From Co-benefits to Core Benefits
Social impacts on local communities can make or break carbon sequestration projects.
The prime purpose of voluntary carbon markets (VCMs) is to limit climate change, by allocating capital to projects that offset, remove or avoid emissions through the generation and sale of credits.
Despite controversies, VCMs are growing. A 2023 survey of businesses across the US, UK and Europe found that 89% of companies considered carbon credits a valuable tool to mitigate CO2 emissions.
The Taskforce on Scaling Voluntary Carbon Markets has predicted carbon credit demand will increase by a factor of 15 by 2030 and by a factor of 100 by 2050. BloombergNEF’s recent carbon offsets outlook report noted that the market could be worth US$1.1 trillion annually by 2050, with carbon credits priced at US$238 per tonne.
But carbon emissions are not offset, removed or avoided in a bubble.
“These projects happen in physical places where people live and work, so it’s important to understand the wider social impact of projects generating the carbon credits,” Simon Puleston Jones, Founder of carbon markets consulting firm Emral Carbon, tells ESG Investor. “The social-related impact of a VCM project can be the difference between a credit selling or not.”
More than 70% of assessed VCM-focused reports published over a five-year period found evidence of harm to Indigenous Peoples and local communities, such as forcibly removing groups from their lands and threatening violence.
“Social risks are wide-ranging, from risks that local communities are economically worse-off compared to what they would have been without a certain project, to risks that the project entrenches existing inequalities,” says Guy Turner, Head of MSCI Carbon Markets. “Investors need to ensure that carbon projects do not have negative consequences on local communities and ideally create social benefits beyond their emissions impact.”
VCM participants are increasingly focused on projects that can demonstrate social ‘co-benefits’ alongside their ability to address carbon emissions, experts agree.
“Co-benefits are increasingly seen as ‘core benefits’,” says Will Turner, Senior Vice President of Natural Climate Solutions at non-profit Conservation International. “These social outcomes can be highly attractive for companies investing in carbon credits.”
Options aplenty
VCMs are home to a huge variety of projects around the globe, with a wide array of social co-benefits being explored.
This trend is supported by the growing portfolio of guidance and principles launched recently to improve VCM integrity and transparency, which have also introduced a series of social safeguards.
“Practically, engaging on the social implications of carbon projects increases the effectiveness of conservation and restoration projects. Having a local constituency that owns or feels brought into a project is a prerequisite for sustained results,” says Turner from Conservation International.
The Rimba Raya Biodiversity Project is estimated to reduce greenhouse gas (GHG) emissions by over three million tonnes and has also contributed to the development of a community-based programme in Indonesia to plant trees and create diversified income through the sale of native crops. Also in Indonesia, the Katingan Mentaya Peat Conservation and Restoration Project has employed over 75% of its staff from the local community to support its efforts in restoring the surrounding ecosystem.
“The potential of carbon market projects to meaningfully reduce systemic climate risks depends heavily on whether they contribute to sustainable communities and resilient ecosystems,” says Carolyn Ching, Director of Research, Food and Forests at investor network Ceres. “These projects can and should bring substantial monetary and sustainable development benefits to nearby communities.”
The Yagasu Project funnelled project yields into a revolving community fund managed by local villagers in Indonesia, while empowering local women to take on management roles.
Separately, the Enabling Access to Benefits While Lowering Emissions (EnABLE) fund aims to enhance the inclusion of marginalised communities and Indigenous Peoples in World Bank-backed carbon credit projects.
“One of my clients is teaching local children how to grow seeds [and] he is paying the children for those seeds – which he then uses for a reforestation project – so that they can afford to go to school,” adds Puleston Jones.
Twenty-eight percent of transactions in VCMs in 2023 supported projects with verified environmental and social co-benefits, such as contributing to water security and supporting sustainable local economies.
Daniel Ortega-Pacheco, Co-chair of the Integrity Council for Voluntary Carbon Markets’ (ICVCM) Expert Panel, tells ESG Investor that a growing number of companies are specifically identifying and purchasing carbon credits from projects which can “attest to both their environmental and social contributions”.
In 2022, Norwegian petroleum refining company Equinor and carbon credit ratings and analytics provider Sylvera purchased a portfolio of carbon credit projects that provided a variety of social co-benefits.
Mixed outcomes
Social-related opportunities are also being explored in projects designed to align with Article 6 of the Paris Agreement, which enables countries to cooperate when implementing their nationally determined contributions, including through the development and mobilisation of carbon markets. Earlier this year, Ghana unveiled an Article 6-aligned project focused on retraining rice farmers to use more sustainable agricultural techniques in a bid to reduce the sector’s carbon footprint and ensure a just transition.
But current efforts to identify and support social-related risks and opportunities are far from perfect.
“More needs to be done on the social side of VCMs,” Puleston Jones admits. “Far more robust due diligence is needed for buyers to understand the true impact the carbon credit they are purchasing has had on communities where the project has been developed is paramount.”
Many social risks are also highly localised, which makes them more difficult to identify – let alone measure, Turner from MSCI Carbon Markets points out.
Truly understanding the social co-benefits or negative impacts requires a detailed project-level assessment. “At a minimum, projects should conduct robust stakeholder consultations, and monitor social impacts of projects on an ongoing basis,” Turner says.
Third-party carbon credit certification firm Verra assesses carbon market projects in line with its Verified Carbon Standard (VCS), incorporating social and environmental safeguards to address potential negative impacts.
“Projects undergo thorough assessment to evaluate their social and environmental risks and benefits, with criteria such as community engagement, biodiversity conservation, and sustainable development taken into account,” a Verra spokesperson says. “Stakeholder consultation and participation are integral to project development, ensuring that local communities are engaged and empowered throughout the process.”
At a higher level, there is the ongoing issue of inconsistent carbon credit pricing.
With contributions to preserve their natural ecosystems often being priced at less than US$5 per tonne, last year, African countries called for higher and fairer carbon prices across the continent. In comparison, carbon credits in the US and Europe could fetch upwards of US$100 per tonne.
The price buyers pay for carbon credits should be sufficient to not only produce demonstrable climate results but also to ensure host communities have access to a fair share value, according to Conservation International’s Turner. This is one of Conservation International’s first listed principles for investments in natural climate solutions.
“Where communities and Indigenous Peoples are the real stewards of the forests and other ecosystems involved in carbon projects, they should be retaining a substantial part of the value of these projects, as negotiated in a fair and transparent process,” he says. “Investors should […] remember that carbon value retained by communities is not only the right thing to do, but critical to project success and ultimately profitability.”
Social guide rails
VCM guidance is attempting to ensure projects are developed with social safeguards in place.
For example, Social Carbon is an international GHG standard originating in Brazil that embeds social, environmental and economic benefits into nature-based projects.
Ceres has also published guidance that outlines safeguards to aid investor assessments of projects’ exposures to potential negative social outcomes.
“Investors can help companies avoid the social- and climate-related reputational risks of carbon market projects,” Ching says. “Engaging companies will help investors understand whether carbon credits are contributing to credible climate mitigation and a just and equitable transition.”
The safeguards include ensuring projects recognise and uphold the sovereignty, governance structures, and right to self-determination of Indigenous Peoples, local communities, and Afro-descendant Peoples, as well as ascertaining all affected parties have access to the resources necessary to have informed conversations about the project in question so that they may give free, prior and informed consent.
More recently, the US government has issued new guidelines to improve trust in VCMs which includes the requirement for credit-generating activities to avoid both environmental and social harms and support co-benefits.
Launched in 2021, the ICVCM has implemented the Core Carbon Principles (CCPs) to ensure the generation of high-quality carbon credits and to facilitate access to climate finance where it is most, such as the Global South.
The CCPs also extend to other ESG issues, such as social safeguards.
“We found inspiration in the best practices not only of the carbon market but in the finance sector, such as the International Financial Corporation’s safeguard policies across human rights, labour rights, and Indigenous peoples rights protection, including the implementation of free prior and informed consent,” says Ortega-Pacheco.
Under the CCPs, project developers are expected to disclose the locations of their projects, applied technologies and practices, and the associated environmental and social impacts.
In April, the ICVCM named ACR, Climate Action Reserve and Gold Standard as the first carbon crediting programmes to have met its CCPs.
“While crediting programmes and projects have historically addressed the social implications of carbon market projects, we are now seeing social requirements addressed more robustly and consistently [as] a prerequisite that the CCP label and many buyers are expecting,” says Turner.
However, he notes that the social safeguards introduced to date predominantly focus on initiatives taken at the start of the project. There remains “limited information” regarding the ongoing monitoring and verification of social impacts once the project is live.
Ortega-Pacheco acknowledges that ensuring integrity and high social performance in carbon markets is an area of “continuous improvement”, pointing to the ICVCM’s recent establishment of the continuous work programme. “This work brings in broad views, not only from the voluntary market, but from people working on the ground helping us understand their concerns so that we can address them,” he says.
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