MSCI's carbon ratings tool aims to raise standards
Investment research firm MSCI has launched a ratings tool for carbon credits to improve clarity and standards in the rapidly-developing carbon market and increase confidence in the product.
MSCI Carbon Project Ratings assesses the integrity and risks of more than 4,000 carbon credit projects across multiple criteria and is the first tool to look at the legal and ethical risks of an instrument that is still facing concerns over its effectiveness.
“Carbon markets are critical to accelerating decarbonisation and meeting net-zero goals, but only 5% of projects on the market are considered to be of very high integrity,” said Guy Turner, head of MSCI Carbon Markets.
The International Energy Agency said in April that high-quality carbon credits have a role to play in scaling up innovative clean energy technologies and could accelerate the adoption of low emissions hydrogen, sustainable aviation fuels and direct air capture.
The IEA said carbon credits can play an important role in attracting private capital and accelerating technology adoption and governments and the private sector need to create the right enabling environment for investments.
Carbon markets are making progress to improve standards. The Integrity Council for the Voluntary Carbon Market has sought to address integrity concerns with Core Carbon Principle standards and is assessing the validity of projects aided by guidance from the Voluntary Carbon Markets Integrity Initiative.
Carbon crediting programmes such as Verra and Gold Standard are also improving their governance and changing their methodologies to give stricter oversight.
"The challenge to the market is that there's a lot of legacy projects and legacy credits on the system, and the registries. There is interest in newer projects as they are being done with much higher degrees of scrutiny," Turner told IFR at New York's Climate Week.
Buyers are showing growing interest in carbon removal projects – either engineered carbon removal or nature-based restoration projects such as degraded landscapes, forests or mangrove swamps that sequester carbon, he added.
MSCI estimates the voluntary carbon markets are valued at around US$1.5bn–$2bn today, which could rise up to US$5bn–$25bn by 2030 and US$30bn–$200bn by 2050.
The firm's carbon project ratings are targeted at buyers and assess a project's impact on the climate, environment and society, as well as legal and ethical risks, including financial crime, fraud and sanctions.
Independent verification is designed to allay buyers' concerns and give a more realistic measurement of benefits in an industry that has been overestimating carbon benefits in some situations and will allow buyers to compare carbon credits across the markets, mitigate investment risks and meet disclosure requirements.
The ratings look at the amount of carbon that projects remove, the additionality of a project, permanent quantification of the carbon benefit and any co-benefits generated. Using this approach, the firm has found some carbon credits based on clean energy cookstoves are overestimating their benefits.
Renewable energy is another source of controversy, particularly older large projects in China or India that do not meet the additionality test and would have gone ahead without carbon credits. MSCI typically gives these projects its lowest rating, Turner said.
MSCI's methodology uses the firm's AI-driven systems to assess each individual project against six criteria and over 50 sub-criteria broadly categorised under emissions impact and implementation integrity.
The rating is a composite of the two categories and based on a seven-point letter rating scale from AAA to CCC. Projects rated AAA have both a high likelihood of achieving a 1 tonne emissions impact per credit and being used in a way that supports positive environmental social and environmental outcomes, while meeting legal and ethical standards.