With the climate emergency and the increasing complexity of the Voluntary Carbon Market (VCM), the portfolio approach is fundamental to ensuring the effectiveness and integrity of your carbon contribution strategy.
This approach enables buyers to purchase carbon credits from a wide diversity of projects, based on various criteria such as project typology, geographic location, or the specific socio-environmental co-benefits sought.
Thanks to this strategic diversification, companies can mitigate the risks inherent to carbon contribution while maximizing the achievement of their climate objectives and the positive impacts on sustainability.
Define your climate strategy: A key step preceding portfolio creation
The purchase of carbon credits must be part of a global, rigorous, and coherent approach aligned with the organization's climate strategy. Prior to the creation of a carbon project portfolio, it is essential to have a clear vision of your sustainability strategy and to establish precise climate objectives.
Defining climate goals requires aligning ambition with corporate sustainability standards and the urgency of the climate crisis. Understanding the types of climate commitments your organization can undertake is part of a larger strategic decision and is crucial for maintaining transparency and avoiding reputational risks. It is also the first step to undertake in order to build a coherent and integrated contribution projects portfolio.
Here is a selection of different climate commitments you can pursue:
- Net-Zero Emissions: The SBTi Net-Zero Standard is widely recognized as the most rigorous climate goal for aligning ambitions with the 1.5°C trajectory of the Paris Agreement. This objective requires reducing the company's emissions by at least 90-95% by 2050 (or the target date) before proceeding with the sequestration of residual emissions (the remaining 5-10%).
- Alignment with Sustainable Development Goals (SDGs): The company can finance projects aligned with the United Nations SDGs, which provide a roadmap for fighting climate change, ending poverty, reducing inequalities, and strengthening economic growth.
- Contribution Claims: This refers to the communication made by the company regarding the financing of carbon reduction and/or sequestration projects beyond its own value chain (Beyond Value Chain Mitigation), through the voluntary purchase of carbon credits.
Adopting a portfolio approach then makes it possible to finance a variety of projects that support multiple climate objectives.
Effective risk management
Similarly as a financial portfolio, a carbon project portfolio is the ideal tool for addressing the various risks inherent to the Voluntary Carbon Market (VCM).
The idea is simple: not putting all your eggs in one basket. A failure or controversy over an isolated project will have a less significant impact on the overall commitment. By diversifying project types, certification standards, and geographical areas, the company minimizes the risk that a flaw in a single element will compromise its entire strategy.
Although the Voluntary Carbon Market (VCM) offers positive-impact climate opportunities, it exposes companies to certain risks that can be classified into three categories: project performance risks, market risks, and regulatory and legal risks.
- Project performance risks are diverse and affect the very integrity of carbon projects and the credits issued. They notably include excessive credit issuance (or over-crediting), lack of additionality (the project would have occurred without carbon financing), non-permanence of reductions—such as the deforestation of a sequestration project—double counting, and leakage, which is related to the displacement of emissions outside the project's perimeter.
- Market Risks include price volatility, supply challenges, lack of price transparency, and liquidity risks for buyers and sellers.
- Finally, there are Regulatory and Legal Risks, including the evolution of legislative frameworks (notably the integration of Article 6 of the Paris Agreement) and reputational risks associated with greenwashing.
Maximizing climate impact and diversifying co-benefits
A well-designed portfolio ensures your contribution delivers value far exceeding the simple metric of one tonne of CO2e. Indeed, each project has its own specificities determined by its type, geographic location, the emissions reduction mechanism used, the co-benefits supported, and the certification methodology. This is why the combination of a variety of projects, through the development of such a portfolio, generates a considerably broader range of benefits.
The construction of your portfolio will therefore depend on the impacts you wish to maximize. These impacts can be diverse and complementary: from targeted support for innovation and the emergence of new carbon removal technologies, to the prioritization of social, economic, or environmental co-benefits (biodiversity, poverty, air and water quality, job creation, etc.).
For example, if your primary objective is to support innovation, a part of your portfolio will be dedicated to innovative or costly projects that struggle to obtain funding, such as DAC (Direct Air Capture) projects, which reduce the amount of CO2e in the air using advanced technologies.
If your objective is to diversify the co-benefits of your contribution, your portfolio could be structured as follows:
- A forestry project with positive impacts on biodiversity and soil protection.
- An improved cookstove project that prioritizes women empowerment and the health improvement for local communities.
- A renewable energy project whose objective is to generate sustainable local jobs and ensure access to clean energy.
A portfolio including several types of projects allows for communication on a complete carbon contribution, covering several SDGs and strengthening the overall brand image.
Furthermore, the portfolio can be used to target projects with a direct or indirect link to the company's industry, areas of operation, and emissions issues (Scopes 1, 2, and especially 3). Ensuring the coherence of your climate contribution with your activities undeniably reinforces the legitimacy of the latter with stakeholders.
A lever for balancing your budget
Finally, the portfolio approach enables to manage the budgetary constraints of a carbon contribution while maintaining its quality.
On the one hand, creating a portfolio makes it possible to balance your budget by associating more expensive carbon sequestration projects with less expensive avoidance projects. Therefore, the necessary contribution volumes to be achieved without exceeding the established budget.
On the other hand, the portfolio is not just a spot purchase. It can include financing for projects under development, allowing a price to be secured in advance and the project's additionality to be funded from its beginning, as well as multi-year agreements that allow for a commitment over several years to finance a defined (or progressive) volume of carbon credits, thus ensuring a predictable financial flow.
Conclusion: The portfolio, an indispensable tool for your carbon contribution strategy
The adoption of the portfolio approach in the Voluntary Carbon Market (VCM) is a strategic imperative for any organization aiming for a credible and high-impact climate contribution. This structured method allows for reconciling the requirements of climate ambition (such as the SBTi Net-Zero Standard) with the operational and financial reality of companies.
The portfolio approach thus makes it possible to transform the purchase of credits into a strategic action lever, ensuring increased transparency and reinforced legitimacy with all stakeholders, while engaging in a sustainable contribution aligned with global net-zero emissions goals.
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