One thing to start: Litigation finance — the investing technique that involves funding lawsuits in the hopes of sharing in any damages awarded in court — has often been viewed as a potential threat to oil and gas companies, without coming to fruition in a big way.
But now there has been a major development. Our colleague Brooke Masters reported at the weekend that US hedge fund Gramercy has struck one of the largest-ever litigation funding deals to back separate environmental lawsuits against miners BHP and Vale, and 14 global carmakers, with both cases set to go to trial next year.
The $552.5mn funding is in the form of a secured loan to law firm Pogust Goodhead, and is the largest ever to a UK law firm in the nearly $16bn litigation funding market. That could be a significant development and one that will surely make big polluters nervous.
Today, I have a report on the rise of “insetting” – as companies shift their focus towards tackling the carbon emissions of their suppliers, rather than offsetting their emissions in the controversial voluntary carbon market. Thanks for reading. — Patrick Temple-West
Carbon offsets are out
One of the big themes at the cocktail parties and luncheons during last month’s Climate Week NYC was the souring mood towards the voluntary carbon market.
Voluntary carbon credits — different from the government-regulated credits seen, for example, in the EU’s emission trading scheme — have been widely used by companies as an inexpensive way to offset emissions. For years, the market has been dogged by claims that it is an unregulated, unreliable wild west and a vehicle for corporate greenwashing. And, as Kenza’s piece last month highlighted, carbon offset projects, even when well intentioned, can come with significant risks for corporate users.
The Commodity Futures Trading Commission this summer issued a rare whistleblower alert, asking people to come to the agency with tips about potential fraud in carbon markets. The agency also created a new “environmental fraud task force” to investigate misconduct in the market for carbon credits and other environmental products. Even if a company’s carbon credits are found to be faultless, the fact that the CFTC is snooping around is certain to have a chilling effect for the offsets market.
The offsets market was “facing a reckoning amidst a continuous stream of news around concerns that the vast majority of carbon offsets are ‘worthless’”, Morgan Stanley warned in a September 6 report. Certain voluntary carbon offset futures traded on the CME Group exchange in Chicago have fallen from a range of $15 to $5 in 2022 to below $1 now, the bank said.
As a result, “we think companies [will] continue to focus on ‘within’ value chain decarbonisation”, Morgan Stanley said.
As voluntary offsets lose favour, this “insetting” approach has quietly gained steam. In an article last year, the World Economic Forum characterised carbon insetting as “doing more good rather than doing less bad within a value chain”.
With insetting, companies spend to improve their suppliers’ carbon footprint, whereas typical decarbonisation spending targets companies’ own decarbonisation efforts (which appear in sustainability reports and sometimes in regulatory filings). Rather than spend cash on carbon offsets in far-flung parts of the world, the insetting concept brings decarbonisation spending closer into a company’s orbit.
But only a few companies are talking about insetting openly. Nestlé has adopted a framework that includes 25-year contracts with coffee suppliers in Nicaragua to implement restoration projects. Since most of Nestlé’s carbon emissions came from agriculture production for its food and beverage products, its supply chain presented an important opportunity, Nestlé spokeswoman Dana Stambaugh told me.
“Our net zero road map does not rely on offsets,” she said. “We focus on greenhouse gas emissions reductions and removals within our value chain to reach our net zero ambition.”
In the US, Gevo, a Colorado-based alternative fuels company, has promoted the insetting approach and announced a system to measure carbon intensity. For example, Gevo said insetting offered an airline that bought sustainable aviation fuel the benefit of the renewable energy used in the production process. By contrast, offsets were a mitigation strategy for what were often unrelated value chains.
Regulations in Europe and California were also driving companies to think more about insetting, said Michael Smith, a co-founder and general partner of venture capital firm Regeneration. The EU’s Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose certain information about their scope 3 emissions, which come from their supply chains and from the use of their products by customers.
Insetting, Smith said, “is not just a Patagonia thing,” referring to the clothing company known for its energetic approach to sustainability. Walmart, with its “Project Gigaton,” as well as Unilever and Ikea had also been actively experimenting with insetting in their supply chains, he said. Regeneration has been investing in start-ups that sell tools to big businesses that need to cut supply chain emissions. For example, Smith’s firm has invested in Greyparrot, a London-based waste analytics company.
As companies shifted from carbon offsets to insetting, “now you have gone from planting trees in a country that you probably have never gone to, to incentivising your [suppliers] to make key changes, which makes more business sense”, Smith said.
But insetting has its sceptics too. “Many of the same criticisms of nature-based offsetting could be applied to insetting projects,” Nora Mardirossian, a senior legal researcher at the Columbia University Center on Sustainable Investment, told me.
Moving away from the loosely-defined term “insetting” was a good first step, Mardirossian said. “To help avoid a new hot-button term from popping up only to find out it’s just traditional offsetting repackaged, there is a serious need for stricter rules on respect for human rights across all nature-based solutions and on the integrity and transparency of carbon credits,” Mardirossian said.
There was definitely a near-term need for the voluntary carbon offset market, Smith said. And the market is racing to set standards. The Integrity Council for the Voluntary Carbon Market, an independent governance body for this market, in July launched a core carbon principles assessment framework and procedure. It is now beginning to assess carbon-crediting programmes to define which are eligible.
Insetting might seem obvious. Why wouldn’t companies be doing this already? But if standards can be set for this area, enabling regulators and shareholders to make meaningful comparisons of companies’ approaches to it, then insetting could pose a viable alternative to the offsetting model that may be losing steam. (Patrick Temple-West)
UK exporters are facing huge payments under the EU’s new carbon border adjustment mechanism — money which would otherwise have flowed to the UK Treasury, the FT reports. This follows a collapse in prices on the UK’s own carbon market, amid a rollback of green policies by Rishi Sunak’s government.