Over the past several decades, the global scientific community has formed a near consensus that anthropogenic activities are contributing to global warming. In the expanding search for solutions, carbon markets have emerged as a high-potential tool to help companies, investors, and governments transition to a sustainable, net-zero emissions reality.
The path to net-zero emissions starts with absolute-zero aspirations
While not intended to be a panacea in the fight against climate change, carbon markets are a tool that can aid the transition to a sustainable future. Global companies, investors, governments, and citizens must prioritize decarbonization and direct abatement above all other climate mitigation activities. Success means getting as close to absolute-zero emissions as possible—and only then identifying high-integrity ways to neutralize or offset remaining tail-end emissions that are the most difficult, expensive, or technologically complex to abate. In addition, emitters should go above and beyond their climate targets to compensate for emissions that—depending on their sector—will likely take many years to reduce. Compensation, or purchasing carbon credits to offset emissions along the journey to net zero, doesn’t mean an emitter has achieved its climate goals but is nonetheless critical to supporting additional emissions reductions.
The evolution of carbon markets
Carbon markets have evolved over the last several decades to involve various methodologies eligible to generate carbon credits, including renewable energy that displaces polluting forms of energy generation and nature-based solutions such as improved forest management, afforestation, and reforestation, or avoided deforestation (reducing emissions from deforestation and forest degradation (REDD+). We believe that these efforts by registries and broader carbon market participants are directionally correct: Using high-accuracy technology and tightening standards to improve rigor can’t happen soon enough. We’re seeing global carbon market developments that support these trends, including the planned release of the Integrity Council for the Voluntary Carbon Market (IC-VCM) Core Carbon Principles (CCPs) in March 2023, the Voluntary Carbon Market Integrity Initiative Claims Code of Practice, and Science Based Targets initiative’s sector-specific net-zero guidance. What has historically been a disjointed and opaque market is rapidly making strides toward transparency, quality, integrity, and standardization within specific carbon project types.
Criticism of the integrity of certain carbon emission reductions standards and claims of over-crediting serve to underline the importance of continually tightening protocols to ensure that climate claims are tangible and scientifically defendable. But progress is being made toward greater rigor. For example, new afforestation and reforestation methodologies are being developed that include high-accuracy technology and remote-sensing-enabled monitoring, verification, and reporting; improvements to verifier training, audits, and project reviews; and adoption of dynamic baselines that are intended to address over-crediting risks. An embryonic market is making rapid progress toward transparency, quality, and standardization within specific carbon project types that ensures that project protocols reliably measure climate claims in quantifiable and objectively defensible ways.
Our carbon focus
Within our timberland business, our focus is on improved forest management (IFM), reducing harvest volumes, improving forest stocking, or extending harvest rotations to intentionally sequester additional carbon compared with BAU practices that would maximize timber value, together with afforestation and reforestation (ARR) projects. In addition, our agriculture business is exploring soil carbon pilots to test what is a relatively nascent carbon project methodology. Our IFM projects involve establishing realistic counterfactual baselines against which increased sequestration compared with BAU activities can generate avoided emissions carbon credits. This is in addition to the opportunity to generate removal credits from the enhancement of a forest’s growth capacity. We manage IFM and ARR projects in the compliance and voluntary carbon markets on behalf of our clients, and we’re adopting new technologies such as lidar imaging, which can enhance the accuracy of our timber inventory, carbon measurement, and reporting.
Our carbon principles
Manulife Investment Management has consistently advocated for clear, high-integrity carbon market standards, demonstrated by our carbon principles that are aligned with the emerging IC-VCM CCPs and continuously reviewed against evolving international best practices seeking to ensure high-quality climate mitigation solutions.
We establish conservative baselines for IFM projects based on regional and project property management realities, and on realistic alternative timber harvest scenarios. Our near 40-year experience in sustainably managing timberlands and vertically integrated operations team provide us with deep knowledge of local harvest opportunities and allow us to establish more conservative baselines than those permitted by many registry protocols. We actively extend avoided emissions credit generation to more accurately reflect forest management practices on the ground rather than taking the additional avoided emissions credits available in the early years of an IFM project. Lastly, we incorporate specific climate impact information requests from potential buyers of carbon credits we generate for tangible climate goals and progress against them to guard against greenwashing in our carbon credit sales and distributions. We believe that maintaining integrity and avoiding reputational harm are key components of our fiduciary duty, and our experience suggests that higher quality credits may command price premiums in the market, more than compensating for lower credit volumes. We remain committed to high-integrity carbon activities that deliver real and durable climate mitigation for the environment and for our clients.
Expect scrutiny—and embrace opportunities to improve carbon standards
Rapidly growing and relatively nascent markets can’t mature effectively without inspection, and an ecosystem of intermediaries, exchanges, consultants, ratings agencies, and scientific reviewers has emerged to scrutinize the carbon standards that are essential to building investor confidence. Close examination of carbon market practices and participants isn’t just inevitable but welcome when it benefits standards and generates valuable ecological and financial outcomes. Critically, climate finance must have confidence that the outcomes promoted are realistically achievable, and rapidly growing carbon market demand must partner with credible, conservative, and experienced carbon credit suppliers. As carbon markets continue their journey toward high integrity, we’ll continue to strengthen our own carbon practices and do the right thing.
A version of this article appears in Portfolio Institutional.
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