C compatible pathways at the global level, some sectors with the technical ability to fully decarbonise will need to reach zero emissions, while scarce carbon dioxide removals are likely needed to balance out the residual emissions from other sectors where the technical mitigation potential of existing technologies remains very limited. This means that the scarce potential of the natural resource base available for carbon dioxide removals must be managed as a public good. Any allocation of rights of ownership to scarce carbon dioxide removals will require international – or at least national – oversight as well as detailed (and likely highly complex) considerations of fairness and appropriate use to ensure that this scarce resource is used in a way that is consistent with achieving net-zero and eventually net-negative emissions at the global level. Accordingly, it is not appropriate for companies today to make climate pledges which assume they will have the right to use scarce carbon dioxide removals to neutralise their own emissions decades in the future. While it may be feasible for countries to manage the scarce resource base for carbon dioxide removals across all sectors within their defined territorial boundaries, the same cannot be said for companies. The relevance of this logic is not affected by whether measures to implement carbon dioxide removals take place inside or outside of any given company’s value chain. This is not only a reason why it is inappropriate for individual companies to claim that carbon dioxide removals can neutralise their emissions, but it is also a reason why the goal for achieving net-zero and eventually net-negative emissions at the global level cannot simply be transferred on to each individual company.

The disconnect between theories and approaches that are applicable at the national level and those that are applicable at the level of individual companies is overlooked by the draft GHG Protocol guidance, as well as the SBTi guidelines that are based on it. The removal and storage of carbon dioxide through nature-based solutions – such as in forests or soils – is extremely important for global climate change mitigation, and mechanisms are required to incentivise companies to take such measures. Allowing companies to implement such measures instead of emission reductions is not the right incentive mechanism for carbon dioxide removal measures, because it will not lead to the achievement of the goals for achieving net-zero and eventually net-negative emissions at the global level, and it will reduce transparency on progress towards those goals.

What is insetting and why is it problematic?

“Insetting” is a business-driven concept with no universally accepted definition. The approach can lead to low credibility GHG emission offsetting claims and the double counting of emission reductions. Some companies, mainly those with links to the agriculture and land-use sector, promote “insetting” as a better alternative to offsetting. Insetting is sometimes described as offsetting in the value chain. This can mean two different things, both of which are highly contentious:

1) Insetting can refer to emission reduction projects within the value chain, usually addressing scope 3 emissions: Describing this as insetting is misleading; this is simply a measure for the reduction of the company’s own (scope 3) emissions. In claiming that these measures neutralise the company’s other GHG emissions, the company is either rejecting responsibility for those scope 3 emission sources and excluding them from its target coverage, or it is counting the emission reductions of those measures twice, aka double counting, to claim reductions in scope 3 emissions and neutralisation of other emissions. The credibility of the claim is critically compromised in either case.

2) Insetting can refer to carbon dioxide removals within the value chain: This may include carbon storage in agricultural soils, tree planting on or close to agricultural land, and carbon storage in harvested wood and wood-based products. Here, the same environmental integrity issues apply as for any other carbon dioxide removal offsetting projects: the suitability of these measures for claiming the neutralisation of GHG emissions is compromised by the lack of permanence of the carbon storage, as well as the scarcity of nature-based solutions for carbon dioxide removals. An apparent key difference here between carbon dioxide removals under an “insetting” approach, as opposed to carbon dioxide removals through certified offsets, is that the companies implementing an insetting approach may not seek independent measurement and verification of the carbon dioxide removals. As such, this is simply a weaker variation of an already non-credible offsetting approach.

What are climate contributions, how are they different from offsets?

We define climate contributions as the financial support that companies provide to climate change action beyond their value chain, without claiming to neutralise own emissions. Offsets are investments in emission reduction or removal projects that are used to claim a “neutralisation” of own unabated emissions.

The key difference between climate contributions and offsetting is that companies making a climate contribution refrain from claiming that their own emissions are “offset” or “neutralised”.

Climate contributions allow companies to take responsibility for their unabated emissions and channel finance to ambitious climate action that contribute to global efforts to urgently decarbonise our economies. Since companies making climate contributions are not planning to claim to neutralise their emissions, they are not tied to procuring carbon offset credits and enjoy far greater flexibility in the type of activities they can support to advance global decarbonisation. This may emerging technologies that may be too risky for traditional offset project developers, but which could have a high transformation potential. Or companies making climate contributions can invest in carbon dioxide removals that are necessary to reduce global emissions to net zero but due to issues around permanence and scarcity are not suitable for making a neutralisation claim.


Renewable electricity and bioenery

Several of the companies that you assessed, use Renewable Energy Certificates (RECs) to account for their electricity-related emissions. Why do you give a poor rating to companies that procure RECs?

We consider the procurement of RECs an ineffective measure to address electricity-related emissions for two main reasons.

First, the sale of RECs does not necessarily contribute to additional renewable energy supply capacity. While the purchase of RECs could send a signal to investors that there is demand for renewable energy in theory, there are indications that this is often not the case in practice due to various issues including oversupply of certificates, associated low prices, and implicit double counting.

For example, in Europe there is an oversupply of RECs at low prices that mostly stems from decades-old hydropower installations in Scandinavia. As these installations were operating long before the system of RECs was established, certificates have had no influence on the development of hydropower capacity in those countries. If Scandinavian customers believe that their energy is unambiguously delivered by renewable energy, they may see little incentive to purchase RECs; consequently, the owners of hydropower installations may sell RECs to foreign customers instead, leading to the renewable energy generation being implicitly double counted. In this case, a German customer who consumes predominantly fossil-fuel based energy from the German grid can purchase Norwegian RECs and claim lower scope 2 emissions. Neither the German energy provider nor the Norwegian hydropower owner, however, have an incentive to increase their RE capacity as a result of this transaction, so actual GHG emissions do not change. While exceptions may exist, the cause-effect relationship between purchasing a REC and contributing to additional renewable energy capacity – and by extension, to the reduction of emissions – is difficult to ascertain.

Second, RECs can displace carbon-intensive energy to other actors unknowingly. When a customer purchases RECs, the actual energy mix that a certificate owner receives does not change, nor does the energy mix in the grid since all generated electricity – no matter if renewable or fossil fuel-based, is fed into the same grid. If fossil-fired power plants and renewable energy technologies feed electricity into a grid, the actors who draw from that grid would all receive a combination of renewable- and fossil-fired electricity. Consequently, if the owner of a renewable energy generation facility were to sell RECs, the purchasing actor may claim a lower grid emission factor to determine its scope 2 emissions, but would still continue to receive the same combination of renewable- and fossil-fired electricity. The sale of RECs neither results in a direct increase of renewable energy capacity, nor does it change the electricity mix that each actor receives. Rather, actors who purchase RECs simply displace more carbon-intensive energy to other consumers.

Why do you consider it problematic for companies to rely on bioenergy to reduce their emissions footprint?

Bioenergy is not an emissions-free energy source and is associated with various sustainability issues, including deforestation, biodiversity loss and food insecurity.

There is limited potential for sustainable biomass globally. An increase in demand for this limited biomass potential is likely to result in an increase in demand not non-sustainable sources, which would exacerbate sustainability issues. For this reason, companies should use alternative technologies that do not depend on combustion where those alternative technologies exist, and invest in emerging zero-carbon technologies.


Next steps

How do you hope that companies will react to your analysis?

We hope that companies will react constructively to our findings, to replicate the good practices that have been identified, and address any open issues. Given the wide range of approaches being pursued, and the inconsistent advice being issued by consultants and standard setting initiatives, it seems that it is currently very difficult for companies to determine what are the most constructive approaches for addressing their climate responsibility. Through highlighting good examples and contentious practices, as well as the publication of our full methodology, we hope to be able to provide ambitious companies more guidance for how they can improve the transparency and integrity of their climate responsibility strategies this year.

How should regulators react to your findings?

The findings of this report indicate that regulators should not rely on consumer and shareholder pressure or on private or voluntary initiatives to drive corporate action. Companies must be subject to intense scrutiny to confirm whether their pledges and claims are credible, and should be made accountable in the case that they are not. Truly ambitious corporate actors can be supported by introducing stronger regulation that levels the playing field by ensuring that those ambitious actors are not at an economic disadvantage compared to their less ambitious peers.

Regulators and standard-setting initiatives must find ways to distinguish and segregate climate leadership from greenwashing support ambitious actors, innovate, and accelerate decarbonisation.

Through the EU Corporate Sustainability Reporting Directive, we saw the first signs of stronger rules for climate transparency finding their way into legislation in 2022, though it remains to be seen how such regulation will be applied.


What do you plan to do next?

The Corporate Climate Responsibility Monitor is an annual publication. We do not consider it a realistic objective to assess the integrity of hundreds or thousands of corporate climate pledges en-masse. Rather, the objective will remain to survey a sample of companies to provide insights on the integrity of corporate climate action and the adequacy of the guidance that is being provided to companies.


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