Companies are coming under increasing pressure to set – and meet – climate goals, according to Nasdaq’s 2023 Global Net Zero Pulse survey of 200+ ESG and sustainability professionals, among other respondents, across the globe. The Nasdaq ESG Advisory team conducted the survey to assess the role carbon-removal credits play in corporate net-zero strategies. Corporates are the primary source of demand for carbon-removal credits and corporate buyer preferences play a crucial role in the evolution of the voluntary carbon market. The team found that net-zero targets will be difficult to meet without the help of carbon dioxide removal (CDR) credits.
More than 5,000 companies – representing nearly one third of global market cap – have already committed to reducing their emissions as of June 2023. To maintain a 1.5°C warming scenario, the Intergovernmental Panel on Climate Change (IPCC) says CDR deployment is critical, with removal targets set through to 2100. While new methods have been developed, traditional solutions – reforestation, afforestation and forest management – account for 99 percent of current CDR credits.
To reach IPCC goals, a CDR ramp-up is required, and Nasdaq’s survey findings point to novel methods including everything from direct air capture to carbon mineralization or enhanced rock weathering – all systems that remove carbon from the air.
Awareness around such options varies, and Steve Vargas, global head of ESG Advisory at Nasdaq, says this is largely because many novel CDR pathways are still in the experimentation phase. ‘Many of these solutions haven’t reached full-scale commercialization yet, so they require more due diligence from the companies that would ultimately be the end-buyer of these credits,’ he explains.
Sector also plays a role in awareness, Vargas adds. For example, some companies in the energy space show a ‘high degree of familiarity and alignment with some of the more energy-intensive forms of CDR, like direct air capture.’ Other sectors like consumer staples and consumer discretionary, have a greater alignment to what their customers are familiar with, typically forest-focused activities.
Understanding your GHG footprint
Vargas advises companies earlier in their carbon-removal journey to take a step back and ‘survey the landscape, soliciting perspectives from some of those first movers or early adopters of novel CDR’.
‘Until you’ve conducted a greenhouse gas (GHG) footprint assessment, it’s very hard to understand the opportunities in the CDR or carbon credit space,’ he notes. Vargas also points to a finding from Nasdaq’s survey that 65 percent of respondents have yet to establish an internal price on carbon. ‘That is a gating factor when you think about really engaging more deeply with the market,’ he says.
Ultimately, companies ‘need that understanding of what their baseline footprint is and what those really challenging emissions are that they can’t necessarily mitigate in the short or medium term’ before they can work out what CDR options are right for them, Vargas adds.
Differentiating with transition a strategy
According to findings in Nasdaq’s 2023 Global Net Zero Pulse survey report, almost a quarter of companies surveyed have set a net-zero target, either verified by the Science Based Targets Initiative (SBTi) or unverified. Another 25 percent indicate they expect to make a net-zero commitment within the next two years and Nasdaq’s survey findings indicate that companies with upcoming plans to set a net-zero target are twice as likely to seek a verified commitment over an unverified one.
Upcoming legislation in the US and elsewhere will likely see more data on Scope 1, Scope 2 and Scope 3 emissions come to the market. Vargas says: ‘In the new regulatory regime, where most companies will have some type of publicly disclosed GHG footprint, the context around that data is going to be incredibly powerful – and necessary – for investors looking to develop high-conviction investment strategies. A Scope 1 number that’s the same at company A and company B may raise questions as to whether or not there is a stronger transition strategy at one firm or the other.’
But many companies have yet to measure their emissions, given the challenges associated with collecting data across their value chain. Many corporates face difficulties due to varying maturity level, processes and timelines, to name a few factors.
So while data collection is important, and granularity is important, the level of transparency and quality of those transition strategies is how Vargas thinks the market is going to differentiate investment opportunities.
Investor education
Vargas describes investors as an ‘interesting stakeholder in this ecosystem’. Traditional carbon credits were met with a degree of investor criticism, particularly around the durability of some options, he explains. But a few bright spots have stemmed from those concerns, such as ‘the development and curation of high-quality CDR credits, that draw down and take out CO2 from the atmosphere for long, long periods of time.’
While some investors have issued guidance on how they want portfolio companies to approach carbon credits, the investor perspective is varied.
‘There are quite a few different perspectives, ranging from the hedge fund space to really long-term investors,’ Vargas notes. ‘Over time, investors will also be conducting education in the space. And that education will trickle into their engagement with management teams.’
For more insights from Nasdaq ESG Advisory, read the full 2023 Global Net Zero Pulse report here.
