Why we should pay a premium for well-implemented social safeguards and benefits

This article is written by Mikkel Larsen, Executive Director of the CIX Board.

Social Safeguards. Most of us probably have a general understanding of the term, but not many realise the complexity and substantial cost of implementing high-integrity social safeguards in Natural Climate Solutions (NCS) projects. This is perhaps why we are not willing to pay a premium for them.

In this article, I shed some light on this complexity, in hopes that buyers will in future be willing to pay a premium for projects that truly go the extra mile in delivering well-implemented social safeguards.

Executive Summary

• There is no universally agreed framework or definition of what constitutes high-integrity social safeguards. The World Bank Environmental and Social Standards (ESS) offer a good principle-based framework for defining what high-integrity social safeguards should look like. However, as with other frameworks, it can only go so far in terms of practical implementation. Only true experience on the ground can assure a well-implemented set of safeguards.
• Implementing high-integrity social safeguards is complex, time-consuming and therefore naturally expensive. Community benefit sharing (monetary or non-monetary) can take up 50% of net profit or 30% revenue in some cases, depending on the local realities. Even without considering benefit sharing, the cost of Free, Prior and Informed Consent (FPIC), grievance mechanisms and education, among others, can be substantial.
• A critical but often overlooked issue is the need to train conservation officers (rangers) who are responsible for ensuring safeguards on the ground. Under investing in continuous practical training while relying solely on textbook learning leads to poor outcomes.
• Improper implementation of social safeguards has consistently been seen as a major cause of failed NCS carbon projects. While establishing baselines and estimating additionality are challenging, they are typically a one-off exercise. In contrast, maintaining the safeguards is an ongoing effort that requires hard, continuous work on the ground throughout the project’s lifetime. There are no technological shortcuts for this.
• Mistakes are inevitable during the implementation and operation of a project, much like it’s hard to imagine a corporation existing for 30-40 years without any governance issues. When evaluating a developer and implementation partner, the focus should be on their ability and willingness to take decisive action when a breach of the safeguard occurs and to communicate this transparently. If corrective actions are taken and the issues are not repeated, the project’s reputation (and hence its value) should be allowed to recover. A University of Sussex study found that governance scandals do impact stock prices in the short term, but not necessarily long-term share prices – what matters are the actions taken. Sadly, the same sentiment is not afforded to NCS projects, but it should.
• The flipside of social safeguards are social (co)benefits, which are prevalent in REDD+ projects. The most tangible examples include community profit sharing and the enhancement of local infrastructure such as schools and healthcare facilities. While safeguards aim to ensure that impacted communities are not left worse off, co-benefits focus on enhancing their quality of life – these two aspects are intrinsically linked.
• It is not always clear whether projects that consistently go above and beyond to implement good social safeguards are renumerated with a substantial premium. This ambiguity partly stems from the complexity of the matter and difficulty in determining ex-ante if the safeguards are of high integrity. I would speculate that it may also be due to the fact that proper safeguards are taken for granted. It’s a bit like asking yourself whether you are truly willing to pay a premium for products with good worker safety records – you may only start to care when the media highlights instances of poor safety. There is evidence suggesting that projects with social benefits are awarded some premium, which is perhaps odd given the close link between safeguards and co-benefits.
• The next time you buy credits from a project, do take the time to ask questions about its implementation of social safeguards. And be prepared to pay a premium for projects that not only do more than what is minimally required, but go the extra mile to deliver robust social safeguards.

What does high-integrity social safeguards look like?

There is no universally agreed framework or definition of what constitutes high-integrity social safeguards. One succinct definition is offered by the Food and Agriculture Organisation of the United Nations (FAO) and simply states: “Social safeguard policies are essential tools to prevent and mitigate undue harm to people during the development process.”

To understand what high-integrity social safeguards in carbon markets look like, a natural starting point would be the Core Carbon Principles (CCPs) by the Integrity Council for the Voluntary Carbon Market (ICVCM). The United Nations Framework Convention on Climate Change (UNFCCC) is another source.

The Natural Climate Solutions Alliance (NCSA) has published a “A Buyer’s Guide to Natural Climate Solutions Carbon Credits”, in which it outlines helpful questions to consider when buying carbon credits from NCS projects. It is a good, practical place to start when procuring your next credits.

At Climate Impact X (CIX), we believe World Bank Environmental and Social Standards (ESS) offer a good principle-based framework for defining what high-integrity social safeguards should look like. It is considered by many as best practice given it has been tested and adjusted over decades. However, as with other frameworks, it can only go so far in terms of practical implementation. Only true experience on the ground can assure a well-implemented set of safeguards.

Some (but far from all) of the considerations when distinguishing a project that is good from one that is truly of high integrity include:

1. Providing the impacted community with firm legal rights to both monetary and non-monetary benefits that corresponds to the income lost from halting deforestation. The selection of these benefits should be at the discretion of the impacted communities. As Elija Ayrey starkly puts it: “In some cases, community co-benefits are used as an excuse to avoid paying people for their natural resources. Co-benefits that improve the quality of life of the community are really great. However, they must be commensurate with the carbon value being extracted from the community. All too often “building six schools” represents a tiny fraction of the carbon value removed from the community.” Conversely, it is also necessary to offer some premium to investors for supplying the financing.
2. Conducting a Free, Prior and Informed Consent (FPIC) process that supports Indigenous Peoples and Local Communities (IPLCs) with the right to appoint their own credible and independent technical or legal advisors to guide the FPIC process, as well as facilitating the appointment of these advisors.
3. Implementing a robust Feedback and Grievance mechanism monitored by an independent third-party. A mediator trusted by the community should be appointed to handle disputes. It is critical to ensure that the Grievance Redress Mechanism is adequately staffed with people who possess the right skills and authority. Failing to address grievances properly and decisively can significantly dilute the outcome of a project. The resources and governance for this eventuality much be clearly established ex-ante not designed ex-post.
4. Recognising and respecting the pre-existing statutory, customary and use rights of IPLCs in relation to lands, territories and resources in the project area. This includes women’s right, as well as the rights of other marginalised or vulnerable groups if relevant (e.g. distinct minority racial groups). In fact, neglecting affected communities outside the project area has led to the discrediting of some projects. The project should include a capacity development needs assessment for self-governance. Projects that address equity issues across a broader range of groups stand a higher chance of success and are more likely to have a significant impact.
5. Conducting a landscape-level Climate Vulnerability Assessment beyond the project area as part of the project/programme feasibility assessment. The project should consult all relevant groups on an ongoing basis regarding the spatially explicit land use plan developed and make adjustments as needed. This ensure that the project/programme includes activities aimed at reducing inequities for all identified groups.
6. Supporting activities to enable recognition of IPLC cultural heritage and traditional knowledge. This includes developing a Cultural Heritage Management Plan (CHMP) if applicable.

The complexity and cost of implementing high-integrity social safeguards

Designing an adequate and fair community benefit sharing scheme is often complex. Firstly, the developer must ascertain what a reasonable incentive is to halt activities that lead to deforestation and to whom it is given. In practical terms, projects need to compensate for the opportunity cost faced by these communities. Should benefits be offered only to those living on the land, or should they also extend to those who live in proximity to the project? Secondly, the nature of the benefits needs to be considered. Does the community want “cash” or other benefits in kind? The total amount of benefits must of course also be of a size that is economically feasible for investors. Finally, a critical but often overlooked aspect is contingency planning for scenarios where carbon credit prices credits drop to a level where the benefits become insufficient in the eyes of the recipient communities. Does the project developer have a reserve fund to ensure continued disbursement? 

Community benefit sharing can take up 50% of net profit or 30% revenue in some cases, depending on the realities on the ground. For example, determining the required and “fair” benefits hinges on factors such as whether the community owns land; whether they receive other benefits (e.g. timber revenues, cost savings from reduced fuel usage, etc.); and whether benefits are delivered in cash or in kind, etc. Ultimately, prioritising transparency and ensuring local communities have agency in how funds are allocated is more important than determining the “fairness” by specific percentages.

I have come to learn that conducting an FPIC exercise is a bit like meditation. Reading about it makes it sounds easy, but doing it is hard and at times frustrating. At its core, it is about building a relationship of trust with communities impact by the NCS project. They are being asked to change their way of living (e.g. use wood from the forest) for the promise of income that will perhaps only come two years later. The multiple challenges include:

• Determining who is actually impacted and getting them to come together to decide – there may be a local chief representing a community or tribe, but you may also have to deal with multiple tribes being impacted.
• Understanding who really makes the decision in practice – who legitimately represents the community and can speak on behalf of them and on what matters?
• Defining what to do with those who dissent to a decision – does a majority get to decide?
• Overcoming language and educational barriers – explaining CO2 and carbon credits is complex to anybody, and even more so for communities that may lack literacy or have had limited exposure to education about how trees absorb CO2.

A critical but often overlooked issue is the need to train conservation officers (rangers) who are responsible for ensuring safeguards on the ground. Under investing in continuous practical training while relying solely on textbook learning leads to poor outcomes. This is challenging work not least because of cultural barriers.

The imperative of focusing on remediation

Mistakes are inevitable during the implementation and operation of a project, much like it’s hard to imagine a corporation existing for 30-40 years without any governance issues. When evaluating a developer and implementation partner, the focus should be on their ability and willingness to take decisive action when a breach of the safeguard occurs and to communicate this transparently. If corrective actions are taken and the issues are not repeated, the project’s reputation (and hence its value) should be allowed to recover.

This is no different from how most investors, buyers and other stakeholders would hold corporates to account. If a corporate has found a weakness in its governance, we would expect them to communicate transparently how they are dealing with it and look prevent it from reoccurring.

A University of Sussex study found that governance scandals do impact stock prices in the short term, but not necessarily long-term share prices – what matters are the actions taken. Looking at the carbon markets and especially that for REDD+, that same sentiment does not seem to be granted to project developers even when actions are taken. Prices of credits have remained deflated for extended periods and have also been seen to have spillover effects on other REDD+ projects. We do not see that same pattern in equity markets.

Social Co-benefits

The definition of social safeguards is focused on avoiding undue social harm. The flipside of social safeguards are social (co)benefits, which are prevalent in REDD+ projects. The most tangible examples include community profit sharing and the enhancement of local infrastructure such as schools and healthcare facilities. Proximate co-benefits therefore include improved rural infrastructure. Long-term co-benefits include greater adaptive capacity of local communities.  Studies including one by Chattre et all suggests that greater tenure security and effective participation of local communities in management will not only prevent adverse social outcomes, but will also enable better forest outcomes and improved capacity for forest governance.

Do NCS projects with well implemented social safeguards receive a premium?

There is no clear evidence that projects that consistently go above and beyond to implement good social safeguards are renumerated with a substantial premium. This ambiguity partly stems from the complexity of the matter and difficulty in determining ex-ante if the safeguards are of high integrity. I would speculate that it may also be due to the fact that proper safeguards are taken for granted. It’s a bit like asking yourself whether you are truly willing to pay a premium for products with good worker safety records – you may only start to care when the media highlights instances of poor safety.

Conversely, there is evidence suggesting that projects with social benefits are awarded a premium. An Ecosystem Marketplace study concludes that “Credits that certified additional robust environmental and social co-benefits “beyond carbon” had a significant price premium. Credits from projects with at least one co-benefit certification had a 78 percent price premium in 2022, compared to projects without any co-benefit certification”. This distinction may seem odd and artificial given the close link between safeguards and co-benefits.

Final thoughts

The next time you buy credits from a project, do take the time to ask questions about its implementation of social safeguards. And be prepared to pay a premium for projects that not only do more than what is minimally required, but go the extra mile to deliver robust social safeguards.