For years, the websites of dozens of multinationals featured a blue emperor penguin − the logo of Swiss climate consultancy South Pole, one of the world’s biggest providers of voluntary carbon offsets. South Pole has been a so-called unicorn since 2022: an unlisted company with an estimated value of more than 1 billion dollars. Companies used the blue logo to publicise that they were ‘climate neutral’ through South Pole. 

The Dutch payment service provider Adyen also featured the penguin logo on its website, just like listed companies Gucci and Volkswagen. Adyen has been offsetting all its carbon emissions through South Pole since 2019, even retroactively since its founding in 2006: ‘All of our material emission sources are covered, ranging from the transactions carried out on our platforms to the flights we take as Ayden employees and the energy our data centres use,’ was stated on Adyen’s website.

Under the banner of South Pole, Adyen supported wind farms in India, a solar farm in the Chilean desert and Zimbabwean forests. It wrote: ‘This is only the first step. Much like the meaning of our name in Suriname: we are starting anew.’

But at the beginning of this year, the emperor penguin disappeared from Adyen’s website. The company says it terminated its partnership with South Pole earlier this year and no longer calls itself ‘climate neutral’. Its website now says that the company has ‘embarked on a climate journey’. 

The timing is remarkable. In January, Follow the Money revealed problems with South Pole’s flagship project: the Kariba forest protection project in Zimbabwe. Confidential information from South Pole showed that the project’s climate impact had been grossly overestimated. Because of this, 27 million tonnes of CO2 – equivalent to seven times Amsterdam’s annual emissions – were emitted into the atmosphere without any offsetting.

South Pole also pocketed tens of millions of euros raised by the Kariba project without sharing these proceeds with the Zimbabwean people as promised. In addition, the Swiss environmental financier transferred the money intended for forest protection and Zimbabwean communities to a partner based in tax haven Guernsey. South Pole subsequently could not prove that the money ended up where it was supposed to go.

‘We found that carbon offsets may run the risk of inadequately compensating for our emissions or may be inaccurate in their claims’

When Follow the Money approached Adyen, the company was candid about the issue. ‘We saw other projects that work better, but they were not available through South Pole,’ a spokesperson explained. The company is now investing in innovative techniques to remove CO2 directly from the air rather than preventing emissions elsewhere. 

Whereas previously Adyen relied on South Pole’s advice, the company has now learned more about sustainability itself, it writes in its latest annual report. ‘We found that carbon offsets may run the risk of inadequately compensating for our emissions or may be inaccurate in their claims’. Therefore, offsetting emissions 1-to-1 is ‘not adequate' enough in terms of taking responsibility for its own climate impact, according to the payment company.

Climate offsets on shaky ground

Besides Adyen, hundreds of other companies depend on South Pole’s Kariba project to meet their climate targets, including many European listed companies required by financial regulators to be transparent towards investors about their performances. 

Of the 50 biggest purchasers of Kariba offsets, 19 are listed on the stock exchange, including car manufacturer Volkswagen, fashion chain Gucci, online travel agency Booking.com, coffee producer Nespresso, lighting manufacturer Signify, cosmetics company L’Oréal, chemicals company Bayer and electronics manufacturer Bosch. None of them disclosed the problems at South Pole to investors via their website or social media.

Fashion company Gucci, which has claimed to be climate neutral since 2018, had bought over 16 million euros worth of Kariba credits from South Pole – more than half (62 per cent) of all carbon credits ever purchased by Gucci, according to financial services provider Bloomberg. 

Now that South Pole’s projected impact of the Kariba project has turned out to be largely fictitious, Gucci’s climate-neutral claim is called into question. The company did not respond to Follow the Money’s questions on the matter.

Booking.com and Nespresso, which combined bought nearly 3 million euros worth of carbon credits from South Pole, removed the penguin logo from their websites, just like Adyen. When asked if (and how) Nespresso and Booking.com shared the news about South Pole with customers and investors, Follow the Money received no answer. Booking.com says it terminated its partnership with the climate consultancy firm late last year but did not provide any reasons.

Consultancy firm McKinsey – by its own admission, climate neutral since 2018 – and Volkswagen, Europe’s largest car manufacturer, also relied heavily on South Pole for their climate impact in recent years. 62 per cent of the carbon credits purchased by Volkswagen came from forest protection projects in developing countries, of which the Kariba project was one of the most important. And 14 per cent of McKinsey’s climate neutrality is based on now essentially worthless carbon credits from South Pole. 

Neither company disclosed anything about the problems with the project. ‘I will check with colleagues on whether we want to start communicating proactively about this,’ a Volkswagen spokesperson replied when asked whether the setback should not have been shared with customers and investors. 

Greenchoice and Volkswagen say they are exploring their legal options

McKinsey, like Gucci, did not respond to Follow the Money’s questions, including whether they are considering legal action. Adyen doesn't comment on that question. Bosch also terminated the partnership late last year but offered no reason. L’Oreal, Nando’s and Bayer are not responding to questions about South Pole. 

Greenchoice and Volkswagen say they are exploring their legal options. Not surprising, according to Elbert de Jong, Professor of Private Law at Utrecht University. ‘It is important to check whether South Pole complies with the agreements made. If not, it could face damage claims from its clients.’

Depending on the contents of those contracts, various legal scenarios are possible, De Jong speculates. ‘It could be “non-performance”: agreed obligations are then not met. If information has indeed been withheld, it could constitute a breach of contract, and in theory, it might even be fraud.’

In the general terms and conditions on its website, the climate consultancy firm certainly covers itself thoroughly against possible claims. It states: ‘If any information changes, South Pole will not be responsible for offsetting previous transactions.’

‘A clear exoneration clause,’ says De Jong.

That said, one could possibly argue that this is a case of ‘tort’ outside the contract. ‘For example, if it can be demonstrated that South Pole took insufficient measures, such as informing its clients,’ De Jong explains. In this case, damage claims could also apply, which could mean large amounts for clients such as Volkswagen, Gucci and Greenchoice, as they paid tens of millions of euros.

There are no rules requiring companies to report carbon market setbacks. ’The law does not mandate anything on the practice of voluntary carbon credit purchases,’ says Nancy Kamp-Roelands, Endowed Professor of Non-Financial Information at the University of Groningen. ‘As a result, the current reporting rules allow too much leeway, which increases the risk of greenwashing and fraud.’

Listed companies are legally required to be transparent about ‘material information’ in their financial reporting. In the Netherlands, the financial market authority AFM regulates the reporting of these companies, and omitting material financial information is punishable by law. 

Since 2017, there are also annual reporting requirements for ‘material non-financial information’: has the company become involved in a scandal? And what is the company’s impact on the surrounding natural environment?

In practice, this means that over 10,000 European companies and larger enterprises (with more than 500 employees) like Gucci and Volkswagen publish an annual ‘sustainability report’, reporting on their strategy, risk management and environmental, social and governance performance, ESG in short.

As they do with financial information, national supervisory authorities also regulate this. ‘The current regulation (the NFRD) is quite vague,’ says Aneesh Raghunandan, Assistant Professor of Accounting at the London School of Economics. ‘Companies comply if they say something about their emissions, but they don’t need to say much about the used offsets.’ 

From the fiscal year 2024, new reporting rules will come into force: the Corporate Sustainability Reporting Directive. This will mean higher requirements on the sustainability reports of an estimated 50,000 large European companies. But even those forthcoming rules are at risk of remaining vague. Kamp-Roelands: ‘The legislation will be supplemented by standards, including one requiring insight into carbon credits in sustainability reports. It also requires insight into the reliability of carbon credits and whether they have been verified by recognised quality standards. But it is still unclear which standards will meet these criteria.’

‘Which authority will regulate this, and will they be able to force Gucci to change?’

‘In theory, Gucci should go and revise its estimates. In practice, this would require Gucci to feel it has to comply. It needs to have either legal, financial or reputational consequences’,  says Raghunandan of the London School of Economics. ‘What’s less clear is if the CSRD will describe which authority will regulate this and whether they will be able to force Gucci to change.’

Under the current rules, listed companies like Gucci will only have to start reporting climate neutrality setbacks at the beginning of 2024 at the earliest. RUG professor Kamp-Roelands also does not expect consequences for companies that fail to do so. ‘The voluntary carbon market is unregulated; there are no rules nor any regulatory bodies to identify improper trading.

‘Climate-neutral’ companies primarily rely on carbon offsets

In the carbon market, no one is responsible, even though a big part of global business avidly uses it to express their climate ambitions. Brussels-based NGO Carbon Market Watch warns that the lack of rules and regulating could derail the climate transition. 

In a recent report, the NGO reiterated its warning after assessing the climate plans of 24 of the world’s largest companies. 15 of the 24 companies scored low to very low, and three-quarters of these companies were found to be primarily reliant on carbon offsets, running the risk of under-reducing their own emissions.

‘By 2050, it is widely accepted that corporations will need to have reduced their emissions by 90-95 per cent compared with current levels,’ the authors wrote. ‘However, we calculated that, taken together, the net zero pledges of the 24 corporations amount to a measly 36 per cent by mid-century.’

An analysis by Bloomberg shows that carbon offsetting is one of the most popular climate strategies companies use – and will remain so for the time being. Bloomberg examined the climate plans of 130 big emitters that claim they will be carbon neutral by 2050. These companies only want to scale back their emissions by a quarter to become ‘climate neutral’: by 2050, compared to 2020 levels. They want to fully offset the remaining emissions with carbon credits.  

Financial regulators in a tight spot

Financial watchdogs in Europe are responsible for reviewing the reports of companies like Gucci. In the Netherlands, the issue is high on the AFM’s agenda. ‘If you as a company say that you will be net-zero by 2050, that’s great. But it has to actually materialise. A bank or insurer that enters into a business relationship with you must be able to trust that you will,’ AFM CEO Laura van Geest told Trouw newspaper in early April. 

The ambition to regulate is present, but a framework to test carbon offsetting is lacking. Van Geest: ‘There is no legislation for those markets, so we cannot regulate them either. The 2015 Paris Agreement states that governments will look into this. We would advocate for that passage to come into effect.’ 

Follow the Money asked the European financial regulator ESMA about its view on the voluntary carbon market. The ESMA acknowledges that there are currently no specific requirements for how companies must report their use of offsets. The European watchdog wants to make regulating these climate-related claims a clear priority for national financial authorities, such as the AFM in the Netherlands. For the time being, all the ESMA can do is to call on companies ‘to make a clear distinction between GHG emission reductions within their own value chain and external sources of GHG emission reductions such as carbon credits.’

‘We are also just a victim; we spent a lot of money on these credits, thinking this was the right thing to do’

While waiting for official legislation, the market has created its own rules. Market standards like Gold Standard and Verra are now setting the tone, which could sometimes lead to problems, as revealed earlier this year by journalism platform Source Material and The Guardian and Die Zeit newspapers. The press exposed that Verra systematically allowed the climate impact of carbon credits from forest projects to be overestimated.

‘Are we the culprits here?’ a Volkswagen spokesperson asked Follow the Money. ‘We bought credits certified by a third party, according to the highest market standards. We are also just a victim; we spent a lot of money on these credits, thinking this was the right thing to do.’ 

In the future, the ‘big four’ auditors (Deloitte, EY, KPMG, PwC) will play a bigger role in quality control, as they have been appointed by the European Union to audit companies’ sustainability reporting when the new rules take effect. 

In a recent report, the AFM tempers expectations: the supervisory authority is concerned about the expertise of audit firms, which will face a ‘boom in assurance services’ in the coming years.

Raghunandan also sees that problem occurring. ‘Auditors often don’t have the expertise. For example, they don’t have the technical knowledge to challenge an offset provider by saying, “no way your tree does what you say it does”.’

Professor Kamp-Roelands also doubts whether accountants will provide the necessary quality control on the use of carbon credits in sustainability reports. ‘They also have to perform checks using the standards, and those standards will always remain a debatable topic as long as they are not regulated. Moreover, although companies may be transparent, it could happen that auditors do not check the used carbon offsets sufficiently.’

Translated from Dutch by Delia Burggraaf.

An earlier version of this article stated that Adyen wasn't considering legal action against South Pole, but Adyen did not comment on that question. This has been adapted.