High-integrity carbon benefits: our carbon principles

An overwhelming majority of nations have adopted the goal of the Paris Agreement to limit the rise in global temperatures to well below 2˚C, and ideally to less than 1.5˚C, compared with preindustrial levels. Now, ever greater numbers of countries, regions, cities, and companies are making net zero commitments—even while their paths to this transition may remain unclear. The increasing urgency of the climate crisis has highlighted the vital role of natural climate solutions (NCS) in advancing these carbon commitments, but to realize the maximum potential of NCS projects, there must be trust and credibility in carbon markets. We examine the vital importance of high-integrity carbon credits and how our carbon principles can help ensure our management practices result in tangible climate benefits for the world and durable carbon value for our investors.  

Net zero—the private sector’s response

Many companies that have made net zero commitments don’t have a definitive framework for achieving those goals, but clearer parameters are emerging. The latest guidance available from the Science Based Targets initiative (SBTi) lays out sector-specific methodologies, frameworks, and requirements to help companies from different industries set science-based net zero targets that will help their progress toward net zero by 2050. 

As of March 2022, more than 2,000 companies in 50 sectors are working with the SBTi to set science-based targets aligned with these criteria. Included in the recommendations after companies initially focus on direct abatement activities are the use of carbon insets or offsets, and these, in turn, rely on effective carbon markets. Further, global consultancy McKinsey has also suggested that companies will need to “define, execute and evolve decarbonization and offsetting plans” in order to achieve the net zero transition by 2050.

Carbon markets have evolved over the last two decades to place an increasing focus on standards and management practices, and scrutiny has become increasingly rigorous. Given the increased demand and focus on carbon markets, more precise analyses and supporting evidence of tangible sequestration benefits should help to strengthen carbon credit quality and transparency going forward.

The forestry NCS opportunity

A range of drivers is emerging that should further support forestry as a viable, scalable, and investable NCS opportunity.

Why NCS are critical to meeting the challenge

Climate change may be the most far-reaching, consequential crisis that humanity has ever faced, and NCS are critical to climate change mitigation. In essence, these solutions depend on using nature’s own climate benefits to address the global warming imperative. Plants and soils in terrestrial ecosystems currently absorb approximately 20% of human-derived greenhouse gas emissions (GHG). Harnessing this capability represents 37% of the opportunity to cost-effectively sequester carbon, which is what’s needed by 2030 to keep global warming below 2˚C. While all avenues for addressing climate change should be explored, NCS offer proven, economic, scalable solutions that are available now.

“Private sector investment in NCS could be a transformative part of our transition to a world in which more than nine billion people can live well, within planetary boundaries.”

—Claire O'Neill, Co-Chair, WBCSD Imperatives Advisory Board

Trees are our most advanced existing technology for removing carbon from the atmosphere; they've had millions of years of evolution to master this critical process. Forest pathways offer over two-thirds of cost-effective NCS mitigation and about half of the low-cost mitigation opportunities needed to hold warming to below 2˚C. In addition to sequestering carbon, forests protect against erosion, provide wildlife habitats, and offer other ecosystem services such as providing clean water and recreational opportunities, and building with timber can reduce GHG emissions by 34% to 84% compared to concrete and steel due to lighter transportation and fewer manufacturing-related emissions.

As with forestry, several strategies can position agriculture as effective NCS, including agroforestry—the intentional blending of trees and shrubs with farmland and avoided grassland conversion—which could prevent the release of 35 million tonnes of carbon dioxide (CO₂) equivalent per year. Regenerative agriculture—the enrichment of soil health from farming practices, including reducing or restricting tillage, planting cover crops, and using organic fertilizers—and other agriculture and grasslands pathways could contribute one-fifth of the total NCS mitigation needed to align with Paris Agreement climate goals and one-quarter of low-cost NCS opportunities. To date, despite agriculture’s enormous potential for contributing toward the carbon sequestration goals sought by investors, progress toward universally agreed-on standards and consistent, affordable measurement approaches for soil carbon is much less developed than for forest carbon. However, we’re confident that the continued development of natural capital accounting, new technologies, and new applications of existing science and monitoring techniques will help deliver on agriculture’s nature-based sequestration potential.

Investing in land-based assets such as timberland and farmland can help investors naturally reduce carbon emissions in their investment portfolios while providing additional beneficial social and ecological impacts and generating competitive financial returns. As the world’s largest timberland investment manager for institutional investors,¹ and the second-largest agriculture investor,² our experience, size, and scale allow us to access a wider array of markets with reduced operating risk. Our experience has honed our ability to drive additional ecological, social, and financial value on behalf of our investors through other value-added strategies such as recreation and renewable energy leases in addition to conservation activities and carbon projects. 

Carbon credits gain attention as a pathway for corporate climate action

Driven by the surge of net zero commitments, companies and investors are increasingly looking to carbon markets as a transitional tool for achieving their climate goals. Voluntary carbon offset demand is expected to increase by a factor of up to 100 times by 2050, driven by the increase in corporate net zero commitments, which, in turn, is likely to drive carbon offset prices higher. While a ton of CO₂ is a ton of CO₂, the underlying projects that claim to sequester these benefits, and the protocols they employ, vary in their rigor and credibility.

Increasing demand and attention are helping the market to move toward greater transparency and standardization. As measurement practices continue to evolve and as more and more investors and companies begin to explicitly value carbon sequestration and other ecosystem services, we believe that carbon will become a more integrated value driver of timberland and agriculture.

These factors are creating the opportunity for new timberland investment strategies that are focused on climate change with co-benefits and carbon value that build on sustainable management practices. Many of the properties we manage have demonstrated the opportunity to develop carbon offsets and insets that can help clients meet climate goals and generate incremental revenue.

If carbon offsets are part of the climate transition story and a potential investment opportunity, carbon insets may be an even more long-lasting piece in the puzzle toward solving the climate crisis. Carbon insets involve carbon sequestration within a company’s value chain or investment portfolio and, as with offsets, are best positioned to neutralize a company’s or investor’s emissions after they’ve taken steps to abate emissions in their own operations.

They can also offer several additional benefits. Carbon insets generated by high-integrity projects potentially offer attractive features; durable, long-term supplies of high-quality carbon sequestration; limited exposure to the volatility of carbon offset markets; and investment in moderate yielding, low volatility, underlying land-based assets, as opposed to recurring liabilities arising from having to purchase carbon offsets. In both cases, sustainable forestry and agriculture can play a significant role, presenting opportunities for investors. 

Our carbon management revolves around high-integrity standards

When they invest in assets that generate carbon credits, investors must be confident that they’re contributing to the goals of the Paris Agreement. Across carbon markets, quality is quickly becoming a critical differentiator between projects and carbon credits, with direct implications for pricing. To ensure that Manulife Investment Management generates the highest-integrity carbon sequestration and value for both investors and the environment, we established a carbon standards working group in early 2021, an internal team drawing on carbon expertise from across our organization and with external input from leading conservation nonprofits that we've worked closely with.

The working group has conducted a landscape analysis of the leading carbon standards created by various independent groups, including the International Carbon Reduction and Offset Alliance, the Oxford Principles for Net Zero Aligned Carbon Offsetting, and The Integrity Council for the Voluntary Carbon Market (IC-VCM)³.

Our own standards are aligned with IC-VCM’s core carbon principles and include key principles of additionality, permanence, leakage and accurate monitoring, reporting, and verification, among others.

Our carbon principles: a high-integrity climate benefit methodology

Manulife Investment Management has adopted a set of strategy-specific carbon guidelines that we integrate into our timberland acquisition screening for existing carbon projects and into our new carbon project development processes. To ensure alignment, the carbon standards working group will recommend moving forward with a new opportunity if the project adheres to these principles.

Carbon credits are required to be:

• Real—Genuinely reduce carbon emissions and contribute to global climate change imperatives
• Based on realistic and credible baselines—Baselines defined as levels of emissions normally occurring in a business-as-usual context
• Monitored, reported, and verified—Using recognized and certified intermediaries, platforms, and protocols run by public or private organizations for verification, issuance, and credit trading
• Permanent—Carbon is sequestered for the long term so the global climate truly benefits
• Additional—Additive carbon sequestration above and beyond the status quo that wouldn’t otherwise have occurred in the absence of carbon finance
• Able to minimize, and account for, any leakage—Calculate and minimize emissions that may transfer to adjacent or nearby locations that aren’t participating in the carbon project
• Only counted once—Unambiguous attribution of the credit
• Focused on co-benefits and doing no net harm—Minimize negative externalities that may result from carbon project activities and focus on additional social and ecological benefits such as improving biodiversity
• Managed to avoid enabling greenwashing for carbon offset buyers and carbon inset transfer recipients—Rigorously screen potential credit buyers and recipients for tangible commitments to and progress toward climate action

1 Fastmarkets RISI Global Timberland Ownership and Investment Database, as of March 11, 2022. This ranking is based on total assets under management. 2 Global AgInvesting Rankings and Trend Report, 2019. 3 The IC-VCM is a recently launched governance body evolving from the TSVCM.