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Treat Carbon Offsets as ‘Last Resort’, Carney Advises Investors

Carbon offsets are to be treated as a last resort for emission reductions, and natural gas plants are unlikely to be recognized as “green” assets, as some of the key policy details behind Mark Carney’s Glasgow Financial Alliance for Net Zero (GFANZ) gradually take shape.

When GFANZ was first announced during the COP 26 summit in Glasgow earlier this month, a spokesperson stressed the high degree of flexibility that was needed to bring together a group of financial institutions and asset managers with control over US$130 trillion in investment.

“No one knows a bank’s portfolio like they do,” the spokesperson told The Energy Mix in the hours after the GFANZ announcement. It was “really tricky to get these banks onboard,” he added, with key decision-makers within major financial institutions worried about their fiduciary duty and responsibility to shareholders.

The result, said a panelist at a November 3 media conference hosted by Climate Action Network-International, was that some of the more than 450 GFANZ signatories had approved new fossil fuel investments since joining the alliance.

But the news since has charted a different course, with Carney, the UN special envoy for climate action and finance, telling a Norges Bank Investment Management event in Oslo last week that carbon offsets should only be seen as a last resort, covering a small fraction of emissions, Bloomberg Green reports.

The “best practice” is “really that those offsets are at the end of a process of reducing absolute emissions,” Carney said.

While Carney and Standard Chartered Plc CEO Bill Winters foresee a $100-billion carbon offset market by the end of this decade, Carney stated last week that “you can only be a participant as a buyer” in that market “if you have a credible decarbonization plan.”

The alliance’s general expectation is that participating financial firms will come up with credible plans to tackle the emissions footprints of their investment, lending, underwriting, and financial service activities. They’ll be pressed for plans that prioritize emission reductions, avoid over-reliance on “speculative” technologies, limit “residual emissions” to any that can’t feasibly be eliminated, and ensure that any offsets they buy are permanent removals.

Earlier in the month, while the COP was still under way, a draft document from the Net Zero Asset Owners Alliance took aim at a draft green rulebook, or taxonomy, in which the European Union was set to recognize natural gas and nuclear facilities as green assets. The GFANZ spokesperson had previously cited the owners’ alliance as a “sector-specific sub-component” of the larger effort, in a structure he likened to a Russian doll.

The asset owners’ alliance “supports a taxonomy that is credible, usable, as well as science- and evidence-based,” the group said, in a draft obtained by Bloomberg News. Including gas in that mix “would be inconsistent with the high ambition level of the EU taxonomy framework overall.”

As for nuclear, “it will be of utmost importance to apply strict criteria when assessing” the principle of doing no significant harm, “with respect to the other environmental objectives to identify a potential taxonomy alignment.”

The draft represented “a blow to those EU members who’d hoped the bloc would take a softer stance on gas and nuclear,” Bloomberg wrote at the time. “Environmental groups have criticized the potential inclusion of gas, arguing it would undermine the EU’s ambition of setting the ‘gold standard’ for green investing” and prevent the bloc from meeting its carbon neutrality targets. “For nuclear, meanwhile, there are concerns over the environmental impacts of radioactive waste.”

The GFANZ spokesperson told The Mix that participating companies—from financial institutions to asset managers—will all be expected to contribute their fair share to a 50% emissions reduction by 2030 that keeps a 1.5°C future within reach. “What that means collectively is that the $130 trillion is committed over 30 years”,  based on five-year rolling targets that begin within 12 to 18 months of a company joining the alliance.

With the pressure on for a 50% emissions cut by 2030, the spokesperson acknowledged that financial institutions face an even tighter timeline to reorient investments if they’re to have an impact in this decade.

“That lag that you’re pointing to is a central question,” he told The Mix. “These are big commitments the financial institutions have made. The question is will they entirely deliver on them.” And if that entails investing in heavy industries, they’ll have to “start tomorrow, today, in order to get to a point where the things we’re financing by 2030” are on a 1.5°C pathway.

When banks, asset managers, and asset owners join the alliance, “they know they have to start today,” the spokesperson added. “Everyone would accept that this is a hugely complex task for the financial industry,” and “you can’t turn around in 2028 and ask how we halve our emissions profile by 2030.” That means “the work has to start quickly.”

That momentum still looks likely to collide with bankers’ anxiety—whether or not it’s warranted—that the technologies driving the transition off carbon are still risky investments. To date, many of them seem less reticent about the “$200-trillion time bomb” they face as their fossil investments turn into stranded assets.

“Right now, we’re at the front end of the risk curve in a lot of the technologies that will be needed for the transition,” Royal Bank of Canada Senior Vice-President John Stackhouse told CBC. “That’s going to require a different financing approach than you would get for established and scaled-up technologies.”

But while “early-stage technologies are inherently risky,” CBC writes, “offshore wind projects are often cited as an example of success… Banks in Europe were hesitant to invest in the technology 15 years ago, but are now much more comfortable with the sector as it has matured.”

CBC notes that other potential decarbonization technologies—from credible options like hydrogen to dodgier ones like carbon capture and storage—are still under development.

Further problems for potential green investors include a limited number of projects to support, the lack of a dominant rating system for assessing projects, the limited number of wind and solar companies that are large enough to attract major investment, and assessing a project’s potential for emission reductions against other environmental essentials like water use, CBC says.

But on one count, at least, Carney sounded a reassuring note, telling net-zero investors during the COP that they don’t have to worry about lower financial returns. “Certainly not on a risk-adjusted basis,” he told Bloomberg Television.

“One thing investors increasingly will need to do is think about terminal value,” the former Bank of Canada/Bank of England governor added. “Think about where certain assets are going to lose value. And potentially lose value quite rapidly because they’re not decarbonizing fast enough or they’re just not suited for a low- and zero-carbon economy.”