A banking perspective on carbon offsetting

Tejas Ewing interviews Richard Burrett and his team at ABN–AMRO

Richard has wide experience of working on UK and International project financing particularly in emerging markets. He has led ABN AMRO's sustainable development initiative since 2004, prior to which he was the bank's Global Head of Project Finance.

ABN–AMRO, like many large financial institutions, is in the midst of developing an integrated approach to the topic of carbon emissions reductions and voluntary offsetting. As an organisation that has committed to ambitious targets for emissions reductions, voluntary offsetting will be a necessity. And as a financial institution, ABN–AMRO has identified a strong potential market for trading voluntary carbon reductions, in addition to the existing work they do in the compliance–based carbon market. Their work, both internally and externally, provides interesting insights into the way the offset market is constantly changing and shifting to meet new consumer demands.

Richard Burrett, the Head of Sustainability at ABN–AMRO, has been tasked with developing the overall emission reduction strategy for the group. The company has identified carbon neutrality as a goal for 2008, meaning that the group will need to lay down an offset strategy soon. “It is not very credible to market offsets unless we do it as well, and it is not really possible to reach carbon neutrality without some responsible offsetting.” But the decision will not be a simple one. “What we don’t want to do is simply measure and offset – we want to reduce our emissions as much as possible, especially in energy use, and business travel, before we decide to offset.” The reason for this cautious approach is that customers of financial service providers are demanding increased environmental awareness and engagement from the providers they choose, and offsetting without emissions reductions can seem like greenwash to today’s informed decision–makers.

Burrett’s main priority will be implementing valid reductions before offsetting, and the credibility of the carbon reductions that they purchase after these reductions are put into operation. ABN–AMRO “must avoid the reputational risk associated with ‘offset cowboys’ operating in the unregulated voluntary carbon markets.” The bank wants a combination of good value for money, credibility and projects which are valuable to local communities. “As a result, CERs will be a major part of what we do, but if we can find credible VERs, we would consider buying them as well.” Interestingly, ABN–AMRO’s internal position accurately reflects the positions of the large organisations that approach the bank to help them with their own voluntary offsetting strategies.

“Voluntary carbon offsetting is only a small part of the emissions trading we do,” says Charles Longden, the Global Head of Credit Trading and Eco–Markets, “but it is growing fast – and most of that growth is coming in the CER market.” Longden believes that the added credibility of the UN’s Clean Development Mechanism makes CERs attractive to risk–averse corporate offsetters. “In the last 6–9 months, we have had no requests for VERs.” But what is most interesting is the level of analysis that potential offset purchasers bring to the table. “Gone are the days when people bought offsets on a whim. What’s amazing now is just how much research a client has done before they contact us.”

And this research involves not only the credibility of the carbon offset, but the geographic location and the story the project tells. Gavin Tait, the Head of Emissions Trading, deals with many of these detailed requests. “When clients purchase CERs for voluntary offsetting, they don’t want to just tick off credits of CO2. They want a narrative beyond that.” For example, they want to offset in the same country as the emissions are generated in, and they want to consider additional benefits above and beyond carbon reductions. Popular offset projects include wind power, small to medium scale hydropower and biomass, whereas improving coal power efficiency, mining projects and nuclear power are deeply unpopular. “You will get clients with detailed lists of what they want and don’t want: they will ask for a Brazilian hydropower project or an Indian wind farm, and specify no methane flaring!”

These buyers are well–informed, squeaky clean, and desperately important for Kyoto, believes Tait. “It is the voluntary buyers that really demand sustainability attributes to the projects they invest in. By doing this, they really help keep Kyoto honest, because voluntary buyers actually ask more questions and conduct more due diligence than compliance buyers!” In that sense, the voluntary market is actually ahead of the curve. For example, compliance buyers are willing to buy offsets on a forward basis, meaning that the credits have not been delivered yet, but voluntary purchasers only want credits that have been delivered already. And they want credits from specific named projects that they have researched ahead of time, notes Tait. “They come to a broker, rather than using a retailer, on the basis that they will have a lot of choice. For offset retailers, their credibility lies in their brand name, but now we see people looking deeper, to the credibility of the projects themselves, and that is where they turn to brokers and wholesalers to supply them with exactly what they want.” This increased interest in choice, due diligence and risk aversion will probably help to move the voluntary offset market towards high–quality credits and projects, and will in turn help increase the credibility and transparency of the industry as a whole. “The voluntary market can only grow in size and stature from here on.”