Corporate motivations and co-benefit valuation in private climate finance investments through voluntary carbon markets

This study aims to investigate corporate motivations for voluntary investments in carbon offset projects and the prioritization of local co-benefits in their decision-making process. By addressing the following research questions, this study contributes to the existing literature: (1) What are the motivations driving corporations to purchase offsets? (2) How does the willingness to pay for additional co-benefits of offsets vary among companies driven by different motivations? We seek to answer these research questions by investigating motivations and co-benefits within the voluntary carbon offset (VCO) market. We utilize two primary data sources: published Corporate Social Responsibility (CSR) reports and self-reported data from the Carbon Disclosure Project (CDP). The Data section provides an in-depth description of these data sources and their utilization to address our research questions. Furthermore, the Strategy section outlines our research strategy, employing a mixed-method approach for comprehensive data analysis and research question resolution. In the Coding Strategy section, we detail our qualitative analysis approach, while the Hypotheses section outlines our quantitative analysis. To ensure the robustness and balance of our study, we incorporate the Balance and Robustness sections, which provide additional support for our quantitative analysis.

A conceptual/theoretical framework

The conceptual framework presented in Fig. 6 below provides support for this study. It illustrates the decision-making process of corporations in purchasing emissions offsets from voluntary markets, leading to the acquisition of carbon credits as final products. Beginning from the left side of the framework, previous research suggests that offset purchasing decisions within corporate entities are often multi-stage, involving various hierarchical levels and offices¹⁰. This led us to our first research question. In the literature review, we identified two attributes of motivations aligned with this multi-stage decision process. The first attribute focuses on reducing greenhouse gas emissions, while the second attribute explores motivations beyond emission reductions. These motivations are discussed in detail in the Introduction of the main paper. Through a qualitative analysis using a coding strategy, we identified three motivations: M1 (company carbon management and efficiency), M2 (company market competitiveness), and M3 (company values), which align with achieving additional benefits while reducing emissions. Moving to the right side of the framework, carbon credits have two functions, influenced by the evolution of practices in the Clean Development Mechanism (CDM) that emphasize sustainable development benefits alongside carbon reductions^{31,39,40,41,42,43,44,45,46,47,48,49}. Carbon offsets, when traded as credits, serve as both a commercial good in voluntary carbon markets and an intangible good with unique consumer behavior. Based on this theoretical foundation, our second research question emerged. To address these research questions, we developed the following hypotheses:

Hypothesis 1: Companies primarily motivated to reduce emissions (M1) will prioritize the purchase of cost-effective offset projects, opting for lower-cost options.

Hypothesis 2: Companies driven by non-emissions-related impacts (M2 and M3), such as market competitiveness and company values, will place a higher value on co-benefits and may be willing to pay a premium for offsets that achieve these impacts.

We conducted quantitative analysis to further explore the research questions through the lens of the hypotheses.

Approach

This paper assesses the convergence of corporate decision-making, co-benefits of climate finance projects, carbon offsets, and sustainability. We examine these critical issues using the case of the VCO markets for insight into how they can help inspire and reform corporate practice on climate change to support sustainable low-carbon society. These markets offer a helpful lens on corporate social responsibility, particularly how companies might value the sustainable benefits in their decision-making process. First, corporates are the primary buyers in the voluntary markets¹⁰. While sometimes individual buyers do engage in these markets, this individual consumption is very limited compared to the corporate consumption. Individuals only made up 5% of the voluntary offset consumers while 80% were companies¹⁰. Secondly, the voluntary carbon markets landscape changed rapidly year by year, reflecting at least in part shifting buyers’ preferences among different projects. Over the course of its initial 16-year history, the cumulative volume of pure transacted VCOs (pure transacted offsets are offsets that not used to fulfill the pre-compliance purpose) have exceeded 1.2 billion metric tons (GtCO₂e) with a total market value of $6.7 billion⁵⁰ as shown in Supplementary Fig. 3.

Corporate investment decisions on the purchase of emissions offsets from the voluntary markets are private and not subject to disclosure to governments or the public. Thus, it is always challenging to understand why these companies makes these decisions. Internal discussions regarding these decisions are not documented nor are they accessible for public review. The price information for projects is likely a factor in decisions but with opaque markets, but we are unable to compare that factor fully with the others noted here. It is likely that offset purchasing decisions are multi-stage within a corporate entity¹⁰, involving different levels of hierarchy and different offices.

However, certain strategies enable at least partial illumination of these motivations. Insights can be obtained through companies’ published CSR reports, and self-reported data (from CDP). There are many ways of studying corporate motivations, such as interviews, social media, or corporate communications. Many companies publish annual CSR reports to communicate the activities and strategies being used to address social and environmental issues. They serve as an indicator of a company’s public stance toward social and environmental responsibility, strategic planning, and the level of integration in the corporate’s business strategic plans⁵¹. We chose to use corporate CSR reports as our primary research sources for the following reasons. First, CSR reports per se are one kind of corporate communication that conveys the voice of the companies to both internal and external audiences. Second, purchasing voluntary carbon credits is part of corporates’ CSR strategy, and CSR reports therefore fits this research need, since the intention of studying the corporates’ purchasing behavior of voluntary carbon credits is their motivation, instead of what have they done. In addition, CDP, acting as a not-for-profit organization, provides a channel for large companies globally to participate an standard annual questionnaire^52,53 that includes detail on emissions and strategies to address climate change, as well as information on offset projects they invested in during the reporting year.

Data

Company selection

The focus of this research is on companies that have engaged in carbon offsets activities. The year 2017 was selected as it allowed us to obtain a relatively comprehensive list of companies from two datasets, and it was also the year following the Paris Agreement’s entry into force, making it a suitable case to study post-Paris corporate sustainable investment. Companies were identified from the CDP Climate Change Questionnaire 2018, specifically Question C11.2 and C11.2a. Question C11.2 asked companies if they had originated or purchased any project-based carbon credits during the reporting period, while C11.2a asked companies to provide details on these credits. From this effort, 414 candidates were identified. We then excluded companies that purchased offset credits to meet compliance requirements or acted as originators of carbon offsets, leaving us with a total of 306 companies for analysis.

CSR reports

Once the target set of corporates were identified, we verified the availability of the CSR reports (free-standing or published jointly with annual reports) using the Corporate Register and the Sustainability Disclosure Database. After the list of companies was finalized, the most recent CSR report was downloaded from corporateregister.com or directly from the companies’ websites. Finally, we obtained 306 CSR/sustainability reports and corporate annual reports. However, after having reviewed all 306 reports, only 186 reports were retained in the final sample. We dropped 120 companies from our sample because their CSR reports did not mention related information about purchasing carbon offsets. A detailed comparison table between these two groups can be found in Supplementary Tables 5 and 6.

Sectoral data

These companies were then classified by industry using the Bloomberg Industry Classification Systems (BICS). In addition, corporate characteristic information, such as headquarters location, primary working currency, number of employees, annual revenue, net income, total assets, operating, and investing, was also obtained from Bloomberg Company Profile 2018.

Project characteristics

Within 186 corporates, we identified from the CDP data 534 projects executed in 28 countries, 12 sectors, 39 industries, and 73 sub-industries. We presented the distribution of project types aggregated at country or regional level in Fig. 1. These 534 projects accounted for 16.2 MtCO₂e, which is about one third of the total volume of transactions in the voluntary market of that year. Supplementary Table 7 lists the descriptive statistics of the 186 companies in our dataset. In aggregate, these companies represent $3.5 trillion in revenue, and $0.4 trillion in profits, $3.1 trillion in total assets, and a workforce of 9 million people worldwide. When we compared the data to the list of global Fortune 500, these 186 companies represent one third of the value created by the Fortune 500 companies in the year of 2018. In conclusion, companies in our sample are quite significant offset buyers, and they can be a representative sample to study corporate investment decisions.

Strategy

Methodologically, we adopted the mixed-method research design by combining the inputs of corporate CSR reports and CDP offsets projects to assess the underlying motivations and decisions for corporates to invest in offset projects. “Mixed methods” is a research approach of using both quantitative and qualitative data collectively within the same study to conduct analysis^53,54. The essential element of this method is data linkage, or data integration at an appropriate stage^53,55.

This paper fulfills the precondition of data linkage and data integration. First, there was a natural linkage between the CSR reports and the CDP Climate Change Questionnaire. They were the same groups of companies reporting different aspects of the offset investment to different audiences and stakeholders. As a result, corporate-level data was constructed from the CSR reports studying the motivations of investment behavior through a defined coding strategy. Meanwhile, the project-level data was extracted from the self-reported CDP data to study the project-specific issues. Second, the two sets of data were integrated into Nvivo 12 through the “case” function. Nvivo is a qualitative data analysis (QDA) computer software package produced by QSR International. Primarily, it is designed for qualitative analysis, but the additional “case” function enables researchers to conduct mixed-methods research. In this function, each individual company was treated as one “case” in the software, allowing analysis of interaction between the specific motivations and project characteristics. In this circumstance, corporate CSR reports act as interviews, and CDP data acts like survey responses. We combined these two datasets for individual corporations. In addition, sectoral data from the Bloomberg Company Profile and the BICS is applied to study corporate aggregated behavior. In conclusion, qualitative data was collected and analyzed first, then quantitative data was collected and used to test findings empirically.

Coding strategy

The first part of our study focuses on underlying motivations behind corporate offset investment behavior to address the first research question, and we have chosen to do a qualitative study using the content analysis. Content analysis is a common method used in qualitative analysis, which comprises a set of methods for systematically coding and analyzing qualitative data for examining trends and patterns in documents^6,56. Originally taken from the consumer behavior and marketing field, this approach was later widely adopted in the social and anthropology field⁵⁷. Recently, content analysis has been used in several studies that examined corporate environmental and social disclosures, as well as corporate risk disclosures⁵⁸.

We conducted the content analysis of the 186 CSR reports by using a coding strategy to extract corporate motivations for offset investment. To create the coding strategy, we first compiled a wide-ranging set of motivations (we called them metrics in our coding strategy) based on the literature. We began with a deductive content analysis of a pilot study of 20 companies to see whether motivations from the pilot study were closely aligned with those from the literature. We found that most of these motivations would fit under the list we compiled, whereas one motivation that relates to SDGs was not on the list. We agreed that the motivation of supporting SDGs, although not mentioned in the literature, was an essential piece that can perhaps describe the current trend of corporate motivations. Thus, we added it to the coding strategy. Later, when reviewing the CRS reports from the pilot sample, we started to see these motivations could be aggregated into three main themes to describe the underlying motivations behind corporate investment behavior. As a result, we identified three main themes of motivations, namely “company carbon management and efficiency,” “company values,” and “company market competitiveness.” At this point, the preliminary coding strategy was eventually defined as in Supplementary Fig. 4. Once the coding strategy was defined, the coding was applied to the full sample. We made small revisions during the coding process.

This technique of content analysis enables assessment of the frequency with which companies undertake different motivations and sub-motivations to invest in offset projects. It also provides understanding of corporate strategies to enhance the quality and impacts of the projects that they have invested in.

Hypotheses

Due to the dual features of carbon offsets, we developed two hypotheses based on empirical literature rather than on theoretical considerations. Anderson and Bernauer’s study of corporate motivations through interviews and online surveys found that if only from reducing GHG emissions’ perspectives, companies were motivated by the economic efficiency offset projects, which deliver cheaper carbon credits at a lower cost²². Ecosystem Marketplace conducted annual market surveys with a focus on corporate voluntary carbon offset activities using the CDP database. They found that offsetting investments primarily served the purpose of companies choosing to meet a voluntary emission reduction target. Beyond that, it could also help companies to derive value from their offset portfolio through offset purchases—particularly when companies were looking to bring in “beyond climate” benefits, such as co-benefits to the society^16,20. Lovell et al. identified three narratives to explain why offset organizations purchase voluntary offset credits: “quick fix for the planet” is based on the science of climate change, “global-local” connections focus on side benefits, and “avoiding the unavoidable” is based on drivers of increasing greenhouse gases²⁶. Two of the three motivations are derived from the logic of emission reductions.

Carbon offsetting has the potential to contribute to a range of other benefits that can fit into a broader goal for corporate social responsibility. Several studies have explored the utilization of VCO projects by companies to achieve specific sustainable development benefits. This extends beyond the primary motivation and enters what is commonly referred to as the “sustainability sweet spot,” where co-benefits play a crucial role in enhancing corporate social responsibility and contribute to the growing trend of companies being willing to pay a premium for projects with better co-benefits. Another study conducted interviews among one carbon offset consulting firm with four of its customers but the data limitations constrained them from drawing a broader conclusions on the motivations of these corporate buyers¹⁰.

Furthermore, emission offsets have two embedded features when they are traded in the form of carbon credits. First, carbon offsets are a commercial good that can be purchased in the voluntary carbon markets. Consumer behavior can play an important role in the purchasing process. Second, carbon offsets are also an uncommon intangible good, which means that consumer behavior differs from behavior in relation to conventional goods under certain circumstances. Therefore, based on the qualitative analysis we conducted in the previous section, we can group the three motivations we found and assign them into the two hypotheses. We can then test the hypotheses based on the combined project characteristics and price data.

Balancing test between the M1, M2, and M3 groups

We acknowledge that diverse corporate characteristics, such as size, revenues, net income, total emission status, etc., might also have influence in their decision of offset investments. Simply looking at the correlation might miss these factors. However, we conducted tests to assess the balance of three different groups of companies before we further calculate the t-test. We present the results of the standardized differences in Supplementary Table 8. Overall, these groups are quite balanced, with only two or three variables out of 10 not being balanced. We can conclude that there is adequate balance among these groups of companies. We also conducted a hedonic model with 37 companies who reported the purchased prices of offsets in 2018. We report the results in Supplementary Table 9. We also found that these corporate features do not statistically have an impact on the offset prices.

Robustness

The standards and registry infrastructure are an essential piece of voluntary offset markets in standardizing carbon credits and proving the legitimacy of these credits by third-party verification. Additionality has been an ongoing concern from environmentalists and some buyers who hold skeptical attitudes towards carbon offsetting. To address the concerns, companies purchase the carbon offsets that meet the highest possible standards to avoid criticism from the media and environmentalists⁵.

Currently, there are five common VCO standards in the market, where the Verified Carbon Standard (VCS) and the Gold Standard account for roughly 66 percent and 20 percent (Supplementary Fig. 5) of the transacted offset volumes respectively based on a market survey⁵⁹. Standards serve the purpose of issuing offsets to a VCO project if the general criteria set by the standards are met, mainly refer to the qualification of validation and verification. On top of these two-primary qualifications, a few standards will issue add-on certification to offer buyers “charismatic” offsets that emphasize co-benefits⁶⁰. For example, Gold Standard certifies positive co-benefits, and the Climate, Community & Biodiversity Standard (CCBS) certifies positive social and biodiversity impacts. In addition, the American Carbon Registry (ACR), listed as the highest priced standard, is recognized for environmental integrity and innovation²¹.

Figure 7 underscores these insights. First, motivations of company values (M2) and company market competitiveness (M3) drove companies to invest in offset standards either with a higher offset price or having more “charismatic” features, compared to companies with the motivation of carbon management and efficiency. In the boxes (diagonal with thick borders) of the three out four highest-priced offset standards with add-on co-benefits (Gold Standard, CCBS and VCR), there is a statistically significant difference at the number of offset standards being purchased by M1 companies compared by M2 and M3 companies. Companies were indifference in preference for offset standards when moving towards the right corner of the diagonal line (offset credit became cheaper with no add-on features are attached, and there is no statistically significant difference among these four motivations towards offset standards).

When we compare the differences of standards purchased, we always subtract the lower-priced offset standard from the higher-priced standard. Green cells indicate that corporates purchase more from offset standards with a higher average price. Rose-colored cells show that the preference over offset standards fits the assumption that buyers buy more offset standards due to the low price of the standards. T-test results are from comparing the difference of the average number of projects (number of transactions) within the respective project offset standards, invested by companies driven by separate motivations. Note 1: The test results compare the difference of the average number of projects (number of transactions) within the respective credit standard, invested by companies driven by separate motivation.

Second, companies with the motivation of carbon management and efficiency (M1) were attracted by the low-priced offset standards, and they tended to purchase more offsets from this group of standards, namely VCS, CAR, and CDM. The average price of offset credits from this group is below $2/tCO₂e. In the boxes (white) that had only one or two yellow-colored cells, at least one of the yellow-colored cells resided in the M1 companies. Yellow-colored cells show that the lower-priced standard was chosen. Thus, when M1 companies faced the investment decision between two offset standards, the one with a lower price had a higher chance to be chosen by M1 companies.

Third, Gold Standard offset credits were favored over other standards by all types of companies, with only one exception, when Gold Standard was compared to VCS by M1 companies. There were two explanations. First, VCS is the most common standard in the voluntary carbon markets with a market share of 66 percent of total transacted credit volumes. Second, lower-priced VCS credits were favored by M1 companies, perhaps related to their tendency purchase relatively large accounts of credits.

Fourth, generally, corporate motivations show a large degree of consistency and orientation, which was aligned with the findings of the purchasing behavior on offset standards. M2 and M3 companies were willing to invest more on offset projects with better add-on features, and willing to pay these offset credits at a higher price. The investment decisions of the M1 companies are primarily related to the low-priced factor. However, when facing choices across project types, they intended to invest in renewable energy projects, which are not only cheap but also can deliver on potential local co-benefits. This observation suggests that co-benefits might be woven into a broader fabric of corporate social responsibility and the decision-making process for offset projects.

Reporting summary

Further information on research design is available in the Nature Research Reporting Summary linked to this article.