How businesses can navigate carbon emissions without greenwashing

Today, an increasing number of businesses are committing to emissions reductions goals. This movement is being driven by new legislation such as the EU’s 2021 Sustainable Finance Disclosure Regulation (SFDR), which compels approximately 50,000 businesses to report on sustainability. Attitudes towards businesses’ climate responsibilities are also shifting alongside legislation, as more consumers, investors and employees demand transparency and sustainable commitment from the businesses they associate with.

Despite its importance, navigating the emissions reduction space isn’t easy for businesses wanting to improve their sustainability, with the carbon management industry being linked to accusations of greenwashing in recent years. This has left businesses uncertain about which emissions management and reduction solutions to invest in. In this article we will offer a guide for navigating the difficult emissions reduction landscape, and investigate future developments which could better the industry.

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Step 1: Accurately measuring carbon footprints

Emissions reduction is a complicated issue. Businesses that want to reduce their emissions have to navigate a complex value chain of emissions management: From measuring their current scope 1, 2 and 3 emissions, to building and implementing a decarbonization strategy. The starting point for all businesses is tracking and measuring its emissions to reveal which part of the value chain produces the most emissions, and where the business can have the most impact.

The necessary data to calculate a business’ carbon footprint may already be available to any business, as it is a calculation of consumption data against emissions (of all scopes). However, collecting and afterwards interpreting that data can be a challenge.

As reporting criteria becomes more stringent, due to the EU’s Corporate Sustainability Reporting Directive (CSRD) being introduced in 2024 and EU ESG legislation being regularly updated, (which requires reporting on social and governance ratings in addition to environmental, adding to the reporting load) businesses will need to build comprehensive data collection and calculation methods and dedicate more resources to the reporting process.

To help simplify the accounting and reporting stage of carbon management, many innovators have founded startups that combine and simplify the collecting and evaluating process for businesses. Carbon accounting tools collect sustainability data about a business to measure its carbon footprints, taking scope 1, 2 and 3 emissions into account. In addition to facilitating environmental reporting, the best carbon accounting tools will also analyze the data and use it to guide businesses as they implement actionable decarbonization strategies, empowering businesses to make optimal carbon reduction choices that align with sustainability and financial targets.

Step 2: Actively reducing emissions

Actively managing emissions is the key to a business’ sustainable and financial success and should always be a business’ top sustainability priority. After measuring total emissions, many companies may be tempted to investigate carbon compensation options, as a quick and easy way of hitting sustainability targets, but this is not the most impactful route. Whereas carbon credits have their place in tackling emissions, there are powerful actions a business can take in their own value chain by reducing their own emissions.

Businesses have a wealth of options to choose from when removing and reducing emissions from their value chain - and generally will need to employ a combination of solutions to achieve their targets. For example, they could reduce scope 1 emissions by improving energy efficiency on-site, replacing fossil fuels burned on site with low or no-carbon options and investing in electrified company fleets. Limiting scope 2 emissions is more straightforward: Choosing renewable energy suppliers over electricity generated from fossil fuels. Businesses have less control over scope 3 emissions, but there are still many ways they can influence them, ranging from encouraging employees to use more sustainable transportation, making products and packaging recyclable or reusable, to choosing suppliers with an advanced sustainability journey.

A major benefit of actively reducing emissions is that meeting the sustainability requirements of customers and investors has direct financial benefits. End customers are increasingly discerning about the sustainability of the businesses they patronize and choose to support more impactful businesses. In addition, investors, encouraged by regulatory requirements, are more likely to invest in companies that show decarbonization commitment as part of their ESG efforts. Emission reduction measures are also often a much more energy-, resource- and cost-efficient solution, especially in terms of electricity demand. The direct financial impact is why many companies place the responsibility for sustainability management with the CFO - financial success and sustainability are deeply intertwined.

Step 3: Offset the rest

Though decarbonizing a business’ own operations is the most impactful route, reducing all emissions across a business’ entire value chain takes time and is often simply not possible. Many scope 3 emissions are unavoidable without fundamental changes to the industries businesses belong to, which requires long-term collaboration across financial participants. What should businesses do about these unavoidable emissions? In such cases, compensation offers a realistic option. There are many technological as well as nature-based solutions that can achieve offsetting.

Examples of impactful carbon offsetting measures include sustainable forest management (e.g. afforestation), usage of biochar, peatland rewetting and conservation of existing habitats. These nature-based solutions are cost-effective ways of building or protecting carbon sinks, often bringing co-benefits such as improved biodiversity. Purchasing carbon credits can also fund engineered solutions like renewable energy generation or carbon capture and sequestration.

The European Commission's 2022 Corporate Sustainability Due Diligence Directive (CS3D) summarizes the philosophy we believe businesses could adopt toward offsetting. The directive recognizes the space that needs to be given to businesses with ambitious climate targets: In this common scenario, the directive offers guidance: “[Companies’ plans] should include time-bound targets related to climate change… based on conclusive scientific evidence and, where appropriate, absolute emission reduction targets for greenhouse gas for scope 1, scope 2, and scope 3 greenhouse gas emissions.”

Adopting this ambitious but realistic attitude toward decarbonization, which can be summarized as an ‘offsetting the rest’ approach, leaves space for carbon offsetting solutions as supplementary methods, alongside direct emissions reduction methods.

Greenwashing scandals are threatening the reputation of the industry

While many businesses are taking action to tackle their emissions, the carbon reduction space has been plagued with scandals that have thrown extra obstacles at businesses wanting to decarbonize responsibly. The dip in confidence the industry is experiencing has had a resounding effect, including a drop in funding in 2023, when investment in carbon tech startups was just $376m compared to $1.4bn in 2022. To restore business’ confidence in emissions reduction solutions, the industry needs cleaning up. Many of the sector’s biggest challenges are related to carbon offsetting. One major issue is double counting. Double counting occurs if a single emission reduction or removal is counted more than once towards the achievement of a mitigation goal

Types of double counting according to Umweltbundesamt:

Double issuance refers to the situation where multiple carbon credits are granted for the same reduction or removal of emissions. This leads to double counting when these credits are used to meet mitigation goals. Such issuance may arise from a project being registered under several carbon crediting programs (double registration) or when there is an overlap between projects, such as both the producer and consumer of a biofuel claiming credits.
Double use happens when a single carbon credit is utilized more than once to fulfill a climate objective, or when a credit is cancelled more than once.
Double claiming takes place when the same reduction or removal of emissions is claimed by both the entity that reports reduced emissions, such as the host country or jurisdiction, and another party.

Similarly, reports by journalists at Die Zeit and other publications have found instances of ‘phantom credits’ being sold, meaning credits that can’t be linked to any tangible carbon reduction, making them worthless. Every time instances of double counting and phantom credits are proven, the reputation of carbon offsetting as a viable channel to create a real climate impact is damaged.

Another issue might occur when looking at ex-ante credits, which represent emissions reductions or carbon removal that will take place in the future. With this method, the eventual carbon reductions are sometimes planned for decades in the future and can hardly be guaranteed. In fact, a study published in Science found that only 6% of carbon credits produced by 18 of the biggest REDD+ (Reducing emissions from deforestation and forest degradation in developing countries) projects in 2020 were valid.

Together, these issues, which have been widely covered in the media, have generated distrust of the carbon emissions reduction industry. The actions of a few and the prevalence of the offsetting sector has damaged the reputation of the entire industry, including those solutions which promote actively managing (and reducing) emissions and the offset the rest approach. Businesses that want to invest in carbon management are left questioning whether they can trust carbon management solutions. In turn, investors and customers question whether companies' sustainability reports are accurate. Meanwhile the future of the planet is left in jeopardy - can we reach climate targets if businesses face such difficulty employing reliable carbon reduction methods?

Solutions to restore confidence in carbon emissions management

Fortunately for businesses wanting to reduce their carbon footprint, efforts to eliminate greenwashing in the industry and promote more reliable and scalable emission reduction solutions are underway. This requires changes to legislation as well as more innovative technology solutions that cater to businesses across industries.

Governments have a role in this process. Improved communications between national governments and businesses can help reduce instances of carbon credits being sold to more than one entity. There is also potential for ex-ante credits, which are currently accepted in ESG reporting, to be delegitimized in favor of ex-post credits. Ex-post credits, meaning credits that are issued based on the reduction or removal of greenhouse gas emissions that have already taken place, are a more reliable form of offsetting. While many climate scientists are calling on governments to limit the use of ex-ante credits, and some businesses share this mindset and voluntarily opt for ex-post credits, new legislation enforcing the use of ex-post credits would ensure this is universal.

Businesses that employ carbon offsetting have a responsibility to carry out thorough due diligence to verify the legitimacy of the offsetting providers and projects they use, for which there are also useful tools available. Carbon credit ratings can help determine the reliability of credits by finding evidence of the claims carbon offsetters make and verifying the additionality and permanence of credits.

While these innovations help businesses make informed decisions with confidence on an individual level, they are also essential in efforts to boost the reputation of this vital market. With the efforts of governments, tech innovators and businesses striving to reduce their emissions combined, the future of the carbon management industry looks promising.

What are we looking for at ENV?

We want to invest in technologies that support businesses' journeys to decarbonization, whether that’s by reducing scope 1, 2 or 3 emissions or by helping businesses make sensible carbon emissions reduction decisions.

Do you engage in emission reduction innovation? Do you provide a scalable nature-based solution? Can you help companies in their offsetting efforts by qualifying carbon credits?

We’d love to hear from you.

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