Nearly 40% of asset owners currently purchase carbon offsets to mitigate their portfolio emissions, and a further 25% say they plan to start doing so within two years.
A survey of more than 600 asset owners, split almost equally across Europe, North America and Asia Pacific, found that only 8% had ruled out the use of the controversial strategy, which involves entities buying ‘credits’ generated by green projects to compensate for carbon emissions in their own value chains.
It is one of the most divisive and complex areas of the net zero debate, with critics arguing that investors and companies that use carbon credits are just buying a license not to reduce their own contribution to climate change.
Others say the current supply of carbon credits are so low quality that they don’t contribute to any meaningful reductions.
But the analysis by Morgan Stanley shows 39% of the 606 asset owners asked currently buy offsets in lieu of emissions reductions in parts of their portfolio, and a quarter are preparing to follow suit.
Supporters of the voluntary carbon markets believe it is a valid tool to help reduce emissions in parts of the value chain where they are currently very difficult to abate, perhaps because green technologies have not yet been developed.
Others argue that carbon credits are a crucial way to channel institutional capital into projects in less economically developed countries where the preservation of nature and the reduction of emissions is vital but harder to finance through capital markets.
Almost another quarter of asset owners had either explored the approach but been unable to find a satisfactory strategy (18%) or are interested in using offsets but don’t currently know how to do it (6%).
Of the 295 asset managers surveyed, 31% said they offer clients carbon offsets linked to specific products or aggregated emissions, and another 32% plan to make such an offering in the next two years.
“Investors are split on whether offsets are a valid approach to broader decarbonisation strategies (32% of asset owners; 31% of asset managers) or whether they should only be used for hard-to-abate emissions (21% of asset owners, 22% of asset managers),” noted Morgan Stanley.
“That said, only 6% of asset managers and 3% of asset owners think that offsets should not be used.”
Efforts to strengthen the credibility and usability of voluntary markets are accelerating.
The International Organization of Securities Commissions last month launched a consultation on its recommendations for good practice in the space, and COP29 negotiators finalised a deal on the development of an international carbon market under the rules of the Paris Agreement.
Elsewhere, the EU signed off on the creation of a regulatory ‘gold standard’ for carbon removals and soil emission reduction activities, and the UK government said it will consult on a recently-published policy paper about improving the voluntary market for carbon and nature credits.
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