What happens if companies ignore financiers’ carbon targets? Novartis, Aviva weigh in on carbon offsetting FAQs

Story by Aileen Macalintal. Photo by Carl Heyerdahl

Investors, banks and insurers are now demanding transition plans and roadmap on how companies are going to reach their carbon targets. Companies now racing to offset their emissions (sustainability plans, carbon offsetting) are creating a surge in demand for credible offsets. 

What about those left in the dark?

Financial risks of ignoring carbon offsetting and net zero

Reputation and funding are at risk, said Sonia Gibbs, Head of Sustainable Finance, Institute of International Finance. 

“If you’re not making credible progress toward the carbon targets, that’s going to be reflected in your credit ratings and in your cost of capital. And, now that climate risk is being clearly defined as a financial risk, and firms are being asked to manage these risks… If that’s not being done, then that will hurt

Sonia Gibbs, Institute of International Finance

The finance world is increasingly factoring ESG considerations into credit ratings. If companies lack the integrity to reach emission targets, this will ultimately determine the price of credit and public perception, said Gibbs during a forum organised by Gold Standard. 

Gold Standard is a Geneva-based non-profit organization focused on climate security. In the forum it highlighted carbon offsetting as one track to reach global net zero targets. The event, “The role of carbon offsetting in Net Zero targets,” is part of the London Climate Action Week 2020.

Science-based carbon offset targets

Investors are increasingly asking companies to sign up to science based targets as part of their engagement process. Failing to sign up could mean that institutional investors can vote against them in their annual report accounts or against their directors in the annual general meeting, said Zelda Bentham, Group Head of sustainability at Aviva, a British multinational insurance company.

“It may come down to regulation. In the end, it is something we don’t particularly want to see because companies don’t react very well to regulation. And, it’s better to be ahead of the game, and listen to what your investors are asking you to do rather than what government is asking you to do.”

Zelda Bentham, Aviva

In general, the expected level of abatement in science-based net zero target should be in line with the Paris Agreement. Abatement in some businesses is understood to be slow, such as in the aviation industry. 

Here, carbon offsetting can come in to compensate or neutralize emissions while in transition to net zero. 

Carbon offset projects

In September, the Novartis CEO announced it is going to push for decarbonisation by 2030. The pharmaceutical giant said it has an approved science-based target across its entire value chain. 

“We’ve been engaged in forestry projects for about 12 to 13 years. We’ve got locations in Colombia, Argentina, Mali and China, and have been working on those. And we recognise that we needed to pick up the pace and move beyond our previous generation goals,” said James Goudreau, Head of Climate at Novartis, during the forum.

Goudreau said companies need to invest in efficiency and shift to renewables, whether on site  or in power purchase agreements. 

“You can do all the carbon rules that you want, but also tie it into corporate structure formal corporate targets science based targets… You can then build this as part of an integrated portfolio to reduce your impact and reduce your footprint. 

We have to be able to hold real science and real data, and real results and say that we made change happen.”

James Goudreau, Novartis

Still figuring out carbon offsetting

Experts think, however, that setting carbon offset commitments, pricing, and project evaluation is still a new assessment process. And, the credibility of voluntary carbon offsets remains open to scrutiny.

In fact, Bentham shared that during a board meeting at Aviva, the first time emissions offset ambitions were presented, it was met with unwelcome remarks. “What do we get from that?”,”Oh, go away” they seemed to be saying.

This is why a global, credible decarbonisation effort and a transparent voluntary carbon market is top priority.

“Scaling voluntary carbon markets is going to be, make no mistake, a phenomenal effort,” said Gibbs. “We need practical tools to mobilise finance for low carbon and resilient transitions. This is going to require a whole economy transition. We’ve all got to adjust our business models.”

“It’s important to note also on the scope, we’re not seeing offsetting as a direct substitute for direct emissions reductions; it’s a complement. I think that’s a very important point to remember. And it’s important that offsetting, as part of any climate commitments, is done through high integrity carbon avoidance reduction and removal sequestration projects.

Sonia Gibbs,  Institute of International Finance

Bentham said that in the succeeding meetings with the board, her team discussed the value that carbon reduction targets could bring in terms of livelihoods, in terms of reducing indoor pollution, and in terms of improving health.

“That was the tipping point for our board,” Bentham said. Explaining “co-benefits” among stakeholders paved the road to carbon offsetting plans.

2020-2030: Decade of emission reduction

Carbon offsetting fits into net zero targets. However, much is to be done to grow it beyond baseline.

Owen Hewlett, CTO of Gold Standard, said that his biggest fear in scaling carbon markets is we don’t raise enough finance or take enough action. His “bigger kind of worst nightmare scenario” is that there is enough finance to resolve the climate emergency, but we fail because we missed the use of mechanisms that we have in front of us right now. 

“The next decade between now and 2030 should be the decade of emission reduction, internal and external.”

Owen Hewlett, Gold Standard

Global companies, such as Novartis and Aviva, realise the need to invest in carbon reductions that used to be beyond their corporate boundaries. If they don’t act on it now, it’s not just their reputation and funding that are at risk. But also the planet’s health and the communities’ well-being.