Key Findings

• More companies are seeking carbon neutrality, although these are still a minority. The number of companies that claim to have achieved carbon neutrality or aim to offset their emissions has nearly doubled from 15 to 28 since last year, although this still represents just 5% of 557 FTSE All-Share companies. Offsetting is predominantly a strategy pursued by companies that are not particularly carbon intensive and only 1% of the emissions of the FTSE All-Share were offset last year.
• The nature and scope of offsetting varies significantly. Only 11 of the 28 companies aim to be, or currently claim to be, carbon neutral for their entire operations. The remainder have investigated carbon neutrality for part of their operations or offer offsets to their customers.
• Offset mechanisms are increasingly subject to scrutiny. With more and more companies investigating ways to offset their emissions and an exponential increase in the number of organisations offering offsets, the industry has been in the spotlight in the past year. In particular, the Financial Times has published a series of articles examining the market and highlighting “widespread failings in new markets for greenhouse gases, suggesting some organisations are paying for emissions reductions that do not take place.”1 The Advertising Standards Authority took action against the electric utility Scottish & Southern for unsubstantiated claims regarding its tree planting schemes.
• Offsetting standards are developing but there is no universally recognised standard as yet. In response to continued uncertainties about the efficacy of such schemes, there have been a number of collaborations to develop or tighten offsetting standards. The UK Government is in the final stages of developing a ‘kitemark’ for credible offsets, investment banks have teamed together through European Carbon Investor Services to develop their own standard and the UN Framework Convention on Climate Change is no longer accepting less credible HFC-23 offsetting projects for the Clean Development Mechanism.
• There remains a significant discrepancy between voluntary and Kyoto-compliant offsetting mechanisms. The last report noted that “voluntary schemes vary wildly in their veracity and quality” while Clean Development Mechanism (CDM) and Joint Implementation (JI) offsets “are credible and verifiable ways of offsetting emissions, but the market is subject to restricted supply and relatively high set-up costs.” Although standards are developing that seek to create a level playing field amongst voluntary offset providers and establish parity between the voluntary and regulated markets, there remains significant variation in the nature and veracity of the offsets provided by the voluntary market. This has led to the coining of the term “carbon cowboys”. The cost of offsetting varies enormously (from £2 to £25 per tonne of carbon offset according to research conducted for this study) with the voluntary market, for the most part, offering a lower cost option to offset carbon emissions. This may be largely why all FTSE All-Share companies that have offset their emissions use voluntary offset providers and 77% of the offsets provided are via non-regulated voluntary mechanisms. Companies also choose voluntary offsets because there is a shortage of regulated credits.

Why did Standard Life Investments and the Environment Agency commission the research?

In 2006 Standard Life Investments and the Environment Agency commissioned Trucost to conduct research into the role and relative efficacy of carbon neutrality compared to other carbon management strategies, and its relevance as applied in different business sectors. The resulting report, published in July 2006, found that 16 companies from 14 different sub-sectors were aiming for carbon neutrality or a low carbon strategy. 

The report was intended to promote a discussion by investors of these key issues leading to better awareness, understanding and disclosure of carbon management strategies by FTSE listed businesses. And indeed, there has been both action and heated commentary on these topics in the last year. For example in December 2006 the House of Commons Environmental Audit Committee launched an inquiry into the voluntary carbon offset market. In January 2007 DEFRA launched a consultation on a voluntary Code of Best Practice on carbon offseting. Throughout the year the press and consumer organisations have been vocal in examining the credibility and reliability of carbon offsetting. The Advertising Standards Authority has also expressed concerns. 

In light of these events Standard Life Investments and the Environment Agency asked Trucost to look at the latest developments in the use of carbon offsetting and carbon neutrality by FTSE companies, in the hope that as the financial materiality of climate change is becoming more and more evident this report will stimulate continued discussion of carbon management by the business and investment community.

Report image: Trends towards carbon neutrality

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