Company climate strategies: inset vs offset

Many companies are grappling with setting climate mitigation strategies, with challenges such as figuring out the right approach to inset vs offset for their emissions, especially in Scope 3. Over 5,400 companies have validated science-based targets according to the Science Based Targets initiative (SBTi). To meet these targets across all their emission scopes, companies need to employ a combination of different strategies across their greenhouse gas inventory.

There’s an ongoing discussion on if and how offsetting strategies can be used, while many argue that they remain vital to take urgent climate action and to address residual emissions. Meanwhile, to meet stakeholder expectations and Scope 3 targets under the SBTi, there is a clear case for companies to implement emission reductions or removals in their own value chain. Some have started to refer to this approach as insetting.

What is the difference between inset vs offset, and how can companies ensure integrity while applying these different but complimentary strategies in their climate journey? Read on to find out.

Offsetting commonly refers to companies buying carbon credits to compensate, or “offset”, their emissions. This can be a viable strategy to take responsibility for ongoing, hard to abate, or residual emissions, which remain once action has been taken to reduce or remove emissions as much as possible. According to the SBTi mitigation hierarchy, companies should prioritize addressing the emissions within their value chain and only after that make actions or investments to mitigate emissions outside their value chains.

An example of offsetting would be a food retailer that buys carbon credits to compensate for the emissions from transporting its goods. The investment goes into climate projects that focus on reforestation, renewable energy, or clean cooking, for example. Offsetting externalizes investment to outside of the company’s value chain and often to different geographical locations.

Recently offsetting as a strategy has received some negative press and companies may shy away from this strategy. It can be difficult to compare emission reductions outside of the company’s operations one-to-one with its ongoing emissions, which has led to arguments that offsetting can be misleading and inaccurate. This is why many climate experts are gravitating towards using carbon credits for contribution claims, rather than offsetting.

Contribution claims are different to offsetting in the sense that the company does not claim that they have offset their emissions by buying carbon credits. Instead, companies can say that they are contributing to climate action through their investments. This takes a more systemic view for a global Net Zero, rather than focusing on the GHG inventories of individual companies. The contribution model has been advocated as an alternative to offsetting by internationally recognized actors, such as World Wildlife Fund (WWF). To finance the contributions, the WWF recommends the money-for-ton approach, in which companies set a price on unabated emissions based on the social cost of carbon.

In terms of company climate strategy, SBTi’s Beyond Value Chain Mitigation (BVCM) reports can be helpful to approach offsetting. BVCM refers to the climate action companies take outside of their own value chains, which can include buying carbon credits to take responsibility for residual emissions, or landscape level measures such as investing in a nature restoration project in the area where the company operates. According to the SBTi, BVCM investments are not accounted for in companies’ Scope 1, 2 or 3 inventory, and therefore don’t count towards achieving science-based targets. However, it is worthy to note that as of May 2024, SBTi is evaluating whether environmental attribute certificates, including carbon credits, can be used under science-based targets to address Scope 3 emissions.

When it comes to the comparison between inset vs offset, carbon credits can be a flexible approach to climate action, as they can be used with relatively less planning and long-term investments. Offsetting requires less stringent safeguard processes than some projects within the value chain, as projects are not linked to the value chain of a company. Nevertheless, independent verification and certification against international standards, such as Gold Standard and Verra, is crucial to ensure carbon projects lead to real climate impact.

There is no clearly agreed definition of insetting, and organizations have applied the term in different ways. The International Platform for Insetting (IPI) defines insetting projects as “interventions along a company’s value chain that are designed to generate GHG emissions reductions and carbon storage, and at the same time create positive impacts for communities, landscapes and ecosystems.” According to a recent report by Abatable and the IPI, other terms used in the field when referring to Scope 3 emission reductions include “in-value chain interventions” used by the World Business Council For Sustainable Development (WBCSD), or value chain interventions. SustainCERT uses the latter to refer to projects that reduce emissions or enhance removals in the value chain.

When comparing inset vs offset, insetting is about making investments to reduce Scope 3 emissions within the company’s own value chain, meaning that action is taken by the company and its suppliers. For example, a food retailer can invest in farm-level regenerative agriculture practices to reduce the emissions and environmental impacts of its suppliers.

SustainCERT’s approach to value chain interventions goes beyond insetting as certain safeguards are in place. Verifying value chain interventions requires proof of sourcing from the supplier or the Supply Shed where investments are made. In addition, companies need to show evidence of causality, which demonstrates that the investment or other action by the relevant company is indeed what made the intervention happen. These safeguards help ensure environmental integrity and the credibility of the approach. They also make the verification process of value chain interventions different to that of offsetting due to the demonstrated link to the value chain.

As a climate mitigation strategy, value chain interventions require long-term planning and strategic decisions about which investments to make and where to make them. With dynamic value chains, companies may not source from the same supplier year after year. This is why companies can benefit from making strategic agreements with suppliers, or from looking into approaches such as the Supply Shed. This can reduce the risk of stranded assets, or investments which the company is unable to fully benefit from, and help companies ensure that they can continue to claim climate impacts from the investments already made.

Value chain interventions allow reducing Scope 3 emissions in line with science-based targets and ­­build value chain resilience through collaboration. They also allow joint value sharing across the value chain, as new opportunities arise for co-claiming climate impacts with value chain partners. Value chain interventions, such as those linked to regenerative agriculture, can enhance a holistic approach to value chains, simultaneously contributing to a healthier climate, ecosystems, and local communities.

Credible and scalable solutions for value chain interventions are an up-and-coming field. SustainCERT has developed a platform for value chain solutions, along with Impact Units that can be transferred among value chain partners. These aim to address challenges such as the risk of double counting and freeriding. Meanwhile, forward-thinking companies can join the Value Change Initiative, a peer-to-peer learning forum, which dives deep into implementation level solutions for accounting, reporting and claiming Scope 3 emission reductions and removals.

The strategic question facing companies is not necessarily inset vs offset. Instead, it is how to implement both inset and offset. These two approaches, when planned out properly, can be complementary to each other in a company’s climate strategy.

Insetting, or the more robust value chain interventions, focus on reducing emissions from within the value chain. This will be a crucial step for companies to respond to increasing scrutiny in the market, make accurate claims under upcoming regulations, and meet science-based targets for a Net Zero world.

Meanwhile, offsetting – better framed through contribution claims – can help companies address residual emissions, which are bound to exist for every company in the short to mid-term. Making use of frameworks such as the SBTi BVCM can provide input on how companies can approach this in the most credible way, and combine it with value chain emission reduction strategies.

At the end of the day, urgent corporate action is key to ensuring a sustainable future, and this means making use of every strategy we have available.

SustainCERT offers cutting-edge Scope 3 solutions for companies in the Food & Agriculture and Apparel & Footwear sectors.