ESG & Diversity
Kezia Farnham Image
Kezia Farnham
Senior Manager

Business carbon offsetting: Meaning, benefits and why your organization should do it

January 4, 2022
0 min read
Image of crates on a ship representing business carbon offsetting

Business carbon offsetting is big news at the moment. Environmental impact is top of mind for C-suites in all sectors; as a result, organizations are exploring all avenues to reduce their corporate carbon footprint.

The challenge is significant: net-zero commitments proliferate, and businesses will be under pressure to deliver on their promises.

Carbon offsetting for business is one of the routes you may be considering — but may have several lingering questions, such as:

  • What does carbon offsetting do?
  • Why do companies use carbon offset?
  • What does it cost to run? Does it actually help move your business towards carbon neutral?

Here we explore these queries and more.

What Is Business Carbon Offsetting?

What does carbon offsetting mean in business? Carbon offsetting (sometimes referred to as “carbon credits”) is the process of neutralizing the number of carbon emissions an individual or organization emits during a specific activity or in the course of its operations. Corporate carbon offsetting covers the organizational element of this.

And it’s gaining traction; as of October 2020, 163 companies from the Fortune Global 500 had publicly committed to achieving climate-related targets, with carbon neutrality the most common of these, cited by 91 companies.

Some carbon is offset for compliance purposes; to meet obligations around emissions and environmental performance. Some of the carbon offset markets are generated via the voluntary purchase of carbon credits, and this is important, as McKinsey notes, not just because voluntary carbon credits increase the amount of carbon offset, but because:

“Voluntary carbon credits direct private financing to climate-action projects that would not otherwise get off the ground [and] support investment into the innovation required to lower the cost of emerging climate technologies.” As well as helping to “facilitate the mobilization of capital to the Global South, where there is the most potential for economical nature-based emissions-reduction projects.”

Business carbon offsetting seems to tick numerous boxes, then. But it’s not necessarily a simple solution, and nor is the framework entirely built to enable it to succeed. Bloomberg calculates that among just the 18 oil majors with current net-zero objectives, 3.3 billion metric tons of annual emissions will need to be eradicated to realize their ambitions, nearly 18 times the amount of carbon offsets issued in 2020.

Even if your goals aren’t equally challenging, they may feel similarly daunting.

How Does Corporate Carbon Offsetting Work?

If carbon offsetting is something your business is considering, you will want to fully understand how it works and what it means in practice. How does carbon offsetting for business actually work? Can a business really offset its carbon footprint?

Business carbon offsetting (and indeed, any carbon offsetting) program works on the basis that carbon dioxide absorbed by the atmosphere can cancel out carbon dioxide emitted elsewhere.

On this premise, businesses can carbon offset by investing in and implementing projects that reduce or store carbon to compensate for the CO2 they emit elsewhere. The term carbon credits, also used to describe carbon offsetting, encapsulates this idea of a quid pro quo for carbon emissions.

What does this look like in reality? The types of projects that can be used for business carbon offsetting include:

  • Tree planting
  • Forest preservation
  • Renewable energy projects, such as wind farms or solar installations
  • Energy efficiency projects, like insulating the business’s premises or introducing an electric car fleet

Why Do Companies Use Carbon Offset?

What are the drivers for corporate carbon offsetting? There are numerous compelling motivators:

  1. Increasingly, organizations in all sectors recognize that environmentally-focused strategies are the “right thing to do” as part of a broader ethical and ESG-oriented culture.
  2. They are also under public pressure to improve their ESG performance. 2022 is predicted to be a “golden age” of investor activism with poor ESG performance named one of the main criteria set to “mark companies as possible targets” for activist shareholders.
  3. Not only this, but ESG performance is becoming more transparent, with disclosure requirements growing stricter and reporting results used to evaluate and judge your organization’s potential as an investment, business partner and supplier.
  4. Suppose your operations generate a significant amount of carbon. In that case, corporate carbon offsetting can be the only realistic way to achieve significant reductions in carbon emissions, at least in the short term.

How Much Does It Cost To Offset Carbon?

Moving to a more nature-positive approach may be the Holy Grail for many organizations, but among the ethical considerations, businesses still have financial obligations. For the CFO and team, a natural next question might be: what will this cost? How much do companies spend on carbon offset?

Currently, offsetting corporate carbon emissions costs around $3-5/tCO2e (that is, $3-5 per ton of carbon dioxide equivalent).

However, a June 2021 report by University College London (UCL) predicts that this could rise to $20-50/tCO2e by 2030 and above $50/tCO2e by 2050 if those responsible for carbon-neutralizing projects are to be appropriately incentivized and remunerated.

Does Corporate Carbon Offsetting Work?

Another vital question. If the process is shown to be ineffective, then businesses aren’t achieving anything by carbon offsetting. And as with anything new, there has been a degree of skepticism around carbon offsetting. But the evidence that offsetting emissions can help — if not solve — the challenge of greenhouse gas emissions is undeniable.

The BBC, a British news and broadcasting corporation, notes that while “numerous skeptics” have argued that carbon offsetting is “ineffective or even unethical” and concurs that “they are absolutely an imperfect tool,” it also concludes that “they absolutely make a difference.”

In exploring whether carbon offsetting works, it’s essential to recognize that it isn’t a silver bullet for climate change. But experts agree that it is a vital step in the net-zero journey. However well-intentioned or rigorous an organization’s emissions reduction strategies, almost all businesses will be left with a carbon footprint they need to offset.

So while corporate carbon offsetting alone is not the answer, it is an integral part of the answer. Companies are no longer asking whether but how they should offset their carbon emissions.

Take the Next Step Towards Carbon-neutral Operations

Climate change is such a massive imperative for all of us — not just for reasons for “optics,” or reporting, or the balance sheet, but for our very survival as a planet — that organizations need to use every weapon in their armories to tackle it.

While business carbon offsetting isn’t a magic wand for corporates looking to improve their ESG standing, it is a robust and proven tool you should include in your toolbox and can have a tangible impact on your carbon footprint.

Carbon offsetting for businesses can deliver concrete improvements in your ESG performance as part of a structured approach that prioritizes:

  • Measuring and understanding the drivers of your corporate carbon footprint
  • Taking steps to minimize your carbon emissions
  • Offsetting any emissions you cannot reduce yourself

We hope this article has given you an understanding of the theory behind the practice of carbon offsetting for business and some of the practicalities of implementing a business carbon offsetting strategy.

Find out more about how you can deliver on your ESG objectives via a modern, data-driven approach to environmental, social and governance challenges.


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