Transparent use of carbon credits and renewable energy certificates: What directors need to know

Organisations should take a strategic – not just compliant – approach to environmental markets, writes Adam Kirkman and Ben Stuart at Xpansiv

Carbon credits, renewable energy certificates (RECs),  and global environmental commodity markets play an important role in corporate transition plans and decarbonisation strategies.

These instruments are particularly relevant for organisations with high energy demand and ‘hard to abate’ sectors, where the technologies needed for significant emissions reductions are either still being developed and commercialised, or not yet available at sufficient scale to achieve climate targets.

Environmental markets serve companies in three main ways:

• Meeting compliance obligations – such as Australian Carbon Credit Units (ACCUs) under Australia’s Safeguard Mechanism, the Carbon Offsetting Scheme for International Aviation (CORSIA), and Article 6 of the Paris Agreement Crediting Mechanism.
• Supporting voluntary decarbonisation goals and targets by offsetting residual emissions.
• Providing carbon pricing signals – for example end-of-day over-the-counter (OTC) trades, Mark-to-Market (MtM), and spot and forward prices, which inform strategic planning, capital allocation and climate scenario analyses.

For most companies, these market instruments form a necessary and legitimate part of robust climate transition strategies, supplementing genuine emissions reductions achieved through investment and deployment of decarbonisation technologies. For directors, maintaining this distinction is vital to preserving credibility with investors and stakeholders increasingly focused on the integrity of corporate climate commitments.

Embedding environmental markets into climate governance

With mandatory climate reporting now in effect in Australia and many other jurisdictions, directors should be fully informed and prepared to meet new disclosure and assurance expectations. For some, climate-related disclosures can be used as tools to assess risk, identify investment opportunities and achieve competitive advantage, making their role as a measure of business performance increasingly significant.

Directors and executive teams – including treasury, finance, legal, risk, compliance and sustainability – should ensure their organisations are not only compliant but strategic in their approach to environmental markets. With appropriate oversight, reliable data and effective assurance, businesses can navigate climate disclosure laws with confidence, while also demonstrating credibility in their transition plans.

What disclosure involves

Under mandatory climate disclosure frameworks now operating in Australia and other jurisdictions, companies may need to disclose detailed information about their planned and actual use of RECs and carbon credits in a company emissions reduction strategy, climate policy, transition plans and climate-related targets (net-zero etc). This includes:

• Total RECs and carbon credits (tCO₂e) verified and retired against international standards (e.g. VCS, Gold Standard, iRECs etc) during the reporting period.
• Attributes of RECs and carbon credits, including characteristics, project location, verification standards, additionality, permanence, monitoring processes and safeguards against double counting.
• The balance of technological and nature-based emissions reductions and removals.
• Future commitments, including forward contracts for RECs and credits scheduled for retirement or cancellation.
• Assumptions and data sources for carbon pricing (e.g. end-of-day OTC, MtM), and alignment with science-based pricing trajectories.

Much of this information is accessible through established environmental markets infrastructure – including exchanges, asset transfer and settlement systems, registries, portfolio management and reporting tools. With directors needing to actively question the data rather than assume its accuracy,  such platforms help facilitate streamlined, standardised reporting and assurance of RECs and carbon credit data.

These platforms effectively ‘balance the ledger’ between an organisation's greenhouse gas (GHG) emissions profile, its sustainability metrics and targets (such as net zero commitments), and the environmental assets – including VCUs, ACCUs, and iRECs – that have been retired on its behalf. They seek to enhance the ability of boards and directors to exercise oversight and gain the necessary assurance regarding the appropriate use of RECs and carbon credits within corporate transition plans and sustainability disclosures.

Questions directors should ask management

Given the board’s central role in climate governance, directors should actively engage management teams on the use of environmental markets and carbon offsetting strategies. Key questions include:

• What role do RECs and carbon credits play in meeting our compliance obligations and decarbonisation goals?
• What due diligence processes underpin our access to markets and selection of projects?
• What steps are taken to ensure transactions and retirements of RECs and carbon credits are accurately executed and assured?
• What information are we disclosing in our annual reporting suite to meet emerging climate disclosure obligations?

Transparency the key to enhanced climate disclosures

Environmental markets help organisations manage the energy transition in a transparent way as they develop and implement robust emissions reduction strategies and invest in the technologies necessary to decarbonise operations and supply chains.

Managing regulatory and reputational risks demands transparency around the use of RECs and carbon credits as an essential component of credible climate commitments. With mandatory disclosures now established in Australia and other jurisdictions, directors and executives should confirm offsetting strategies are clearly integrated within strategic frameworks, supported by rigorous governance practices and transparently reported.