companies are under a lot of pressure from investors and customers to reduce their
environmental footprint carbon offsets were an easy solution that for a while
kept stakeholders happy unfortunately for the companies patting themselves on the back for
their ESG efforts people eventually realize that these offsets achieve nothing major investors have
lost hundreds of millions of dollars in just the last week and now a multi-billion dollar
speculative Market that you weren't supposed to know about is imploding a Dutch Court says shell
must produce its CO2 emissions by 45 percent by the year 2030. environmental groups are
really skeptical they argue that offsetting now can simply be a way for the wealthy to
avoid or delay taking the necessary steps to reduce their use of fossil fuels be assumed
5.75 billion dollars in sustainability box the largest by any company in history
anytime you see a company promoting a product as carbon neutral it got that status by buying
a security off an unregulated Financial Market if a clothing brand like Gucci emits one ton of
carbon to produce its hideous pair of flip-flops they can buy a one-ton carbon credit to offset
their emissions and Market their shoes as carbon neutral there are two major non-profit
organizations that dominate the market for these credits Vera headquartered in DC and gold
standard headquartered in Geneva Switzerland these organizations do not remove any carbon themselves
they audit other companies or projects like carbon sequestration forestry and agriculture if you own
a company that can prove to Vero or gold standard that you have removed a ton of carbon dioxide from
the atmosphere or prevented it from being released in the first place you can get given a verified
carbon credit Vera and gold standard both have an application and verification process for companies
that want to start receiving verified carbon units Vera charges an application fee and a verification
fee and a fee of 10 cents for every carbon unit awarded with a discount applied to companies
that are issued with over 1 million carbon units in a calendar year if you owned a company that
was reducing carbon emissions in a way that you could verify with these organizations it's worth
paying these fees because you can then take your carbon unit and sell it at a markup to a company
like Gucci so they can sell their flip-flops as carbon neutral this entire process is separate
from the legally required cap and trade programs like ones enforced here in California and in the
European Union but if this is entirely voluntary why the [ __ ] are companies paying millions of
dollars every year to buy these credits well there are three reasons and none of them are because
these companies really care about the environment although that's what they would like you to think
it's not even for marketing a survey conducted by the Harvard Business Review found that 65
percent of respondents said that they would want to buy from purpose-driven brands that Advocate
sustainability but only 26 percent actually did if you have ever seen a carbon neutral logo while
doing your shopping and acted on it well done but most people are not like you the three real
reasons companies are spending billions of these voluntary credits are the same reasons that the
whole system is now falling apart the first reason companies are actually doing this is because it
lets them take advantage of new investment Trends GSG stands for environmental social and governance
and it has been a popular investing practice since 2008 when a lot of companies were criticized for
a moral conduct investors wanted to put their money into companies with good ethics for two
reasons the first reason was because they thought they could generate better returns companies in
environmentally friendly fields looked like the future and if the companies that collapsed in the
mortgage crisis had better governance they might have survived in the first place the second reason
was because people wanted to Pat themselves on the back for doing a good thing by only supporting
companies that were ethical unfortunately it is questionable at best if these well-intentioned
investors achieved either of these goals in the beginning ESG investing required people to
individually pick their stocks and research the company's financial and operational credentials
as well as their ESG performance it was time consuming and individual stock picking is very
risky the trend took off when asset managers like BlackRock and Vanguard to introduce mutual funds
and index funds with their own ESG certifications this led investors to buy one Diversified Group of
shares out of the box that was already certified ESG compliant although that really had no official
meaning the role of senior company leadership is to maximize returns for their shareholders
that is their legal and fiduciary duty and more importantly how they secure their annual
performance bonuses every boardroom in America saw this trend and they knew that if they got
their company listed on an ESG index it would boost their share price because more potential
investors would buy their stock getting into these ESG indices was surprisingly easy ESG
funds were made using either the inclusion method or the emission method the inclusion
method was much more rigorous fund managers would go through companies one by one and only accept
businesses doing outstanding work to benefit the environment the problem with this method is that
it wasn't very well Diversified if you bought into such a fund you would be Overexposed to
electric cars and renewable energy companies which are highly speculative a more popular method was
the emission method which took an existing index like blackrock's ivv S P 500 Index and kicked out
the Bad actors like tobacco gambling and weapons companies These funds still wanted diversity in
their asset base so they let these companies back in if they could prove that they were better than
other companies in the same industry and the easiest way that companies found to get past
the ESG bouncer was to offer carbon neutral products and that's how companies like Royal
Dutch Shell Exxon and Nestle made it into the ESG funds but Tesla was excluded from them you don't
have to like musk but it's hard to argue that the company that made electric cars mainstream is a
worse ESG candidate than the world's largest oil companies suspicious very suspicious the
performance of ESG funds was initially promising although that had a lot to do with the investors
rushing into the space rather than business fundamentals in a recent Journal of Finance paper
University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20
000 mutual funds representing over 8 trillion dollars of investor savings although the highest
rated funds in terms of sustainability certainly attracted more Capital than the lowest rated funds
none of the high sustainability funds outperformed any of the lowest rated funds the actual power
that companies like BlackRock and Vanguard have over the companies they invest in on behalf of
their clients is usually overstated but even they have started pulling back on ESG initiatives if
buying carbon credits to be carbon neutral isn't going to make a company any more attractive to
these groups of investors then they aren't going to waste the money on a voluntary expense that
according to some studies actually does more harm than good so it's time to learn how money Works to
find out how a well-intentioned plan turned into a multi-billion dollar bubble this week's lesson
was sponsored by Babel one of the top language learning apps in the world its intuitive lessons
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the link in the the description what language would you learn let me know in the comments the
companies that make carbon credits the company that use carbon credits and the non-profits
that regulate this voluntary Market are not the only players in this game the market for
carbon credits became so large that hedge funds started trading carbon credits in unregulated
private markets the price of carbon credits varies depending on how many projects are producing the
credits by taking carbon out of the atmosphere and how many companies are buying the credits
to make their products carbon neutral treating firms like the traficurer group moved into this
market and attempted to profit by speculating on these price fluctuations unfortunately for them
they have now lost a significant amount of money because the value of voluntary carbon credits has
fallen from a high of 19 in January of 2022 to a dollar and 77 cents in September of 2023. a
loss of more than 90 percent in 18 months and that's because of the second reason this Market
became so popular to begin with it slowed down regulation there are other markets for carbon
credits that are not voluntary the largest of such is the European carbon credit Market companies in
the European Union have a cap on the amount of carbon they are allowed to Emit and once they
go over that cap they need to buy carbon credits for every ton they are over the price of a metric
ton of carbon in the EU is currently around 82 dollars which is 50 times the price of a ton
of carbon in the voluntary markets the price of carbon credits in the European markets has
been increasing at the same time as the price of carbon in the voluntary Market has been crashing
the reason that the voluntary markets were so popular to begin with was that companies liked
the idea of self-regulating if they could prove to the public that they could go carbon neutral
with voluntary carbon offsets that cost 19 a ton it is less likely that they would need to
buy mandatory carbon credits for eighty dollars a ton going carbon neutral by choice was cheaper and
it let companies run PR to investors and customers about their green initiatives some of these claims
sounded too good to be true and that's because they were the third reason this multi-billion
dollar market is collapsing is because the whole scheme never worked in the first place
according to a study led by Cambridge University on 40 Vera approved projects as much as 94 of the
carbon credits sold never actually removed any carbon from the atmosphere but they still let
companies claim their High emissions products were carbon neutral so how the [ __ ] did they get away
with this the organizations like Vera creating carbon credits are non-profits but they still
need to make money to keep their operations going and further their mission these organizations do
not take donations they make all of their money from the various fees projects have to pay to
register carbon credit they have an incentive to allow as many to be created as possible
according to propublica and the company's own filings Vera generated 40.5 million dollars in
Revenue in 2021 and had assets worth a total of 50.5 million dollars they also paid their CEO a
total compensation of three hundred and seventy thousand dollars when you hear carbon removal you
probably think of projects like this one big machines that literally suck carbon dioxide
out of the atmosphere that's what they would like you to think but most carbon credits had
nothing to do with machines like this and were instead created in rainforests the cheapest and
therefore most popular way to produce voluntary carbon credits was to buy tracks of land in the
Amazon for preservation the trees not logged were accepted by Vera as carbon that won't be released
into the atmosphere so they qualified for carbon credits preventing deforestation is a great cause
but the Cambridge report revealed that most of the land set aside for preservation was never going to
be locked anyway because it was too remote and difficult to get to which is why it was cheap to
begin with because this Lane was useless for any company it was very cheap so it became the most
popular way to generate carbon credits following this report Vera CEO that had run the carbon
credit certifier for 15 years resigned in a press statement the non-profit said his sudden departure
was made for unrelated reasons the bombshell report has attracted the attention of regulators
which are now cracking down on the carbon neutral branding investors and customers trusted these
certifications and changed their investing and purchasing habits around them believing they would
do some good this put less pressure on businesses to pursue real solutions that actually would have
a positive impact on net emissions hey and I'm a fan of carbon offsets in the sense that they can
help mitigate climate change they absolutely can but you know if we're not going to do it correctly
in a way that actually does help mitigate climate change then it's nothing but a distraction the
trading firms that we're holding on to these carbon credits with the long-term Vision that they
would become more valuable in the future have had to write them off as completely worthless because
companies are no longer interested in buying them in an interview with Bloomberg the head
of carbon trading at trafigura the largest carbon credit Trader in the world said that the complete
loss in value in some corners of the voluntary carbon credit Market is unlike anything she's
witnessed now that Vera and gold standard have put new restrictions in place to Define what
counts as an offset a new registry opened in the Middle East to hand out offset certifications to
companies that don't care and just want to put carbon neutral stickers on the stuff they sell
the fourth reason that this Market is collapsing is because companies have realized there are more
effective ways to Lobby against regulation and they have learned from the masters of the trade
two brothers that have used their money and influence over politics to shape laws in their
favor and build the largest private company in America go and watch my video on the Koch
brothers over on how history Works to find out how a business that got its start in the Soviet
Union has kept regulations like carbon limits out of America for half a century if you want to watch
these videos a day early and get articles that will never be made into videos on YouTube then go
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