Cimate Change-Investment Grade-Standards-v-Private Special Interest Group "Standards".

EDITED COPYThis copy has been edited to remove commercially sensitive information

Probus Sigma would like to thank Professor Nouri Chtourou and his team at The University Business School of Nice-Sfax forreviewing the contents and findings of this Report and for kindly providing this forward.

Forward

Professor Nouri ChtourouProfessor des Universities, Economist, University de Sfax (Tunisia) University de Nice-Sophia Antipolis (France)

Social Capital as a Foundation for Building Sustainable "Shared Economic Prosperity"

As the last century fades, leaving behind it the legacy of the Industrial age, we now look forward to finding better, moresustainable socio-economic and environmentally benign solutions. Any economic prosperity must be shared and inclusive if itis to be sustainable. The answer, therefore, could be found in Social Capital, which develops vertical as well as horizontalassociations between representatives of the state, the corporate sector, financial Institutions and civil society to create andfacilitate growth by increasing trust in the social and political environment that shapes social structure. Experience has shownthat economic development is boosted when civil society creates forums through which they can identify and pursuecommon goals from which norms can be developed.

In order to achieve social and environmental goals it is necessary that economic prosperity must be shared:

By all society;

Between present and future generations;

Between rich and poor geographical areas;

It is a shared belief in environmental research and development that the current deficit hindering the economic progress ofmany countries and regions explains "the rise of the major risks" that we see today in the world. Internationally, these risksrelate mainly to finance, the environment and to terrorism, though other risks of instability are present at national level. Thishas largely contributed to the erosion of Social Capital in societies. According to the opinions of several prominent scientists,this has, in turn, undermined one of the pillars of any progressive economic dynamic: "Trust", which is an integral part ofSocial Capital.

The concept of Social Capital has its origins in the 1970s and in order to explain the success of its economic processes in non-economic terms reference is taken from the studies of Coleman (1990), Putnam (1993) and Fukuyama (1997). These authorshighlight that concepts such as trust, participation of civil society and social networks, all form the “Social Capital" of a givencollective activity.

James Coleman is recognized as a pioneer of studies on Social Capital. In his book about the foundations of social theory(1990), he compares Social Capital to the social relationships that exist and develop between individuals, i.e. authoritativerelationships and the relationships of trust and norms, which are tantamount to Social Capital. Like other forms of capital,Social Capital is productive. It allows for the achievement of goals that would otherwise be unattainable. However, unlikeother forms of capital, Social Capital inheres in relationships between people. It is situated neither in individuals nor inphysical aspects of production.

Putnam defines Social Capital as: "features of social organization such as networks, norms and social trust that facilitatecoordination and cooperation for mutual benefit" (Putnam, 1995, p. 67).

In line with Putnam, Fukuyama (1997) emphasizes the cultural dimension of economic life. This refers to the cultural factors,which create such differences in economic performance between countries. Western countries to nations in South-East Asia,Fukuyama distinguishes between two types of company, companies which are family-oriented and companies which are“based on trust”.

In societies based on trust (Japan and Germany), there are large companies that are not based around or reliant on family.As a result of this trust, working relationships are more efficient and satisfactory and the structure of the organization canadopt more innovative forms.

Furthermore, social trust is the main component of Social Capital. This is, according to Fukuyama, “an asset that arises fromthe prevalence of trust in a company or in several parts of it. It can be embodied in the family, the smallest and mostfundamental social group, as well as the largest in the nation, as in all other intermediary bodies." (Fukuyama, 1995)

Social Capital actually the rules, relationships and norms that shape the quality of a society's social interactions and theirquantity. It therefore generates "positive externalities" through the sharing of trust, norms and values.

It is precisely at this level that standards, accreditation procedures, impartiality, objectivity, transparency and mutualunderstandings – in short, the quality of governance – guarantees economic and political confidence. The lack of these pillarsof good governance and verification by an independent third party, which is often been found to be absent in some “pseudoprivate standards”, impacts on much more than just the value of the standard.

At the heart of economic activity, the market cannot function without coordination rules that the 1993 Nobel Prize Winner inEconomics, Douglas North, calls “Institutions”. The nature of these rules and the quality of their implementation control thelevel of transaction costs. Market efficiency depends on the skill level of these costs. The absence of rules or the absence ofeffective implementation and good governance of the rules, lead to the employment of “high cost, high risk” strategies. Inorder to collate information and take precautions against such risks incurred within the framework of their transactions,parties into adopting the behaviour of a "Free Rider". This will inevitably undermine confidence. Furthermore "…there is nota market without a minimum of trust" Albert Hirschman (1970). For this reason, Probus-Sigma calls for the restoration ofconfidence in the carbon market through the strength of its commitment to creating common international Carbon andEnvironmental, Social and Governance Standards endowed with all the means to ensure its integrity.

“Clearly, without introducing the required underlying standardisation, transparency and common methodologies to bothprivate Voluntary Carbon Standards and ESG, the combining of the two will continue to result in a toxic interrelationship,exactly mirroring the Sub-Prime model”.

Chris Yates-Smith

This concept is of the utmost importance because the carbon market offers a multitude of challenges, issues and societalrewards. Indeed, the carbon chain can provide a precious opportunity to deliver shared economic prosperity, which caneasily be supported by several elements as listed below:

i. Common standards and high quality Validation & Verification to place pressure on governments and companiesencouraging them to lower their emissions and thus ensure a better preservation of the environment and naturalresources and a significant reduction in natural disasters for future generations;

ii. International common standards will be a great motivation for innovation in green technologies as well as thefinancing of such projects through the sharing of risks for economic operators;

iii. Research strongly enforces the effectiveness of carbon finance in mobilising the fight against poverty and exclusionof the poorest populations of the planet;

iv. The carbon chain contains high-value nodes of activity and externalities thus placing considerable importance on theeffects of training and skills transfer, which ultimately boost sustainable economic growth.

v. Accreditation and Audit to a rigorous and trusted standard is crucial in this area because it is directly linked to amultitude of risks. Indeed, the carbon market and the issue of Validation & Verification (certification) are to befound in the very centre of the issue of risk management.

vi. An audit of certification processes underlying carbon finance reveals dubious financial assets can seep into theclassic financial market and infect it the risks of major financial crises increase, such as the on-going financial criseswhich began 2008;

vii. The current lax standards and auditing processes also contribute to the increasing risks of major natural disasters.Indeed, if we refer to the new paradigm of complexity ("Sustainable Hazard Mitigation"), which analyses thephenomenon of natural disasters as a multidimensional problem, we see that the "atmosphere" dimension is apowerful determinant explaining their occurrence. The following two graphs clearly show a strong correlationbetween the increase in carbon emissions and the occurrence of natural disasters:

That is why it is considered that the sanitation of the standards, linked to robust accreditation and certification audits thatdrive carbon investment as proposed in this Report, would directly contribute to building the Social Capital necessary for asustainable and shared economic prosperity.

Professor Nouri Chtourou

University of nice-Sfax 2012

GHG EVOLUTION

The Charts below illustrate the correlation between the rise in Global Carbon Emissions and incidence of Natural Disasters.

CATASTROPHIC NATURAL DISASTERS EVOLUTION

CONTENTS

INTRODUCTION

The Authors of this Report The Purpose of this Report

o Defining Standardso The Nature of Private Standards

Background Information on International Standards and Private Standardso A Brief Overview of the ISOo Private Standards in a Wider Contexto Trade, Public Policies and International Standardso The Advent of Private Standardso Voluntary versus Mandatoryo Defining Carbon Offseto The Problem of Additionality

The Key Features of this Report 15

A Breakdown and Description of the Report’s Sections and Structure.

SECTION ONE: 17

A Comparative Analysis of the leading Voluntary Carbon Standards

SECTION TWO: 26

An Overview of the Development of Probus-Sigma

SECTION THREE: 28

Analytical results of the (five year) VCS Temporary Accreditation Programme

SECTON FOUR: 29

An Overview of Environmental, Social, Governance, (ESG) in Investment

SECTION FIVE: 32

Analysis of the Cost Reduction Strategies related to the Project Development (PDD) Transactions

SECTION SIX: An Introduction to the Crucial Role of Due Diligence 33

SECTION SEVEN: Comparative Review of ISEAL Alliance’s Code of Practice with Voluntary Carbon Standards 47

CONCLUSION 51

BIBLIOGRAPHY 53

Doc Ref: Final ReportDate: 06/07/2012 7/55

© 2012 Probus Sigma Lda

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IMPORTANT CLARIFICATIONS

This document has been commissioned as a General Report for use as a guidance document, which may lead to a morethorough compliance based (ISO, WTO, etc.), analytical document detailing an exact specification of improvements, whichwill provide a platform from which to address the issues as detailed in Item 5 (Summation) within this document.

This document is not intended as an academic, technical or definitive commentary; further incisive research will be requiredto implement revision of key weaknesses and risk.

All research and analytics has been conducted by Probus Sigma however, for clarity, Probus Sigma has sourced descriptivedocuments from reliable sources, such as ISO, WTO, IAF, UN, Respected Academia and other Institutions which provideresearch and context to this Report. Attribution of these third party documents is detailed within the Bibliography section.

This document is not for public distribution and is protected under appropriate agreements from the commissioning party.

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Introduction

About the Authors of this Report

Probus Sigma (“Probus”) is a privately held independent specialist environmental investment research facility based inLisbon, Portugal. The company is owned by its staff and partners. Probus Partners represent senior seasoned specialistsdrawn from several specialist professional backgrounds including respected Academia.

Probus has no connections to any other entity, which may cause conflict of interest to its research work, clients orprospective clients.

Probus holds a unique position within the Global Climate Change and attendant Environmental Investment Community.Probus began developing technical correlations between environmental conservation, social equity and risk/financialperformance over fifteen years ago and is the most globally recognised and experienced company in this field.

Having originated, developed or played a significant role in all the major international environmental ISO based PrivateInternational Standards in use today, Probus also has clear long term Environmental Social and Governance, (ESG) credentialsand a deep knowledge of what constitutes and underpins ESG based investment metrics. No other company can claim asimilar heritage. Probus maintains a significant list of international ‘Blue Chip’ clients while its accreditation activitiescontinue to ‘audit the auditors’.

As long ago as 2002, while based in the City of London, the financial capital of the world, Probus combined leading City-basedfirms of accountants, lawyers and financial engineering specialists into research teams. These teams came to be known as‘The Virtuous Circle’. This amalgam of talent led to several technical breakthroughs related to establishing the real valuedrivers and risk within environmentally investment based upon Private Standards.

While Probus is very much a research and development facility well known to the world of environmental standard owners, itis less well known that Probus has pioneered the integration of investment grade methodologies into ISO based internationalenvironmental standards, especially those related to Carbon Trading and the Validation and Verification of Carbon Offsetprojects. Concomitantly, Probus has been responsible for providing training facilities and founding in addition to funding andincubating some well-known commercial initiatives related to CO² emissions reduction. Probus is the only qualified entity tocombine both quantitively based mainstream investment risk metrics with a deep, long term knowledge of the developmentand construction of ISO based private standards.

The partners and staff at Probus Sigma are strong believers that environmental conservation and social parity can beachieved harnessing the positive power of the international investment markets linked to, credible, robust investment grade,and third party verified standards. Probus has pioneered the concept and principles and development of investment grade,environmentally based private standards.

Members of the Probus team have been invited to provide specialist knowledge related to the EUregulation of carbon markets and legislation regarding the EU directives applicable to theembedding of environmental, social and governance (ESG) aspects into the Europeaninvestment markets, similarly, a Probus senior partner has contributed to the developmentof the UK Financial Stewardship Code. Another senior partner has served on internationalaccreditation panels for several ground breaking international private standardsranging from, the Global Organic Agricultural Standard, Halal Standard, GLOBALGAP, andmany others. Probus partners have served on global expert panels within the sustainabletimber industry, supervisory accreditation boards and specialist expert panels.

In 2005 Probus set up a private research group in Lisbon, an international hub of environmental accords and ISO Standardsdevelopment. The international ISO based environmental-social equity standards that Probus has contributed to nowfacilitate over $1 trillion in global trade. Currently, Probus has several important academic research programmes inoperation, including the integration of neural finance technologies into larger scale national and international environmentalinvestment project risk identification.



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The Purpose of this Report

The purpose of this Report is to review the claims, environmental effectiveness and investment risks of three leading (byproject volume) private carbon reduction standards, namely, the Verified Carbon Standard, The Gold Standard and Plan Vivo,plus the CCBA standard. This Report does not seek to advise as to what measures may be required to remedy anyweaknesses; neither does it make comment in regard to claims made versus actualities. Since the launch phase of thesestandards some +/- four - five years have elapsed, this time period has allowed for the necessary adjustments, qualityimprovements and empirical evidence to be gathered in order to fulfil the early (and current) claims made by privatestandard owners to evolve into reality (or not). As the Industry has matured allowing experience to be usefully implemented,many questions still remain to be answered especially in terms of credibility, transparency, regulation, beneficial ownershipand influence,, conflict of interest and financial probity.

This Report seeks to highlight areas of continuing concern related to the above issues, the Report also seeks to clarify exactlywhat these standards are and are not.

Defining Standards

A standard is "a document, established by consensus, which provides, for common and repeated use, rules, guidelines orcharacteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context"(ISO/IEC, 1996)”. Consensus, in that context, is defined as a "general agreement, characterised by the absence of sustainedopposition to substantial issues by any important part of the concerned interests and by a process that involves seeking totake into account the views of all parties concerned and to reconcile any conflicting arguments. The Standardization processrequires consensus between experts representing the designers of the object or of the process and the main stakeholders, inorder to guarantee to the users that the results achieved by the use of the product or by the implementation of the processare “optimum”. When reviewing this Report, it may become apparent that some of the standards reviewed do not conformto the above definition.

The Nature of Private Standards

It is essential for the reader to understand that all standards reviewed in this Report (unless specified as such) are actuallyindependent “private” standards; they do not have the benefit of rigorous ISO regulation or transparency requirements. Amajor problem is that often these private standards are opaque in terms of ownership and control thus bringing intoquestion, unwarranted influence, conflict of interest and transparency issues.

As with the sustainable timber industry, whereby certification is mainly controlled by two international umbrella standards,with one viewed as representing the interests of the BINGOs, (Big International Non-Governmental Organisations) and theother viewed as representing the interests of the larger corporates and Investment Industry. A similar situation exists withinthe Voluntary Carbon Markets, and in one case, mandatory (CDM) standards. This situation (as with sustainable timberstandards) then leads to the “owners and/or influencers” of these standards to be concerned more with brand reach ,marketdominance and return on investment than addressing Climate Change via, common credible ,transparent and rigorousprocesses.

It is essential for the reader to understand that ISO standards were never intended as investment benchmarks, they areguides to quality, trade reciprocity and facilitating global trade especially amongst emerging economies. While privatestandards often claim compliance or even parity with ISO Standards to gain credibility, this Report highlights the accuracy ofsome of these claims.



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Background Information Regarding International Standards and Private Standards

A Brief Overview of the ISO

ISO stands for and acts as the International Organization for Standardization. It has a membership of 161 national standardsbodies from industrialized, developing and in transition countries of all sizes in all regions of the world. ISO’s portfolios ofmore than 18100 standards provide business, government and society with practical tools for all three dimensions ofsustainable development: economic, environmental and societal.

ISO international standards make a positive contribution to the world we live in. They facilitate trade, spread knowledge,disseminate innovative advances in technology, and share good management and conformity assessment practices. ISOStandards provide solutions and achieve benefits for almost all sectors of activity, including agriculture, construction,mechanical engineering, manufacturing, distribution and the environment.

The Construction of the CDM Programme

The construction of private voluntary standards was based upon the long-term infrastructure development of the CleanDevelopment Mechanism (CDM). This process was led by the Executive Board (EB) of the CDM and Joint ImplementationProcess.

The decisions made during the years of EB meetings were tracked and recorded by Probus observers. These decisions wererecorded in a series of spread sheets and were to form the basis of the construction of VCS and all other voluntary standards.It is noticeable that the constructors of private (i.e. non CDM) voluntary standards when constructing their “CDM Light”versions removed a range of CDM requirements, which, while not in any way providing substantial accountability, increasedtransparency and rigour of process and did provide a modicum of assurance regarding these issues. Probus was to constructits own accreditation modules based upon the long-term research into the CDM requirements.

A sample EB Meeting record, its contents and decisions may be reviewed here (EB Meeting Record)

Private Standards in a Wider Context

Discussion and debate about “private standards” and their potential to act as actual or potential barriers to trade hasincreased in recent times, notably in the World Trade Organization (WTO) Technical Barriers to Trade (TBT) Committee and inthe WTO Sanitary and Phytosanitary (SPS) Committee. The issue is also specifically referred to in paragraph 26 of the WTOTBT Committee’s Fifth triennial review of the operation and implementation of the Agreement on Technical Barriers to Tradeadopted by WTO members on 13 November 2009. Please refer to the documents: WTO Legal & WTO Agreement.

But what is meant by “private standards?” and what is the role of standards in supporting public policy and technicalregulations that are designed to protect the environment? This Report outlines the important role that ISO’s internationalstandards play in fostering trade while supporting the implementation of public policy and allowing good regulatory practicethrough performance-based, as opposed to prescriptive, technical regulations.

The Report also makes the important distinction between standards that are developed using the core WTO TBT principles oftransparency, openness, impartiality and consensus, effectiveness and relevance, coherence, and addressing the concerns ofdeveloping countries – and standards that do not follow these principles. These principles are set out in the WTO TBTcommittee’s second triennial review and were reconfirmed by members of the WTO during the fifth triennial review. Theseprinciples are further complemented by compliance with the disciplines of Annex 3 of the WTO TBT agreement Code of GoodPractice for the preparation, adoption and application of standards (which ISO national standards bodies (NSBs) areencouraged to accept and comply with). Standards that are developed using processes which are open to worldwideparticipation and that use these principles are considered to be “international standards”. While other standards may bedeveloped that meet the needs of specific sectors or segments of the population, these standards may be perfectly valid andrelevant for their purpose, but they do not adhere to the above-described disciplines, nor do they share other attributes offormal international standards.



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Trade, Public Policies and International Standards

Public policies are established by governmental authorities and, in a number of cases, ISOstandards support or relate to such public policy initiatives. ISO, and its sister organization,the International Electrotechnical Commission (IEC), have agreed on four principles to guidethe development of such standards. The first principle is to provide market-driveninternational standards, based on objective, quantitive information and knowledge. Thesecond principle is to meet the needs and concerns of all relevant stakeholders, includingpublic authorities where appropriate, without seeking to establish, drive or motivate publicpolicy, regulations, or social and political agendas. The third principle is recognition that thedevelopment of regulation, public policy or the development and interpretation ofinternational treaties are the role of governments or treaty organizations. Finally, such ISOand IEC standards supporting public policy are best developed within proven structures,operational approaches and participation models detailed in ISO/IEC’s existing directives anddevelopment procedures.

Technical regulations set out legally binding technical requirements often with the aim of protecting public health and safety,and the environment. They may set out the requirements in generic terms (e.g. essential requirements), or in explicit terms,and they may incorporate, by reference or verbatim, the contents of a voluntary standard for all, or some, of the details,thereby making compliance to the voluntary standard a part of, or a presumption of, compliance with a regulation.1

Standards may be necessary to achieve legitimate public policy objectives, but ISO warns against their misuse. Importantly,where regulation is necessary, the WTO TBT Agreement requires the use of relevant “international standards”, or parts of

them, as the basis for technical regulations whenever appropriate. The WTO TBT Committee hasagreed on principles and procedures that should be observed when such internationalstandards are elaborated upon. In these principles for international standards, no distinction ismade between standards developed by international governmental organizations, internationalnon-governmental organizations or other private organizations.

In the context of discussions in the SPS Committee, standards promulgated by non-governmental organizations, be they international standards from organizations such as ISO andIEC or social and environmental standards from NGOs or industry/retailer standards, arereferred to as “private standards”. The lack of distinction between these different “privatestandards” has also contributed to extensive discussion and a certain amount of confusion invarious fora.

The Advent of “Private Standards”

Although so-called “private standards” may be viewed to encompass any standard developed by an entity outside ofgovernment, the characterization may be misleading. In many fora, the term “private” is often perceived as “lesser”, “self-serving” or “not in the interest of the public”.

There is a vast range of non-governmental standards and there are significant differences in the bodies and organizationsthat develop these standards related to such aspects as governance, development approach, stakeholder engagement, etc.In this context, a distinction is made between “formal” international standardizing organizations and other “private”standards setters.

Additional ISO prerequisite programme standards are being developed to complement the main management systemstandard and to address inconsistencies that can be detrimental to producers (large and small), manufacturers andultimately, the consumer. For example, the International Social and Environmental Accreditation and Labelling Alliance(ISEAL), is a global association for social and environmental standards systems. Together, ISEAL and its members seek to“contribute to a world where ecological sustainability and social justice are the normal conditions of business”.



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In a number of cases, private standards initiatives in the social and environmental field could be reconciled and, in somecases, merged to avoid confusion, fragmentation of the marketplace and potential dilution of their intended effects. Theformal international standardization system is a platform that can potentially complement, or help to harmonize variousprivate standards, and help provide coherent global solutions. This could lead to a greater level of marketplace andregulatory acceptance and, ultimately, to the intended social and environmental impact.

ISO provides international standards addressing such subjects as environmental management (ISO 14001/4); environmentallabelling (ISO 14020/21/24/25), lifecycle assessment (ISO14040/44); greenhouse gas measurement, verification andvalidation (ISO 14064 / 65).

Any organization may claim to have developed a “standard” and, even further, may subsequently establish acertification/marking/labelling scheme that demonstrates conformance to such a “standard”. However, not all standardsare created equal. WTO disciplines for use of standards as the basis for regulatory measures demand that “internationalstandards” be developed by designated organizations in the case of the SPS Agreement or according principles forinternational standards development – in the case of the TBT Agreement. Formal international standards, such as those fromISO and IEC, follow such principles and are conventionally not considered “private standards”. It is therefore urged that adistinction be made between international standards which use principles for international standards set out in the WTOagreements and disciplines established through acceptance of the Code of Good Practice, from other standards that maybe described as private standards, not having adhered to these WTO principles and disciplines.

The existence of a growing multitude of private standards in such fields as social and environmental issues may ultimatelyconfuse users and consumers, thereby diminishing their important market, safety, social or environmental effect. Inaddition, claims of conformity, using potentially inconsistent methodologies for their assessment, may also undermine theintended impacts of such private standards.

In the end, coherence, harmonization and a closer level of cooperation between the developers of private standards and theformal international standards system needs to occur. Sessions organized by the WTO have addressed the issue of privatestandards and have recognized the need to promote dialogue and strengthen linkages between private standards schemesand formal international standard-setting organizations. Ultimately, the goal of “one international standard, one test and onecertificate” should be pursued.

Voluntary versus Mandatory

The voluntary carbon offset market differs from a cap and trade program, such as the Kyoto Protocol to the United NationsFramework Convention on Climate Change (UNFCCC). Kyoto is a legally binding agreement for nations who choose toparticipate. Under Kyoto’s cap and trade program, nations have “caps” or limits on the amount of emissions they canproduce. Most nations target heavy polluting industries to reduce their emissions by placing a cap on their emissions thatthey cannot exceed, if the entity exceeds the amount, it must buy credits from another, who has excess allowances orpossibly from a Carbon Offset project under the Joint Implementation (JI) or Clean Development Mechanism (CDM).However, under the Kyoto Protocol, and unlike the voluntary Carbon Offset market, this behaviour is legally enforceable anduses a trading program.

The voluntary Carbon Offset market differs in that it is just that, voluntary. No one is obliged to participate; it is another wayto reduce greenhouse gas emissions that otherwise would not have been reduced under a cap and trade program.



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The Problem of Additionality

The concept of additionality seems simple enough, but isone of the biggest factors that can affect the integrity of aproject. It begs the question, “would the activity haveoccurred, holding all else constant, if the activity were notimplemented as an offset project?” In other words wouldthe entity seeking offset money to fund a project, havegone ahead and completed the project anyway, even if theycould not have obtained the funding through selling CarbonOffsets? If so, it is argued that these projects are notadditional and should be excluded from the Offset market.

How can it ever be truly determined if a project would nothave occurred? This simple question becomes morecomplicated when applied to actual projects and theirsources of funding. With such a difficult question to answer,it is difficult to begin to develop or edit a process forevaluating an Offset project for additionality.

Depending on the entity, additionality is addressed inseveral different manners. Two main but expansivemethods of testing for additionality, as well as the entireOffset process, have risen to the top, the project specificapproach and the standardized or benchmarked approach.

The Project Specific Approach

The project specific approach is an analysis that focuses onthe investment test, i.e. whether a project is dependent onoffset revenue. It also takes into account whether theproject has overcome significant implementationroadblocks, known as the barrier test. Finally, the projectspecific approach looks to the technology beingimplemented and how common it is, otherwise known asthe common practice test.

The project specific approach is used by the KyotoProtocol’s CDM and is considered a bottom up approach.The CDM offers a voluntary methodological tool fordemonstration and assessment of additionality, whichemploys four steps similar to the tests discussed above,into consideration.

Those four steps include: identification of alternatives tothe project activity; investment analysis; barriers analysis;and common practice analysis.

Each step includes detailed questions to ask and factors toconsider.

Defining Carbon Offset

The term “Carbon Offset” has been the definition of manydescriptions relating to climate change and carbon. ThisReport will define carbon offset as a “measurablereduction, removal or avoidance of greenhouse gasemissions purchased from a source that is used tocompensate for emissions from sources that may not besubject to a cap and trade program.”

With regard to the focus of this Report, it mainly directs itsattention towards the Voluntary Carbon Market. Hundredsof companies are selling Carbon Offsets to individuals, theSME market and other entities to counterbalance theircarbon footprint from manufacturing processes, flying,driving, home, holding an event, or just for daily activitiesthat produce carbon.

While the motivation for most individuals is to “Go Green”,many entities are currently purchasing Carbon Offsets fromthe voluntary sector in hopes that if mandated in future,they can use their already purchased offsets. These entitiesmay go to numerous websites and buy the equivalentoffset of how much carbon they expended. "

Currently, a person will pay a market rate per ton of carbonto offset their usage. The money reportedly, then goes toprojects in an area of their choice, usually found in threemain realms, renewable energy, reforestation, or energyefficiency.

The entities selling carbon offsets are not regulated,although some voluntarily comply and agree to follow therules set out by the Clean Development Mechanism andJoint Implementation’s gold standard or to auditing by athird party. However, there are many Carbon Offsetproviders that do not comply with any regulatory body.This does not mean that they are fraudulent but ratherconsumers may be unaware that they are buying from abody, which is non-compliant. This in turn presents ascenario where consumers do not have the extraregulatory protection needed to ensure that their money isactually going to a carbon-reducing project.



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The first step, which involves identifying alternatives to project activity, is probably the least self-explanatory. At this stage,consideration of the project’s compliance with mandatory regulations and laws is important. While some exceptions may bemade for unenforced regulations or laws, projects must be in compliance with the jurisdiction’s laws and regulations even ifthey are contrary to objectives that lead to greenhouse gas reductions.

The second step analyses whether the project is the most economically or financially attractive practice or if it is noteconomically or financially feasible. Determining the best analysis is important here. As different projects vary, so does theway they should be analysed. The CDM suggests using one of three options for an economic and financial evaluation:

1. A simple analysis that considers the cost and the costs of alternatives;

2. An investment comparison analysis, identifying the financial indicator, such as IRR, NPV, cost benefit ratio, or unit cost ofservice;

3. Benchmark analysis.

As part of the third step, the CDM uses a barriers analysis to find out whether the proposed project faces barriers, which willprevent a proposed project from being implemented and to find out if these barriers do not prevent the proposed project’salternatives implementation. Within this analysis, it is important to identify barriers, and then show that those identifiedbarriers would prevent the proposed project from occurring but not the alternatives. If this analysis does not assuage theidentified barriers that prevent the proposed project’s creation, then it is not additional.

Finally, if the proposed project survives the three steps described above, a common practice analysis is completed, unless theproject is the first of its kind. This includes looking at comparable projects and taking into consideration any other optionsthat are occurring with the same goal.

The Benchmarked or Standardized Approach

The benchmarked approach is quickly becoming the preferred rather than the alternative to the project based approach. Itfocuses less on the project and more on the amount of emissions itreduces by its activity. Usually the benchmarked approach is a top-downanalysis and creates a benchmark for emissions across a certain area.Those that outperform the benchmark are considered additional. Abenchmarked approach minimizes the focus that is placed on projects andthe individual analysis needed for each one. However, it heavily increasesthe work required on the front end and places a significant burden onensuring that the measurement of emissions is accurate. While reducingthe amount of work required, the benchmarked approach needs muchwork and third party accredited accuracy of its measurements to ensurethat it was assessing additionality correctly.



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The Key Features of this Report

SECTION ONE: A Comparative Analysis of the leading Voluntary Carbon Standards

Context:

A comparative analysis of the leading Voluntary Carbon Standards in terms of their ability to consistently deliver upon theclaims made by these standards.

This section compiles a general review of the standards found in the Voluntary Carbon Market, including a comparisonbetween the ISO baseline standard requirements (ISO14065:2007) and those similar Private Voluntary Standards, which areconsidered as “leading standards”. The focus of this section is led by an in-depth review of the background of andrequirements of the current VCS Programme and is followed with comparative reviews of Plan Vivo, Gold Standard and CCBAand a final summary of two key observations, which arose through these comparative reviews.

Whereas the brief, as written, called for comparative analysis limited to four standards considered as the “leading Voluntary”standards which are listed below, for reasons of clarity and to ensure the widest contribution to this Report, other significantstandards were also reviewed.

A) VCSB) Plan VivoC) The Gold StandardD) CCBA

SECTION TWO: An Overview of the Development of the Probus-Sigma Temporary VCS Accreditation Module

This section provides an overview of the five-year development of VCS accreditation module, detailing and analysing arepresentative sample of 14 Applicants. Together these Applicants hold a significant global market share in terms of thevariety and type of projects Validated & Verified, the value of Carbon Credits issued and their positioning in relevant sectors,these sectors being:

A) Global Accountancy based Designated Operational Entities (DOE)B) Global Inspection Agency based DOEC) Global NGO Sector DOED) Small & Medium DOE Sector

SECTION THREE: Analytical results of the (five year) VCS Temporary Accreditation Programme

This section of the Report aims to provide an overview of the five-year application of the VCS Accreditation module detailingand providing analysis of a representative sample of 14 Applicants as described in Section Two.

SECTON FOUR: An Overview of Environmental, Social, Governance (ESG) in Investment

This section of the Report aims to provide a brief overview of the concept of Environmental, Social & Governance as anadditional component within project Validation & Verification and the concerns that this raises in terms of risk andenvironmental and social counter productivity. Drawing on recently conducted academic and empirical research, thissummary also highlights many of the problems, which result from ESG being an unregulated investment tool and in this wayis linked intrinsically to the issues raised in this Report concerning voluntary carbon standards.



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SECTION FIVE: Analysis of the Cost Reduction Strategies related to the Project Development (PDD) Transactions

Reducing overall project costs is wholly dependent upon establishing a common approach to this problem especially whereMicro, Small and Medium Projects are concerned. This section should be subject to a more substantial and incisive studydocument but for purposes of this Report, this section outlines the problem and provides some ideas for solutions.

SECTION SIX: An Introduction to the Crucial Role of Due Diligence

Due Diligence is a key component of any investment, this section contains a summation of key issues and improvements thatshould be made to all GHG standards with the aim of;

a) Providing additional transparency to all standardsb) Improving the identification of conflicts of interest and special interestsc) Providing lower costs to communities even for small and medium sized projectsd) Substantially improving Due Diligence with the aim of removing substandard/high risk entities at sourcee) To encourage significantly increased volume of potential investors, (especially for small & medium projects) via

improved returns and risk identificationf) To facilitate focus upon community development and improved environmental benefits via improved and more

transparent project requirements.

SECTION SEVEN: Comparative Review of ISEAL Alliance’s Code of Practice with Voluntary Carbon Standards

This section provides an introduction to the history, work and mission of the International, Social, EnvironmentalAccreditation and Labelling Alliance (ISEAL Alliance). It also provides an analysis of their Code of Practice for Setting Socialand Environmental Standards in the context of comparing if and how this Code of Practice could be applied to voluntarycarbon standards, and the advantages of this with a view to addressing many of the concerns already raised in this Report.



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SECTION ONE A Comparative Analysis of the leading Voluntary Carbon Standards

COMPARISON OF ISO 14065 AND THE LEADING PRIVATE VOLUNTARYSTANDARDS CONFORMANCE TO THIS STANDARD

As part of the ISO 14000 series of environmental standards, theInternational Organization for Standardization has drawn up a group ofstandards specifically governing verification of widely used self-declaredenvironmental claims and declarations. ISO 14065 specifies accreditationrequirements for organisations that validate or verify resulting GHGemission assertions or claims. (Private & ISO based standards)

Strict adherence to the requirements of ISO 14065 (compliance) provides assurance to both consumers and investors thatValidation & Verification of Projects is a substantial audit process resulting in reduced financial risk and environmental andsocial protection leading to the production of legitimate, high quality Verified, Carbon Credits.

For the non-expert in ISO Standards, the accreditation process provides the applicant with a License to act, it providesauthorization to issue documentation that in turn underpins the issuance of Carbon Credits. Accreditation procedures are theStandards equivalent of holding a Financial Services Authority (or any EU Financial Regulatory body) license to issue highvalue Financial Instruments.

Since the Voluntary Carbon Markets are entirely un-regulated and contain no oversight, it substantially increases the needfor benchmark standard compliance, (ISO 14065 etc.) however as is described in background information on Internationaland Private standards, referred to within this document, (view here) and as will be observed within the comparativestandards analysis of Private Standards to the benchmark ISO 14065 Standard, document, there is substantial non-conformance. It can be reasonably stated that the gap between conformance and non conformance represents serious riskboth to environmental performance and very substantially to investment risk.

IMPORTANT

While Probus Sigma Lda considers that the information and opinions given in this work are sound, all parties must rely upontheir own skill and judgment when making use of it. Probus Sigma Lda does not make any representation or warranty,expressed or implied, as to the accuracy or completeness of the information contained in this document and assumes noresponsibility for the accuracy or completeness of such information. Probus Sigma Lda will not assume any liability to anyonefor any loss or damage arising out of the provision of this document.

ANNEXURES TO MAIN DOCUMENTS

A substantial portion of any origination of new ISO based standards project budget is dedicated to constructing the complexseries of technical documentation required. GAP Analysis, programme requirements, legal compliance, accreditationprocedures and intensive competitive analysis.

These illustrative documents do not include the required regulated fund construction documents.

The following is a sample (taken from over 300 core documents) of the type of documentation which has to be absolutelyaccurate in order to support financial compliance, environmental ISO based standards compliance and ESG complianceenabling a fund to receive inward investment.

These documents are early versions, all of which has since been substantially updated. Constant update of data is crucial toensure latest comparison and competitor analysis.



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Context:

A comparative analysis of the leading Voluntary Carbon Standards in terms of their ability to consistently deliver upon theclaims made by these standards.

This section compiles a general review of the standards found in the Voluntary Carbon Market, including a comparisonbetween the ISO baseline standard requirements (ISO14065:2007) and those similar Private Voluntary Standards, which areconsidered as “leading standards”. The focus of this section is led by an in-depth review of the background of andrequirements of the current VCS Programme and is followed with comparative reviews of Plan Vivo, Gold Standard and CCBAand a final summary of two key observations, which arose through these comparative reviews.

Whereas the brief, as written, called for comparative analysis limited to four standards considered as the “leading Voluntary”standards which are listed below, for reasons of clarity and to ensure the widest contribution to this Report, other significantstandards were also reviewed.

E) VCSF) Plan VivoG) The Gold StandardH) CCBA

GHG Standards Processes Overview Validators & Verifier’s AccreditationProcess Verification of Projects Process

This section of the Report aims to give an overview about specific processes within the main GHG standards currentlyavailable in the voluntary carbon market.

The review and analysis made was based on the available documentation and information disclosed publicly on each of thestandard’s websites and takes into account two processes:

1) Accreditation of validators/verifiers where referenced (there is little available information on these), and2) Verification of projects. Verification in this context refers to assessment of compliance checks the GHG projects

are submitted to under each standard.

Though it is not a GHG programme, but a national accreditation body, ANSI was also included within this research since thisentity plays an important and pivotal role in the accreditation processes of a leading standard, the Voluntary CarbonStandard (VCS), which accounts for over 50% of the entire voluntary GHG market.

The following linked document aims to give an overview regarding specific processes within the main GHG Standardscurrently available in the carbon market.

The review made was based in the information disclosed publicly in each standard website and takes into account twoprocesses:

1) Accreditation of validators/verifiers where referenced (there is little available information on these), and2) Verification1 of projects

and the research parameters were:

Standards Used (Proprietary/ISO standards)

Required documentation

1 Verification in this context refers to assessment of compliance checks the GHG projects are submitted to under eachstandard.



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Fee structure (where provided)

Use of independent validators/verifiers

Overall application process

Period of applicability

The Entity/GHG Standards researched for item 1) above were:

American National Standards Institute (ANSI), ANSI’s Pilot Program “Accreditation program for the

Greenhouse Gas validation/verification bodies”2

United Nations Framework Convention on Climate Change, Clean Development Mechanism (UNFCCC CDM)

Gold Standard

California Climate Action Registry

Chicago Climate Exchange

The Climate, Community & Biodiversity Alliance

Climate Neutral Network

Green-e Product Standard

Plan Vivo System

Greenhouse Friendly Programme

Social Carbon

VER +

Carbon Trust Standard

The Verified Carbon Offset Standard

The GHG Standards’ researched for item 2) above were :Gold Standard

California Climate Action Registry

Chicago Climate Exchange

The Climate, Community & Biodiversity Standards

Climate Neutral Network

Green-e Product Standard

Plan Vivo System

Greenhouse Friendly Programme

Social Carbon

TUV Sud - VER +

Carbon Trust Standard

The Verified Carbon Offset Standard

The information each website provided was not clear as to the requirements for the interested parties wishing to becomeaccredited under the GHG Programme standard. There was little/no information on the fees that would be required and therequirements to start the application process sparse.

2 Though it is not a GHG Programme, but a National Accreditation Body, ANSI was also included within this research since allthe current applicants under the VCS Temporary Accreditation Provision are engaged in the ANSI’s Pilot Program“Accreditation program for the Greenhouse Gas validation / verification bodies”.



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Accreditation of Validators & Verifiers

These tables and charts refer to the Accreditation requirements related to Applicants requesting to be accredited under theVerified Carbon Standard Programme.

This document includes two tables, “Table 1 - Accreditation of Verifiers/Validators” (provides an overview of theaccreditation requirements for validators and verifiers under each standard/entity) and “Table 2 - Verification of Projects”(provides an overview of the general requirements and process to the verification1 of projects under each standard).

Table 2 is hyperlinked with the flowcharts within “Appendix 1”; these flowcharts illustrate the general applicable process toverification1 of projects under each standard. The top of the page of each flowchart is hyperlinked to return to Table 2.

Please view the GHG Standards Processes Overview Validators & Verifier’s Accreditation Process Verification of ProjectsProcess.

1) Voluntary Carbon Standard

All research work was undertaken and completed during Q2 of 2012 and therefore was carried out using contemporaryinformation, which was available up to the end of Q1 2012. Although the majority of the accreditation assessments wereperformed against earlier versions of the VCS, the current version applies to Applicants currently undergoing Accreditation.

The VCS Standard (“VCS”) addresses three separate areas of the Validation/Verification process without fully satisfying anyone of these. The three areas in question are project requirements, monitoring requirements and validation/verificationrequirements. Since the accreditation process is mainly based around Validation and Verification it was decided that thisreview should focus on this section of the standard.

A Brief History of the VCS

The VCS Temporary Accreditation module was initially developed in 2007 by the Voluntary Carbon Standard Association(“VCSA”) with a view to providing temporary accreditation for companies that could prove they had already applied foraccreditation to ISO 14065:2007 through the UNFCC or Clean Development Mechanism (“CDM”). As such it was meant toprovide one year’s accreditation thereby allowing the companies to continue the process of GHG Validation/Verificationwhilst the ISO 14065:2007 Standard accreditation was progressing. When The Voluntary Carbon Standard changed it’s nameand became the Verified Carbon Standard companies that had previously been provided temporary accreditations under theprevious scheme name were then automatically awarded permanent accreditation with no extra effort.

Review of the Verified Carbon Standard (VCS)

The Verified Carbon Standard,( VCS) is owned by the Verified Carbon standard Association, registered to the same address inGeneva as the International Emissions Trading Association, (IETA), they were in fact developed in tandem and had commondirection. It may be questionable that an “independent standard” should also direct (by proxy) a market making body oftraders of Credits derived from that standard, this activity could be deemed as a conflict of interest.

Over the period of study (2008 – 2012) VCSA have published five versions of this standard, meaning that five new updates tothe standard were produced during the five years Probus has been involved in its assessment, averaging one per year. Thestandard has ten pages of claims and assurance before the technical documentation begins, one might call this excessive.There have been at least three major revision versions (hence the fact that they are now using Version 3) and whilst a reviewof the document history does not mention when these major revisions occurred or what the changes were, it does documentthat the effective date for Version 3.0 was 8th March 2011. Since then there have been two further revisions, Version 3.1 on15th July 2011 and the current Version 3.2, which has been in place since 1st February 2012.



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On reviewing the current VCS it states in Section 1.1 that “…readers should ensure that they are using the most currentversion of the document…” Language in the standards world is very specific; the word “shall” means that the reader mustcomply with the requirement, the word “should” is less restrictive, meaning that the reader may comply with therequirement but it is not compulsory. For this reason, this wording of the standard seems to be telling the reader that theymay comply with the written requirement to use the current version but there is no written compulsion to so do. Oneconsequence of this is that it means Verification and Validation bodies (V/VBs) of the standard will undertake their work andaccreditation assessments based on different versions of the standard, therefore creating differing quality standards and alack of consistency.

Problems caused by Updated Versions

Of greater concern is this absence of an absolute requirement for accredited entities to be re-assessed and re-accredited inline with updated standard versions (an absolute requirement for ISO 14001:2004 the environmental management standard,which is a governing document for the 14000 series including ISO 14065:2007). A number of large scale DesignatedOperational Entities (DOEs) who are currently responsible for the majority of the global Carbon Offset projects, wereaccredited in line with the earliest or previous versions of VCS.

Potentially additional risk/quality problems will be caused by a lack of re-assessment. If a DOE was accredited in 2008 and hasnot been subject to any additional processes of re-assessment or review, it is probable that personnel changes within thatthe DOE will mean that the management system that was originally assessed five years ago is no longer in place. It is a worthydebate whether this then calls their current accreditation status into question. As time progresses, more changes within aDOE are likely to occur and in the same vein it is expected that further revisions and updated versions of the VCS will bepublished. Without a requirement for regular oversight and re-assessments the potential issues raised here will persist andmultiply.

Submission of Original Documents

Section 2.2.1 of the standard states that the VCS operating language is English and that all documentation is required in thislanguage. It is known that this requirement has resulted in some non-English speaking applicants investing considerableamounts of time and money in translating their documents into English for submission. This therefore means that thedocuments submitted for review are not originals. The submission of original documents is a “Major Must” requirement, sothe failure to do so automatically results in non-accreditation, even if all other requirements are satisfied.

Areas of Contradiction

A review of Clause 2.3 (“Timing of Crediting”) reveals two sub clauses, 2.3.1 and 2.3.2,which appear to be in conflict with each other. Clause 2.3.1 states that Carbon Credits(referred to in the standard as “VCUs”) “shall not be issued … for GHG emission reductionsor removals that have not been verified…” Based on this one assumes this means thatVCUs cannot be issued as futures. However, clause 2.3.2 explains that future VCUs can beissued under defined exceptions. This brings into question the ability to provide aninsurance “wrap” as required by established market future trading methodologies, it is not possible to provide insurancewraps without defining the underlying risk to enable an insurance company to establish risk and premium.

Section 5.2.2 of the VCS states that “validation … may occur at the same time as the first verification…” However, in Section5.1.1 of the standard the term Validation is described as “… the independent assessment of the project … determines whetherthe project complies with the VCS rules …” and Verification is defined as “periodic ex-post independent assessment … of theGHG emission reductions and removal s that have occurred as a result of the project during the monitoring period …” Fromthis, it is interpreted that Validation should occur at the commencement of a project and Verification would begin at a



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designated point after the project’s onset. It would seem that both functions should not occur simultaneously, which iscontrary to what is stated in Section 5.2.2.

Liability and Insurance

According to Section 5.2.4 of the VCS the V/VB “shall be liable for any over-issuance of VCUs in accordance with the provisionsin the agreement signed with the VCSA”. Under Section 2.2, at clause 2.3.2(3) there is a requirement that the Applicant hasliability insurance either for up to $4m or a minimum level of five times the market value of the forecasted VCUs (which couldbe significantly in excess of $4 Million) depending on which is the lesser amount. This raises the following question; if theV/VB is to be liable for all over-issued VCUs why should the standard limit the insurance liability to a minimum amount andnot the actual estimated amount? Also, since one cannot know the future value of VCUs then any insured amount is notsufficient (unless the futures issued have Insurance wraps) and could present the V/VB with and buyers a serious financialrisk.

Validation/Verification Competence

The validation/verification bodies are accredited to a given version of the standard. This means that once successful, theaccredited body is able to validate/verify a GHG reduction via a certification process. However, a large portion of the body ofthe actual standard, as written, is not given over to these accreditation requirements, but rather discusses projectrequirements and methodology requirements which have not formed part of the assessment process.

Within the VCS standard the only mention of ensuring Validation/Verification team competence can be found in section 5.3.5wherein it states that the validating/verifying body or team “… shall meet the competence requirements set out in ISO14065:2007, there are no specified requirements, which indicates that the Applicant can change the requirements to suit hispurpose.

With reference to 5.4.2 of the ISO standard, accredited bodies shall not validate and verify the same project (“unless allowedby the GHG programme”) there is no such requirement in the VCS, where section 5.2.2 states that both “validation andverification of the project may be undertaken by the same validation/verification body…” This is a source for a serious and on-going conflict of interest, (according to ISO, this practice is expressly precluded) so that each specific function must be carriedout by a separate body.

2) Plan Vivo

The Plan Vivo Foundation is an independent, registered charity that is primarily funded through a levy imposed on theissuance of so-called Plan Vivo Certificates (PV Certificates) and project reseller registration fees. This means that Plan Vivo’sfunding is directly related to the number of certificates it issues.

Originally developed in the mid-1990s by a group, which was led by the Edinburgh Centre for Carbon Management (ECCM),its activities were wholly transferred to the Plan Vivo Foundation as it stands now in 2008. The current standard wasdeveloped in late 2008 and issued with an effective date of 6th October 2008. It has not been updated or revised since thisdate.

The Plan Vivo standard is an independent standard aimed at promoting sustainable rural livelihoods in developing countriesthrough the supply of VER’s for community-based land-use projects. This is achieved by working with small-scale producersto deliver long-term carbon sequestration and/or Greenhouse Gas emission reduction benefits in land-use projects thatinvolve any of the following:

Afforestation and reforestation projects Projects to avoid deforestation Agroforestry projects Forest restoration projects



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The Plan Vivo Foundation is specific that no other sectoral scopes are involved.

Plan Vivo projects must promote sustainable land-use practices, designed for use by rural communities in developingcountries. For all Plan Vivo projects the Plan Vivo Foundation will undertake the initial validation and registration, whilst allon-going verification activities will be achieved through third party verifiers that have been accredited by an internationalcertification authority such as CDM. Third-party verifiers are to be chosen by the project’s named producer. Producers aresmall-scale farmers, forest dwellers and land-users, who are listed as key participants in the project. Though producers areresponsible for choosing the third-party verifier, this selection must be approved by the Project Coordinator (i.e. Plan VivoFoundation). In this way, Plan Vivo predominantly serves a role of overseeing a project and the involved parties, rather thanproactive regulatory function.

The key participants in the project are the producers (e.g. small-scale farmers, forest dwellers and land-users) and the ProjectCoordinator (typically a community-based NGO) that is responsible for overall management of the project.

A producer is typically expected to use the Plan Vivo standard from the very outset of a project; however it is possible for aproject that is already running to register to the Plan Vivo standard at a later date. However, the Plan Vivo standard does notallow for retrospective crediting for the time when projects were already running.

Once a project has been registered and approved, carbon credits may be sold based upon calculated volumes determined byexpected sequestration/reduction activities. So it would therefore appear that future credits may be traded. All credits aretraded as PV Certificates (1 Plan Vivo certificate = 1 tonne CO2) and are sold on behalf of the producer by the ProjectCoordinator with the imposed levy as discussed above. Although the standard states that the credits are traded on behalf ofthe producers, payments to the producer are made in instalments “over many years…” so the producers may not actually seetheir fees for some time after the credits have been sold and it is thought that in this time they themselves would haveincurred additional fees to cover establishment costs.

3) Gold Standard

The Gold Standard is not an independent standard. It was developed through ECOFYS, TUV-SUD and the Federation forInternational Environment Law and Development (FIELD), and lists a number of corporate entities as co-developers (e.g. BNPParibas) as well as a number of NGOs (e.g. WWF), all of whom it is assumed have a financial interest in the fees generatedthrough applications and the credits therein produced.

Rather than being a management standard, this standard is more a generalised document for entities wishing to know theGold Standard’s rules on Carbon Credit generation. It does not provide information on how to develop or implement amanagement system, which allows for best practice Validation/Verification or development of GHG reduction projects.

The standard limits its sectoral scopes to:

Renewable Energy Supply End-use Energy Efficient Improvement

However, should non-eligible scopes form part of the overall project then the project may still be accepted but only creditsassociated with the eligible scopes may be claimed. This allows Gold Standard a revenue from projects its limited scopeswould otherwise not allow and means that the same project may be certified under two separate schemes - the energyscopes certified by Gold Standard and any other scopes certified by a second scheme - so there is the possibility of doubleaccounting the credits.

The standard allows the inclusion of projects developed through Clean Design Mechanism (CDM), Joint Implementation (JI)and Voluntary (VER) markets; whilst projects may be large, small or micro scale they should be developed from “bottom up”via an integrated approach to its design.



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The Gold Standard Certification Scheme is a subjective scheme. In the body of the standard it states in the section“Fundamental Principles of the Gold Standard Certification Scheme” that the scheme “…assumes a world of imperfectinformation and unforeseen consequences…” and that it may therefore be impossible to accumulate a portfolio of completeinformation. Furthermore it states that it relies upon conservative choices that are traceable and well documented. It alsorequires projects to demonstrate that there were sincere attempts and best efforts to apply the Gold Standard Toolkit in fullwith a view to ensuring a transparent and pragmatic delivery, but no precise documentary guidelines on how this is to bepresented.

The standard appears to provide a route for project proponents to attain UNFCC registration without meeting theirrespective requirements. According to one section of the standard (iii.h) should a project be rejected by UNFCC then theymay apply for Gold Standard registration under the VER stream and may then seek to upgrade to CDM or JI so seeminglyallowing an UNFCC registration via the backdoor. The requirements for such an upgrade are that the project proponenteither apply before any VERs have been issued, or when they have been issued, the project proponent must enter into anagreement that they commit to surrender to the Foundation (“…for immediate retirement”) any CER/ERUs claimed that areequivalent to the VERs already issued. There is no subsequent requirement stating that the project proponent uses theUNFCC methodologies or meet the UNFCC requirements to allow the upgrade.

There have been three versions of this standard (since 2003) but there is no requirement that Accredited Entities re-registerto the most current version, in fact the opposite appears to be true. Section IV states that though projects may upgrade tothe latest version if they wish to do so, there is no absolute requirement that projects must upgrade to the current version.Moreover the standard states that all projects that were applied for under Gold Standard Version 1 (which expired on 1 st

August 2008) and all projects that were applied for under Gold Standard Version 2 (which expired on 1st August 2009) remainapplicable.

The standard’s flexibility goes considerably further as it also allows for retrospective registration to the previous versions, forexample, where a project has uploaded the “Local Stakeholder Report” on 1stAugust 2008 then they are deemed to haverequested Gold Standard Applicant status under Version 1, which is effectively an expired standard.

Special Note:

In a worrying departure from accepted good practice and in direct contravention of ISO 14065,and ISEAL requirements,WWF related parties founded a for profit company called ASI, Accreditation Services International, based in Bonn,Germany, housed at its FSC Sustainable Timber Standard offices in Bonn Germany. From that date, all accreditation forPrivate Standards which are either directly or substantially influenced by WWF would not be carried out by a neutral ,transparent unrelated third party, (a national accreditation body under ISO 14065) but by WWF influenced and relatedparties. This is (as far as can be established) the first time that an owner (or related interested party) of major InternationalPrivate Environmental Standards would be accrediting its own standards, Therefore for the first time we have a situationwhereby a standard owner is auditing it’s own standard and setting their own rules, for that audit, a very dangerous situationwhere massive investment scan hinge upon Validation and Verification, carried out by an “accredited” firm.



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4) CCBA

The Climate, Community and Biodiversity Alliance (CCBA) is a global partnership of leading companies (e.g. Intel, BP and GFA)and NGOs (e.g. Rainforest Alliance, Nature Conservancy, Conservational International and Wildlife Conservation Society). TheCCBA was created in 2003 for the promotion of projects designed to protect the forests in the following key ways:

Forest protection Forest restoration Agroforestry

The remit of the CCBA does not extend to include any other sectoral scopes. All projects using the CCBA standard mustinvolve well-designed land-based activities that are focused on achieving and encouraging a robust reduction in GreenhouseGas emissions and positive benefits to the local community and its biodiversity.

The CCBA standard is a standard that outlines the requirements that a producer must satisfy in terms of designing,developing and implementing a project that will help improve the local climate, community and/or biodiversity in developingareas.

The standard aims to perform two principal roles:

Project Design Standard: This is the Validation stage, which provides rules and guidance aimed at encouraging aneffective and integrated project design.

Multiple Benefit Standard: This is the Verification stage and is the standard that is to be applied throughout the lifeof the project. It is to be combined with a carbon accounting standard such as CDM or VCS.

CCBA requires that Validation and Verification activities are performed by independent, accredited auditors and Verificationmust be performed at least every 5 years. This is considerably different to other standards, for example, VCS stipulates yearlyVerification.

Important Observations

As a result of this exercise it became apparent that there are two important aspects of voluntary Carbon standards, whichrequire further in-depth study.

1) As is discussed above, some voluntary standard owners gain their revenues from a levy made upon every Creditregistered; therefore maximizing volumes of credits issued is an important factor to the standard owner. Thispractice could potentially prevent standard owners form applying rigour and appropriate due diligence to theirstandard in order to maximize revenues.

2) All voluntary Standards allow the DOEs to commit to working with Project Developers on a “no win, no fee”basis. This allows DOEs to make no charge for Validating and Verifying Projects however; the DOE receives aportion of the credits issued. This business model is taken from the notorious USA originating practice ofpermitting Lawyers, (mainly in civil actions) to work solely upon a share of the proceeds of a successful claim. Inthe case of Validating and Verifying Carbon Projects under the VCS, given that this Programme permits the sameDOE to Validate and Verify Projects, there is likelihood of substantial conflict of interest; is it likely that a DOEwill reject a Project in Verification if that DOE has a substantial amount of money dependent upon the outcomeof the Validation?



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SECTION TWO Overview of the Probus Sigma Development of the VCS Accreditation Module

This section provides an overview of the five-year development of the Temporary VCS accreditation module, detailing andanalysing a representative sample of 14 Applicants. Together these Applicants hold a significant global market share in termsof the variety and type of projects Validated & Verified, the value of Carbon Credits issued and their positioning in relevantsectors, these sectors being:

E) Global Accountancy based Designated Operational Entities (DOE)F) Global Inspection Agency based DOEG) Global NGO Sector DOEH) Small & Medium DOE Sector

NOTE: Probus Sigma was retained to research, develop and write the VCS, General Agreement on Principles (“GAP”) Analysisand Temporary Accreditation Module, this was to be a temporary form of accreditation which would allow applicants to gainexperience in the range of necessary skills which would lead them to eventual accreditation under national accreditationschemes, the most significant being the American National Standards Institute, (ANSI).

This process was to be a desk based procedure, Probus was mindful thattraditional ISO Approved Accreditation methodologies were (and are) entirelybased upon conformance with a set of ISO based standards, however in thiscase the VCS is a private ISO derived Standard or “Private Standard”, thereforelikely to be less rigorous in nature. (Please see the IAF Quality ManuelContents Page). It was decided that in view of the fact that temporaryaccreditation would enable DOEs to Validate/Verify a substantial number ofhigh value projects, especially those that had already been through PDD andawaited Validation & Verification, and being aware of the potential risks,Probus developed the following:

Onsite Inspection

Desk-based assessments do not have benefit of onsite inspection and therefore rely entirely upon documentation providedand careful analysis of these documents. It is normal procedure during the accreditation process for an assessor to visit theapplicant onsite, however, had onsite inspection been inaugurated, the work volume and availability of trained inspectionstaff would have precluded the launch of VCS and denied project proponents and communities cash flow for at least a year.

Best Practice

A published requirement for all ISO Standards is that not only are they fit for purpose and include a substantial number ofother requirements but all ISO Standards must also comply with statutory and regulatory frameworks in each country whichadopt these standards. Whereas private standards are not required to adhere to ISO overarching directives, in view of therisk and early stage of the GHG Industry it was considered prudent to follow UK & EU Financial Regulatory guidelines.

Probus has proven experience of financial markets and (UK & European) Financial Services Authority guidelines, which detail“Best Practice Guidelines” for unregulated entities dealing with regulated entities. This is precisely the scenario, which Probuswere tasked with managing and developing, i.e. the unregulated activities of the voluntary carbon standards (which were thefirst kind of non-ISO private standards to be implemented as investment benchmarks). There were a number of issues relatedto this that Probus needed to address:

a) Contingent liability factors which could affect Probus in case of claim

b) Best practice compliance, i.e. a documented evidence of process



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Departure from Previous Processes

At the time, incisive research of voluntary private standard accreditation processes demonstrated that none of these processdeviated from the standard ISO based accreditation therefore none of these accreditation processes took into considerationthe financial risk aspects specific to non ISO private standards. This is still the case.

Consequently Probus introduced a different approach into the VCS Temporary Accreditation process marking a significantdeparture from the previously adopted IAF standard procedure. This deviation precluded the assessor speaking directly withthe applicant, a mainstay of established assessment practice since the beginning of accreditation procedures. To overcomethis issue Probus inserted a trained Coordinator who would be responsible for handling communications between theAssessor and Applicant, thus it was possible that all communications between Coordinator and Assessor were recorded andstored creating a full record of communication, which adhered to the FSA and EU Financial Regulatory Guidelines BestPractice Guidelines. Had Probus not created this filter of compliance and implemented the customary unrecorded “chat”between Applicant and Assessor, there could be no reliable record of the accreditation process.

During the process of receiving applications for Temporary Accreditation and subsequently carrying out these assessments,Applicants were somewhat displeased that they could not “chat” with the Assessor and that all communications were to bepaper based and recordable. This resulted in complaints from Applicants and also from the Assessors, but Probus wasinsistent upon this record keeping for all the reasons stated above.

Changes in the Global Markets and Increased Corporate Due Diligence

2007 saw the collapse of many of the world’s financial markets, which was retrospectively to demonstrate a severe lack offinancial oversight and regulation within the voluntary carbon industry. By 2008 and 2009 reports of fraudulent CarbonCredits and the involvement of organised crime within the Carbon Markets were published worldwide. Probus moved to re-evaluate accreditation assessment requirements, processes, internal record keeping and compliance procedures.

Conversely the global voluntary carbon standards markets did not react in the same way. Despite increased rhetoric of rigourand transparency across the industry, standards’ requirements were not rewritten to demand increased diligence orattentiveness to potential conflicts of interest, transparency issues and increased financial integrity regarding those whowere to be empowered to Validate & Verify large-scale projects in countries of minimal financial regulations.

Also in 2007, on the 15th of December 2007 the UK and EU published strict guidelines in regard to Anti-Money Laundering(AML) Regulations. Clearly facilitating the issuance of substantially valuable financial instruments (i.e. Carbon Credits) viaOffset Projects based in some of the world’s least regulated countries was and remains of concern. This increased regulationposed and continues to pose severe investor risk implications, a scenario that is exacerbated due to the entirely unregulatednature of the voluntary carbon industry. Not only would Probus operations need to be compliant with the new AMLRegulations but Probus also took the view that significantly increased corporate due diligence procedures would need to beimplemented as part of any rigorous accreditation process. Despite repeated concerns being voiced by Probus, theaccreditation module in terms of corporate due diligence by client direction was not implemented. This is still the case for allvoluntary standards. (See Section Six for a further analysis of this.)



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SECTION THREE Analytical results of the (five year) VCS Temporary Accreditation Programme

The following link provides access to the statistical analysis of a sample 14 applicants (under the VCS AccreditationProgramme, sample applicant data was gathered over a period of five years. The results are obvious as are the conclusionswhich can be drawn from this analysis. The questions that arise from these results centre around the reliability of Validation& Verification audits performed without on-going sampling for quality or any other oversight. Please view the statisticalanalysis matrix here.

This section of the Report provides an overview of the results of the five-year study of the VCS Accreditation module detailingand providing analysis of a representative sample of 14 applicants as described in Section Two.

Results of Accreditation Applications

Over the five years that companies were applying for VCS accreditation, it transpired that Applicants paid little heed to therequirements of the standard although they were supplied with thechecklist well ahead of the time of their applications being submitted. Itwas Probus view that this checklist effectively served as a roadmap onhow to satisfy the standard requirements for accreditation. However itquickly became apparent that many Applicants were unable to fulfileven basic requirements and thus failed numerous attempts to becomeaccredited. however, many of these applicants were continuing toValidate & Verify GHG Projects..

There is no limit to the number of times an applicant can re-apply forassessment. Research conducted showed that Applicants often continued to re-apply over a period of 6 – 9 months withoutany real improvements to their submitted documentation.

The Introduction of Categories

Initially, the earlier assessments were based on an auditors understanding of the Applicants outlined system supported byvarious items of supporting documentation. A decision was based on the overall compliance of that assessment. This is akinto the numerous similar assessed standards in the market place. In early 2010, this assessment process was changed by VCSto a system of “Major Must”, “Minor Must” and “Recommended” categories. The designation of what constitutes each of thethree categories would appear to be arbitrary. Analysis of information about these changes, where available, suggests thatthere was little discussion or documented review of the Accreditation assessment methodology leading up to theintroduction of these categories. In fact, additional analysis suggests they appear to have been set incorrectly. For example,the determination of whether the applicant has sufficiently described its organisation is far more important than whether theapplicant has personnel capable of performing either Validation or Verification duties, or if they have demonstrableexperience of this in the past.

An Applicant can fail 100% of the “Recommended” clauses without failing the assessment; similarly the Applicant is allowedto fail 25% of the “Minor Must” clauses without failing the assessment. However, should the applicant fail a single “MajorMust” clause then the application automatically fails. The majority of the standard is composed of “Major Must” clauses.

There are two areas, which are expected to be an absolute requirement for accreditation, therefore falling under the “MajorMust” category. These requirement areas are, firstly the competency of staff to undertake Validation or Verification roles andsecondly evidence that the Applicant has successfully undertaken GHG projects. Surprisingly these are listed as“Recommended” and so it is possible for an Applicant to not satisfy these requirements and still proceed to be awardedaccreditation.

There is a need for streamlining the process where possible. The review has revealed a number of issues both with thewording of the standard and how the standard is assessed. Addressing these concerns would go some way to producing animproved, more applicable document for V/VB assessments of GHG reduction projects.



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SECTON FOUR Environmental, Social & Governance (ESG)

None of the Private Voluntary Standards contain any requirements in terms of the overall environmental, social andgovernance (ESG) aspects of a Project. There have. in recent time in an attempt to assuage investor concern ,been attemptsto introduce an extra module to address this issue but there remains a large gap in terms of delivering verifiable ESG benefitsto the communities hosting Projects.

This section of the Report aims to provide a brief overview into the concept of Environmental, Social & Governance as aninvestment tool and the concerns that this raises in terms of risk and potential environmental and social counter productivity.Drawing on recently conducted academic and empirical research, this summary also highlights many of the problems, whichresult from ESG being an unregulated investment tool and in this way is linked intrinsically to the issues raised in this Reportconcerning voluntary carbon standards.

A Background of ESG in Investment

All major banks and financial institutions are now requiring the presence of substantial ESG factors within their Carbon Offsetfinancing activities and risk evaluations. The general view of most sectors involved in the Carbon Offset industry has been towelcome an increased focus upon the Social and Environmental issues and increased attention to the overall Governancefactors; this may be viewed as a step in the right direction. That is until these aspects are examined in detail.

Banking institutions such as Société Générale, Credit Agricole , BNP Paribas, HSBC, Goldman Sachs and many others, promoteand indeed make a virtue of their inclusion of ESG as an important factor in all financing decisions. This serves to allay theconcerns of Civil Society Groups, Foundations and especially the global NGO sector. In fact, conversely, this inclusion of “ESG”factors can increase risk and serve to avoid tangible improvements in environmental conservation and the delivering ofpromised social upliftment to the communities involved, especially the poorest communities. Additionally, when privatestandards, implement subjectively based ESG Policies as “proof of intent”, as demanded by the funding entities, theseentities (private standards and subjectively based pseudo metric ESG policies) then merge to form a toxic interrelationship.

The specialist knowledge and analysis methodologies related to ESG metrics linked to the history of this subject requires aseparate detailed report to enable the non-specialist to fully understand the issues involved. Probus has previously publisheda detailed analysis of the SRI Ratings Industry,

Understanding ESG as an Investment Tool

The emergence of ESG as an investment tool needs to be clearly distinguished from the field of Socially ResponsibleInvestment (SRI) and other similar terminology.

The fundamental distinguishing feature between these two scenarios is motivation. Whereas SRI is essentially motivated byconscience driven ethical imperatives and aims to actively shape the market, (e.g. Greenwash), ESG integration is motivatedby economic imperatives and is a risk-analytics tool aimed at capturing the effects of environment, social and corporategovernance considerations on the risk-adjusted return of portfolios. In this regard, ESG integration is arguably a moretangible and effective method of addressing such issues given conventional investment practice, which relies heavily onquantitative measures and standardised benchmarks.

Clearly, any and all assertions made without the ability to verify those claims seriously questions the credibility of thatinformation. Sustainably based, verified and quantified ESG risk metrics based upon accepted financial market ratingprinciples take precedence over qualitative based data. As much as the CSR, SRI, Green and Eco practitioners claim that theseacronyms represent ESG, they provably, do not.



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Corporate Social Responsibility, (CSR)

Much of the environmental reporting data released by some of the world’s biggest companies is incomplete, inaccurate ordeliberately distorted, according to a review of more than 4,000 CSR reports carried out by researchers from Leeds Universityin the UK and Euromed Management School in France.

According to a report in the UK Guardian Newspaper, corporate CSR statements are marked by “irrelevant data,unsubstantiated claims, gaps in data and inaccurate figures”, with companies routinely ignoring data from individualcountries or failing to mention polluting subsidiaries.

“The quality of environmental data in sustainability reports remains appalling at times, even today,” said Dr Ralf Barkemeyer,a lecturer in CSR at Leeds and one of the team leaders. “In financial reporting to leave out an undisclosed part of thecompany in the calculation of profits would be a scandal. In sustainability reporting it is common practice.”

Among the inaccuracies cited by the University of Leeds researchers, is a company which stated that its carbon footprint wasfour times larger than that of the whole world, a power group that over-reported its sulphur emissions by a factor of 1,000for three years in a row by using kilo-tonnes instead of tonnes and a large Swedish group that was not aware that it owned apaper and pulp business until the researchers pointed it out that it was the subsidiary of an acquisition.

The above sets the basis for corporate ESG claims and also the basis for the pseudo ESG metrics implemented by banks andinvestment houses claiming “a strong commitment to these ESG practices”,

These same funding entities often refer to their membership of a range of “International Protocols, Principles and Codes ofPractice” aimed at assuring Civil Society that these entities act correctly in terms of Environmental, Social and Governancewithin their investment portfolios. There are 51 of these International Protocols, (please note; none of the listed Protocolsand Codes are a “standard”. These include:

General

The IFC Performance Standards

The IFC Environmental, Health and SafetyGuidelines

The IFC Environmental and Social ManagementProtocol for Private Equity Investments

The Equator Principles

The UN Global Compact

The UN Global Reporting Initiative

The UN Principles for Responsible Investment

The US Private Equity Council ResponsibleInvestment Guidelines

The EDFI Principles for Responsible Financing andGuidelines for Fund Managers

UK Financial Stewardship Code

The Environment

The Montreal Protocol

The UN Framework Convention on ClimateChange, the Kyoto Protocol & the CopenhagenAccord

The Stockholm Convention

The Rotterdam Convention

The Basel Convention

The Convention on International Trade inEndangered Species of Wild Flora and Fauna

Social Considerations

The ILO Fundamental Conventions

ISO 26000

The Occupational Health and Safety AssessmentSeries OHSAS 18000

Good Manufacturing Practices in the Productionof Food and Pharmaceuticals

The Food and Agriculture OrganisationsGuidelines



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Governance

The UN Convention against Corruption

The UN Anti-Corruption Protocol

The OECD Anti-Bribery Convention

Transparency International’s CorruptionPerceptions Index

The Extractive Industries Transparency Initiative

The Financial Action Task Force

The UK Proceeds of Crime Act and the UK BriberyAct

The UK Money Laundering Regulations

The US Foreign Corrupt Practices Act

The Business Anti-Corruption Portal

The OECD Principles of Corporate Governance

The Walker Report

The International Private Equity and VentureCapital Valuation Guidelines

The International Accounting Standards Boardand the International Financial ReportingStandards

The DFI Protocol on Corporate Governance

The Construction Sector – Transparency Initiative

ESG Regulatory

The EU Accounts Modernisation Directive(2003/51/CE)

UK- Climate Change Act 2008

USA-SEC Commission Guidance RegardingDisclosure Related to Climate Change

Analysis of these Protocols and Codes of Good Practice produces similar findings to the Leeds University Research and insome key areas it finds an even more concerning lack of realstandards of ESG performance.

All of the above are voluntary codes of practice, none contain ordemand any form of third party verification of fact and neither dothey contain any real sanctions for misreporting or failing todisclose. Under these circumstances, none of these Codes containany form of predictive risk element since they are often reportedup to 18 months post any significant ESG event. In terms ofproviding quantifiable baselines from which objective ESG related

measures of risk may be derived or estimated, these Codes are incapable of delivering such metrics.

Within the EU, the current environmental and social reporting system does not create a level playing field among business asin most EU countries the reporting by companies on their non-financial impacts is voluntary. A number of companiesincluding banks and finance houses currently publish voluntary reports on the ESG impacts of their business. However,because of their voluntary nature, these do not always provide a full and accurate picture of financial institutions activities.Mandatory, standardized reporting would ensure that reports are comparable and that all financial institutions wouldoperate to the same objective and standardised baselines, all would have an equal advantage: since all organizations wouldbe required to report on the same issues, under a measurable objective framework, whether their impact is positive ornegative.

Fillip Gregor, Chair of the Board of the European Coalition for Corporate justice, (ECCJ) hasnoted that: “A financial institution’s environmental and social impact is a crucial part of itsbusiness. We need a mandatory system that allows investors and other stakeholders toassess the financial Institutions performance. That means that information should be basedon clear indicators, covering core areas – including human rights, environmental standardsand corruption risks. These will allow an institution’s performance to be compared withother financial institutions in the sector and allow investors and others to assess the theirexposure;



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The ECCJ and ETUC call for regulation that must ensure:• Mandatory reporting, using clearly defined indicators developed with the involvement of stakeholder groups• Reporting throughout the supply chain• Objective information on whether the Institution has been involved in, or risks being involved in, violations of internationalstandards for human rights and environmental protection to risk.”

Within Europe, France has become the leader in mandatory environmental and social reporting. All large listed and non-listed companies are now required under Grenelle II Law to disclose environmental and social information in their annualreports. Furthermore an independent third party must verify the information reported. In terms of developing a commonobjective in reporting standard for ESG, France has the best capability.

Summation

As has been previously demonstrated in regard to (private) Voluntary Carbon Standards, there is a recognised imperative todevelop enforceable, standardised, common methodologies for both private standards and ESG metrics, without anintegrated common approach. Clearly, without introducing the required underlying common standardisation, transparencyand common methodologies to both private Voluntary Carbon Standards and ESG, the combining of the two will result in atoxic relationship, which will create substantially more risk for investors. In turn this could have serious consequences forthe smaller and mid-sized projects and their dependent communities. As importantly, implementing subjectively based,non-audited ESG requirements within Projects could lead to environmental degradation and a lowering of socialupliftment opportunities.

SECTION FIVE Analysis of the Cost Reduction Strategies related to the Project Development Transactions (PDD)

A Standardised Approach to Reducing Project Costs

According to the report released by Fichtner, Grael and Rentz in 2011, the transaction costs of GHG projects range between7% and more than 100% of production costs with a mean average of between 14 & 89%. They state that “data clearlyillustrates that larger projects have lower specific costs indicating that economies of scale are an important cost factor”. Hightransaction costs will push some excellent and much needed small and medium projects out of the market.

Further research carried out by Probus, indicates that by aggregating small and medium projects into a meaningful portfolioof projects and then standardizing approaches and procedures less than one management structure produces significantsavings, especially in relation to micro and small projects. There are further significant savings to be achieved via a process ofdisintermediation, reducing the layers of middlemen and agents.

This approach can have significant effects upon the funding matrix, the aggregated total funding requirement can bring theseprojects into mainstream ranges of financing, and this strategy may also reduce costs and raise returns to the project owners.There are fund structures that lend themselves very well to the aggregated project approach, one of these being theGibraltar Protected Cell Structure, (PCS) this makes it possible to place individual projects into a “ring fenced” cell under anoverall Umbrella, therefore delivering economies of scale under one fund structure and cost of management but eachindividual project is protected from any contagion from its siblings.

Clearly a standardised approach to project development, management and technical consultancy requirements will supportthe vital small and medium projects and when linked to disintermediation and lower overall financing costs will deliver atseveral levels not least of which is delivering solutions to the poorest along with the more affluent.



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SECTION SIX An Introduction to the Crucial Role of Due Diligence

This section of the Report presents a summation of key issues and urgent improvements that should be made to all GHGstandards with the aim of:

a) Providing additional transparency to all standardsb) Improving the identification of conflicts of interest and special interestsc) Providing lower costs to communities even for small and medium sized projectsd) Substantially improving Due Diligence with the aim of removing substandard/high risk entities at sourcee) To encourage significantly increased volume of potential investors, (especially for small & medium projects) via

improved returns and risk identificationf) To facilitate focus upon community development and improved environmental benefits via improved and more

transparent project requirements.

In general terms, due diligence refers to the care a person or entity should take before entering into an agreement or atransaction with another party

The Authors of this Report with benefit of long term City of London financial experience included a review of due diligencemethodologies across all private Voluntary GHG standards and the CDM.3 This was expected to be a brief description of whatpreventative measures are enacted to preclude entities from being accredited and provided with access to significantopportunities for fraud, bribery, money laundering and similar criminal activities. However, research revealed an extensivelist of areas where across the industry these issues are not being addressed in the standards’ requirements.

Increasingly governments are legislating against foreign corrupt practices, for instance the United States government makesmany demands under the Foreign Corrupt Practices Act, including the legal obligation on companies to include due diligenceas part of their standard approach to business with any third party entity or individual, including but not limited to agents,vendors, suppliers and investment partners. Though originally enacted in 1977 the scope of the FCPA was extended in 1998to include a cross border jurisdictional reach, with the direct intention of ensuring that US companies exercise the same if notmore caution when entering into agreements in other countries. Like the comparatively recent Bribery Act 2012 in the UK,which also has an extra-territorial scope, it is necessary for entities to prove that they took measures to prevent corruptionshould they fall under investigation by the relevant authorities. In the simplest terms, it is now not possible for a company toclaim they were unaware of an illicit practice, they must prove that they took proactive steps to avoid this occurring. Duediligence has been highlighted as one way in which a company or project owner/developer/investor can satisfy this legalrequirement.

A sample due diligence checklist is attached here. This list is a very comprehensive illustration of the most extensive due nowrequired or expected for even relatively small transactions.

The Authors of this Report do not suggest that all items mentioned in this checklist are appropriate or necessary in terms ofvoluntary Carbon transactions and agreements but in any recognised developed jurisdiction (EU, USA etc.) the need tocomply with Anti-Money Laundering and Anti-Bribery legislation, demands that a certain level of due diligence should betaking place within the entire GHG Market. The rigour of any due diligence process will depend upon the risk/reward profileof the entity being assessed. A large scale GHG project carried out by a Global DOE may require very substantial due diligencewhereas a small-scale project involving less risk may require a more basic approach.

3See http://europa.eu/legislation_summaries/fight_against_fraud/fight_against_corruption/l33301_en.htm and

http://www.kpmg.com/IN/en/IssuesAndInsights/ThoughtLeadership/KPMG_Bribery_Survey_Report_new.pdf for additional in-depth information about the increasing importance of due diligence across all industries and sectors.



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The Authors of this Report in some cases like the title “Integrity Check”, especially where small scale projects are involved,we suggest that communities have the ability to complete an “Integrity Check” related to Project Developers, the standardunder which the Project will be completed, the Validators and Verifiers and the source of potential investments to be made.

The following section of the Report aims to establish what intensity of due diligence is currently being conducted as part ofthe Accreditation process in the voluntary carbon market.

Anecdotal evidence suggests that Fund Managers and similar Asset Managers simply rely upon the fact that a project isdeveloped under a “Standard” and Validated and Verified by an “Accredited” DOE, as the only assurance that appropriateregulatory compliant due diligence reviews have taken place. In addition to there being no requirement in the Standard fordue diligence, these Accredited DOEs are often large companies with multiple functions, though very few will have internaldue diligence capabilities. This reliance on DOEs in Voluntary or indeed CDM Projects is gross misjudgement, though there isno regulation or superior authority in place to flag this up as such. In fact the process closely mirrors the same circularity ascaused the Sub–Prime collapse in that ,the, (Project) risk rating is linked to the perceived ranking of the “standard”(established “leader”) and the perceived rigour of process, which in fact is not present.

Investigative Due Diligence Review

Although not defined as an integral part of this Report, in light of the findings that emerged during the research phase, theAuthors of this Report retained the services of third party, professional financial, legal and corporate due diligence expertiseto examine and comment upon the findings of this current research in terms of reliance upon the standards themselves andtheir accreditation process to provide investors with adequate due diligence.

We include this section of the Report as delivered by the retained Third Party IDDSpecialists.

IDD Review of GHG Standard Requirements

Introduction

A review was conducted of the Standard requirements produced by the followingentities:

1) Plan Vivo2) Gold Standard3) CDM4) VCS (Temporary Accreditation)5) ANSI VCS

This review is based on findings resulting from an examination of and the analysis of a number of documents believed to bestincorporate all the relevant provisions for each Standard, including what is asked of applicants and how this is to be assessed.The review was specifically aimed at establishing what provisions if any were related to financial, corporate or legal duediligence.

In order to simplify the findings of this review at this stage, when referring to financial, corporate or legal due diligence in thisreview the term Investigative Due Diligence (IDD) is used and intends to incorporate the three terms or imply one or theother. Investigative Due Diligence is an all-encompassing term often specifically used to describe the most in-depth form ofdue diligence, which aims to discover conflicts of interest, reputational concerns and any other threat to compliance,integrity and financial probity.

Below is a summary of findings for each standard.



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1) Plan Vivo

A number of documents and the content of one website were reviewed in order to obtain a full picture of what is outlinedand included in Plan Vivo’s Standard requirements.

DOC 1: The Plan Vivo Standard 2008

Section 4 - "Plan Vivo Project Standards"

In-depth analysis was done of Section 4 - "Plan Vivo Project Standards" and the following observations made about the“Indicators for Verification/Validation”. From a content perspective there is very little detail and very few technical examplesof scenarios, which presents numerous ambiguities in terms of interpreting that these provisions extend to IDD.

Observations

Nowhere in this document is the term "due diligence" used.

There is a reference in this document to applicants using "External Consultants" as part of the Project Designprocess, however, this does appear to include due diligence or risk mitigation specialists. What is of concern from adue diligence perspective is that there doesn't appear to be any requirement on project partners to conduct duediligence of partners or applicants. It is also interesting that it is not clear at what stage Plan Vivo ask for specificsabout project partners (i.e. owners, controllers, key personnel).

Effective & Transparent Project Governance

There is a reference to “an approved PDD” (Project Design Document - the initial approval stage of the Plan VivoStandard verification), however, there is no further clarification explaining how a PDD is approved (i.e. to whatstandards technically, with regard to integrity, impartiality or otherwise) or by whom. It would be interesting toknow more about this as projects frequently involve a number of different partners and organisations, thereforeraising the question of how much IDD (Investigative Due Diligence) or KYC (Know Your Customer) checks are done.There is certainly no specific or express requirement for IDD or KYC checks from the content of this and otherdocuments reviewed (see below, DOC 2).

It is a Verification/Validation requirement for "approved annual reports" to be submitted at relevant stages of theproject. Plan Vivo provides the templates for these reports, but there is no further detail as to who or what entityapproves these.

Carbon Benefits

There is reference to "evidence of management regimes implemented to minimise risks" being an indicator ofVerification/Validation, however, no explanation on how this may be proven, i.e. reports from external consultant,the required engagement of risk mitigation specialist, a report from the investigation of leakage risk, the dedicationof this responsibility to personnel etc.

Livelihood Benefits

There are two references to "verbal reports" from producers regarding the assessment of livelihood benefits. Howare these to be collated, verified and audited? As a general rule, reliance on any kind of verbal report could posepotential issues, particularly in terms of transparency.

"Other evidence of payments" is very vague and could incorporate many things, most of which could present issuesregarding transparency and integrity.

Is it to be understood that in order to satisfy the Standard that the "Project has undergone a producer/community-led planning process aimed at identifying and defining sustainable land-use activities that serve the community’sneeds and priorities" that an assessment of "livelihood benefits" should involve independent third party researchand analysis (i.e. IDD) or at least a level of "Know Your Supplier" checks? Though this would be optimum, from both



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an impartiality point of view as well as ensuring livelihood benefits, it isn't clear from the list ofVerification/Validation indicators if this is the intended interpretation.

DOC 2: Final Plan Vivo Validation Report: Emiti Nibwo Burola Project, VI Agroforestry, Kagera

This is a validation report from a Plan Vivo approved project. The document was downloaded from the Plan Vivo websitewhere approved reports are shared in the interests of transparency. This document was helpful in providing furtherinformation about what is being asked of those involved in these projects and how the information is being assessed withregard to IDD.

Observations

From this document it was possible to draw some additional conclusions about what is and isn't required as far asIDD is concerned though again the document does not refer to "due diligence" specifically.

The report states the following: "A review of Annex 8.2 Articles of association and Annex 8.4 Certificateof registration incorporated in the PDD indicate that VI Agroforestry is a legal registered entity in Tanzania". Thissuggests that they have analysed documents provided by the applicant as opposed to requesting copies from source(national corporate registry). The latter is considered best practice in addition to other checks.

There is also reference to analysing past annual reports, however, how in-depth this was done is not made clear;who handles this task? Is it outsourced to an independent accountant?

There is no reference to any requirement for pre-project KYC checks or third party partner or supplier checks at anystage in the accreditation or the verification processes. There is no documented or specific reference to anyindividual or entity having looked into ownership and ultimate controlling individuals of the applicant, VIAgroforestry.

There is a definite emphasis on individuals demonstrating knowledge and ability, rather than financial probity andintegrity and the most important phase in this process is a site visit. Site visits are also considered an integral part ofIDD; however, it is clear from the report’s summary that IDD is not the intention of the site visit. In fact, in the reportit states that one key personnel wasn't present during a field visit and it is assumed no additional checks orinvestigation was done into this.

WEBSITE: http://www.planvivo.org

In the light of limited information about Plan Vivo Standards being found, additional examination was carried out of PlanVivo’s website.

Observations

It is unclear who Plan Vivo's "Third Party Verifiers" are. Looking on this page http://www.planvivo.org/projects/ itappears they've only used Rainforest Alliance. This could be considered a potential source of conflict consideringthat members of the Rainforest Alliance sit on Plan Vivo's Technical Advisory Group http://www.planvivo.org/wp-content/uploads/2010May_PlanVivoTAP_members.pdf. It is assumed that greater transparency and impartialitywould come with using a range of third party verifiers.



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2) The Gold Standard

A review of the Gold Standard's Requirements v2.2 was conducted with additional consultation of the accompanying Toolkitas and when potential ambiguities arose. The findings are listed below in the order the text analysed appears in thedocument being reviewed.

DOC: Gold Standard’s Requirements v.2.2 (with the accompanying Toolkit)

Observations

No specific mention of “due diligence” in any form.

If there were to be a reference to any kind of due diligence process or background verification of information (bothof applicants and then of projects), it is assumed that this would fall under section VIII Risk Assessment, however,there is no direct or indirect reference to IDD.

Though this exercise was not to make recommendations one worthy observation at this stage is that there should beclearer guidelines on who, how and when risk is assessed. There is a reference to an "External Consultant" or"Objective Observer", however, there are no clear definitions of who these third parties are, why they are engagedand what makes them external or objective.

In other places in this document and in the Toolkit there is a reference to the "applicant OR an objective observer"completing certain tasks as though the two are interchangeable, which of course makes it questionable why there isthen an onus on an observer being objective.

It is assumed that section VIII.a.2. Opening of Accounts is referring to the initial stage of registering an applicant.There is much made here about approval of the various stages and different accounts, however, there is noinformation about what constitutes approval and how it is awarded.

Sections VIII.e.1, VIII.e.2 & VIII.e.3 are concerned with "External Validation"; however there is no guidance or detailas to who is "an independent third party Validator". It should also be noted that this doesn't go far enough toconstitute IDD as they should be two separate processes, i.e. firstly IDD to assess and investigate issues to do withintegrity, financial probity and transparency and secondly the tests for validation. These should be separate andideally conducted at different stages (so that integrity issues can be flagged up and dealt with prior to investment oftime and resources into validation) and ideally should be carried out by different independent parties.

The sections included in VIII.e.7 - VIII.e.11 Validation Guidelines, it states that one of the requirements for validationof projects is a site visit. There is an inference in the text that this is required in order to check everyone is who theysay they are and that this is therefore an important integrity and probity measure. Very often a site visit is anintegral part of due diligence, however, it is not an adequate enough standalone measure.

In section VIII.g Monitoring and Verification of project activities the question of an "External Validation" is raisedagain, this time in relation to the requirement of effective monitoring. However, it appears this reference is more todo with emission reductions etc. than it is verifying and monitoring integrity and accountability.

Again as part of the monitoring requirements under section VIII.g.9 Site Visit, a site visit by the contracted DOE isrequired once in the first two years and then in the following three and then five subsequent years. This indicates aneed to carry out continuous checks (quite rightly) that the project is meeting Verification/Validation standards butthe same provisions should also be considered in relation to on-going monitoring of transparency, integrity andfinancial probity.

In section IX.a.1. Submission of GS Verification Report, it is worth noting that DOE/AIEs are referred to asinterchangeable with external Project Representatives, indicating that the external element isn't forindependence/integrity but more for practical or logistical reasons.



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In neither the Standard document or in the Toolkit is there any explanation as to who or what organisation verifieseven the most basic bits of information. Nor is it clarified how if the collation of information is in order to verify andanalyse it or if it is merely a bureaucratic requirement.

Observations relating to additional documents

A quick review of the Gold Standard Passport Template document was conducted to see what additionalinformation is requested. The Passport Template doesn't ask any questions, which probe integrity, background orfinancial solubility of the project’s partners. It is predominantly focused on the environmental impact assessmentand project technicalities.

A brief review and analysis was also done of a completed PDD – Please view here. In this document there is veryminimal information about private project partners leaving many questions about ultimate ownership, control, etc.unanswered. This document also proves that monitoring is done by one of the project partners (i.e. ProjectRepresentative) in this case, JP Morgan, as opposed to an external or third party unbiased consultant.

It is unclear if a focus does not fall on DD because it is primarily centred on the overall goal of "promotinginvestments in renewable energy" as the rhetoric of this Standard is heavily focused on the sustainable andenvironmental benefits. It is, of course, understood by the Authors of this review that this is essential; however, itshouldn’t subsequently overlook or compromise integrity and transparency, two elements which are essential to thesuccess of such a goal.

3) CDM

The CDM Accreditation Standard is an extensive document and in line with this a numerous observations were made aboutpotential references to IDD. For this reason a Summary of Observations has been included in order to summarise the keyfindings.

The full list of Observations follow and are presented in the order the text analysed appears in the document being reviewed,with sub-headings within the text included in the review for ease of reference.

DOC: CDM Accreditation Standard for Operational Entities

Summary of Observations

Comparatively this document goes further than both Plan Vivo and The Gold Standard and there is as muchemphasis on impartiality, financial and legal probity as there is technical expertise.

There is no specific use of the term "due diligence" anywhere in this document. There are, however, many inferences to due diligence being required, including conducting a level of background

checks as part of a confirmation that an AE (Accredited Entity) and DOE (Designated Operational Entity) has proventhe competence of staff, however, it is not expressly stated that this is done with pre- or post-employmentscreening or as part of IDD. This is an example of how the application of due diligence is often inferred in thisdocument but the methodology is not elaborated upon.

The section entitled “Liability and Finance” goes far to indicate that financial probity and integrity is of utmostimportance, however, it doesn't elaborate on how best to investigate and prove it.

Another strong hint that IDD is necessary is the section called "Pending judicial process", which states an"operational entity shall: (h) Not have pending any judicial process for malpractice, fraud and/or other functionincompatible with its functions as a designated operational entity."

Perhaps the most important section of the document from an IDD perspective is Partiality, which includes thesetting up of an “Impartiality Committee” and describes the requirement of overseeing impartiality at organisationaland operational level. This is all but a checklist for due diligence without specifically referring to it as being required.



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Observations

II Introduction

In the opening definitions, under "Competence" there is only discussion of knowledge and skills, as opposed to alegal entity being of solid financial standing or satisfying transparency requirements, though perhaps a separateterm for this (and definition) would be a better. (This issue is covered at a later stage of this document, however forthe purposes of introducing integrity from the outset it could be recommended that it is referred to in theIntroduction.)

III Legal Issues

This section provides a helpful definition of "operational entity": "An operational entity shall: (a) be a legal entity(either a domestic legal entity or an international organization) and provide documentation of this status;” There isno clarification on how this is or should then be verified.

In paragraph 23 there is a reference to the operational entity being legally registered so that it can inter alia "besued". What would be considered better due diligence is also verifying an entity's financial status and ownership asthese are equally if not more important when it comes to civil action.

A clear reference to a requirement of IDD is found in paragraph 26 "Even if the validation and/orverification/certification functions are carried out only by a part of a legal entity, the CDM AT (Clean DevelopmentMechanism Assessment Team) shall examine all other activities of the legal entity that might affect its CDMoperations, in particular, for potential conflicts of interest, independence and impartiality."

Paragraphs 27 - 30 explain that the engagement of an independent company, which could possibly extend to IDD, issubject to additional provisions.

IV Human Resources

The opening description of the Human Resources requirement states that “1 (b) "An operational entity shall: (b)Employ a sufficient number of persons having the necessary competence to perform validation, verification andcertification functions relating to the type, range and volume of work performed, under a responsiblesenior executive;" It's a surprisingly common problem across all industries that very little if any pre-employmentscreening is done and when it comes to conflicts of interest this could be a definite area where problems can evolve.Coincidentally screening could fall under the following requirement, which is included in this opening description.“An applicant entity shall make available: 1 (v) Its policy and procedures for the recruitment and trainingof operational entity personnel, for ensuring their competence for all necessary functions for validation, verificationand certification functions, and for monitoring their performance.”

Paragraph 43 states that “The AE/DOE shall ensure that its management is competent to:(a) Analyse and determine the human resource requirements;(b) Evaluate and qualify the personnel;(c) Allocate the personnel;

This could be interpreted to imply a minimal level of background probing to ensure integrity, previous experienceand skills of management. This would be comprehensively covered by IDD.

Section 3 (paragraphs 44 to 46) includes a provision for assessing the “Competence for validation/verification team”.It is important to understand how this is assessed: Knowledge tests? Background checks? Verbal or writtenconfirmation?

Paragraphs 50 and 51 give further detail about “Ensuring competence of personnel”. It is one interpretation of thetext that these provisions cover the importance of confirming that AE’s and DOE's personnel are competent andthere is a specific reference to ensuring team leaders' experience is adequate. From a due diligence perspective itwould be useful to understand how this is tested? Are staff background checks conducted?



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Further clarification on the subject of assessing competence and experience can possibly be found in paragraph 55“The performance evaluation process should include... (b) Selecting the appropriate evaluation method; typicalmethods include review of validation/verification reports, on-site observation, interview and/or feedbackfrom stakeholders.”

Paragraphs 63 and 64 refer to a "documented procedure for qualification of the personnel involvedin validation/verification functions for technical areas within CDM sectoral scopes." The most thorough way toensure this is and to ensure transparency is by having some level of third party pre and/or post-employmentscreening as part of the IDD. This could answer many of the above raised questions about competency, as well asintegrity.

Paragraphs 65 to 67 refer to the "Use of external validators, verifiers and technical experts" and provide for theengagement of external contractors by ensuring agreements are in place and documented. Examples of contractorsused do not specifically include IDD specialists and in fact the small print in the footnote indicates thatsubcontractors should have "expertise relevant to technical issues related to validation and verification of CDM". It'sopen to interpretation if this includes IDD specialists or providers but it is thorough in terms of outlining appropriateterms of engagement, which could apply to a company to carry out IDD.

Paragraph 66 specifically refers to the obligation on "external individuals to notify the AE/DOE of any existing or priorassociation with any CDM PP they may be assigned to validate/verify as well as actual or potential involvement inidentification, development or financing of CDM activities". This is encouraging as far as integrity is concerned andsupports the case for additional IDD including financial probity checks.

Paragraphs 68 and 69 deal specifically with the issue of recruitment elaborating somewhat on previous sectionshighlighted in this review with regard to pre-employment (and post-employment) screening. The key question in thissection is whether an "appropriate system for recruitment" extends to incorporate pre-employment screening ornot?

In paragraph 73, it states that “the AE/DOE shall provide documentation on evaluation of its subcontractors tothe CDM ATs during assessments". One interpretation of this is that this should include some IDD as part ofprocurement, which would certainly be considered best practice.

Overall there is a lot of information and many examples of what constitutes adequate human resources in thissection of the document. Assessing the text as a whole it is considered that it would simple and effective toincorporate background checks of key personnel as part of this.

V Liability and Finance

The opening paragraph of this section indirectly supports the use of IDD as a means to verify the followingdetails: "An operational entity shall:(c) Have the financial stability, insurance coverage and resources required for its functions;(d) Have sufficient arrangements to cover legal and financial liabilities arising from its functions;”

This section supports the case for introducing corporate and legal due diligence as a requirement. To summarise,this section makes express reference to obtaining the following from an AE/DOE:"- Evidence of financial resources including previous three years financial statements for companies existing for morethan three years (balance sheets, profit and loss accounts, etc. );- other relevant evidence such as shareholders commitment for newly established companies- Business or work plan or equivalent financial plan for next three years"

With regard to the above text, the obvious question from an IDD perspective is are these documents verified? Arethey obtained from AE/DOE and then checked out with copies obtained from source? Or is the act of obtaining themsatisfactory enough and they are accepted as accurate? It appears redundant to ask for these documents if they arenot interrogated.

In paragraph 76, it states, “this documented evidence must be sufficient to generate confidence that financial statusshall not compromise the impartiality of the AE/DOE". Further clarification is required and should IDD be inferredhere it is important to answer the question; "What is sufficient?"

Paragraph 78 states that “An AE/DOE shall demonstrate that it has analysed, identified and evaluated the nature,scale and impact of all potential financial risks arising from its CDM related activities and has adequate



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arrangements to cover the identified financial risks." This could easily be interpreted as an obligation to conduct alevel of IDD as a comprehensive report of findings from an IDD provider would go far to satisfy this requirement.What is less clear is if it is inferred that AE/DOEs should carry out IDD.

VII Information Management

There is an inference in this section that information management should include some form of IDD "101. Theorganizational structure, names, qualifications, experience and terms of reference of senior management personnel,such as the senior executive, board members, senior officers, team leaders and other relevant personnel, shall bemade available annually to the UNFCCC CDM secretariat.” An obvious follow up question to this is who analyses thisdata?

VIII AE’s/DOE's organization

In this section there is further clarification regarding what information is to be obtained from the applicant, howeverit is not detailed if the data is simply stored and relied upon in trust or if it is fully analysed and verified? Thefollowing lists the information, which must be provided: “The applicant operational entity shall make available:

(i) The names, qualifications, experience and terms of reference of senior management personnel such asthe senior executive, board members, senior officers and other relevant personnel;

(ii) An organization chart showing lines of authority, responsibility and allocation of functions stemmingfrom senior management;”It should be noted that this is all information that would be scrutinised as part of IDD.

This section provides for considerable amounts of information about the AE/DOE's organizational structure and alsothat this data is updated when changes occur. It is interesting to compare the amount and type of informationrequired about top-level management but not necessarily about shareholders, ultimate owners and controllers ofthe company (though it is a tentative assumption that this would be covered in the Finance and Liability section).

XI Pending judicial processes

This section states clearly that "An operational entity shall: … (h) Not have pending any judicial process formalpractice, fraud and/or other function incompatible with its functions as a designated operational entity." This isagain a rhetoric that could be interpreted as a strong indicator that due diligence is required to verify this as fact andit is certainly a recommendation to interpret it this way.

According to paragraph 142 “An AE/DOE shall maintain a record of all the judicial processes pending against it aswell as information of any judicial cases held in the past. If the subject matter of the cases is such that itis incompatible with its functions as a DOE, then the same shall be duly reported to its management and the UNFCCCCDM secretariat." It could be debated if keeping a list sufficed, particularly when it is still not clear who is verifyingand monitoring this and other adverse information (i.e. company reputation/PR).

XII. Safeguarding impartiality

The onus appears to be on the AE/DOE to "demonstrate that no conflict of interest exists between its functions asan operational entity and any other functions that it may have, and demonstrate how business is managed tominimize any identified risk to impartiality". Although this is crucial to a test of impartiality it is not all encompassingand should be seen as a surface level check only. Should this demonstration come from the findings of an IDD reportthere is an increased level impartiality in that process alone.

With reference to this section stating that the AE/DOE will establish a designated committee to assess and overseeimpartiality, one obvious observation is to question what makes this “Impartiality Committee” impartial? (As hasbeen seen across industries these are positions that can be abused in many ways so it is one suggestion thatunrelated out-of-industry IDD specialists may be worthy advisors on establishing the Impartiality Committee at least,i.e. they don't need to have in-depth GHG Standards knowledge and are unlikely to be previously involved orassociated to other entities. From this unbiased position and with proven history in investigating conflicts of



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interest, IDD specialists are well placed to assess if threats to impartiality exist. The furthest the text goes to hint atagreeing with this is to say the Impartiality Committee shall... "Have its chairman who shall be a person independentfrom and external to the AE/DOE").

This section goes into many specifics about avoiding and preventing conflicts of interest. It also describes what itconsiders to be a threat to impartiality. This is very encouraging as far as transparency of standards is concerned. Itis effectively a very useful guide or almost a checklist for due diligence, however, it is again unclear if it is up to theAE/DOE Impartiality Committee to demonstrate this alone or if this is to be investigated and verified. (This thenmakes it of utmost importance for the Impartiality Committee to be rigorously selected).

There is a lot of text here, which could be analysed and commented on in much greater detail but for the currentpurpose it is sufficient to say this section is important to support the case for IDD, though it does not make directreference to it as compulsory.

Annex C: Requirements for the preparation of the annual activity report by a DOE to the Board

This section covers some of the changes that need to be reported in the monitoring reports to be submitted. It goesfar to cover some issues that would otherwise be overlooked without IDD, if indeed the reports are checked out.

4) VCS Temporary Accreditation

The current VCS Temporary Accreditation Application Form was reviewed and analysed regarding its scope for due diligence.

DOC: VCS Temporary Accreditation Application Form

Observations

The questions asked in this application form are thorough insofar that it asks for specific pieces of detailedinformation about a company, including its current and previous financial standing. This document directly lendsitself to the process of IDD at an early stage of the accreditation procedure. This is an effective way of also setting aprecedent that IDD is to be included in any standard requirements.

There is also a direct reference to the term “due diligence” when it refers to the inclusion of a “Legal Due DiligenceReport” being collected by However, it should be noted that there is no specific mention of “due diligence” withinthe text of this document.

This document asks for other directorships held by directors as well as their personal information. However, inaddition to directorships it would be very useful and thorough for additional details about them such as (but notlimited to) any company shareholdings held and if they have any political affiliations/memberships etc. Even if theyare not a director of a conflicting company, but this does not preclude them from being could be a majorshareholder in one, which is of greater conflict. Likewise there is the question of directors’ spouses, businessassociations and political affiliations.

It's encouraging to see additional questions about subsidiaries and the group of companies, however, it would beuseful to have a precise definition of what it means to be part of a group of companies - as in some countriescompany structure isn't always as clear or clean-cut as others, particularly in the developing world.

The insertion of the following question in the first section "Is applicant a wholly owned subsidiary or a branch (orother)?" could be useful in order to ensure full understanding by the applicant that they need to provide additionaldetail in Section 1.2.

It may seem pedantic but when conducting IDD on individuals it is very useful to also have dates of birth andpossibly residential addresses for directors. They are a crucial piece of info when doing IDD, so if this applicationform is to be handed over for additional checks, this information would be very important.

In the Declaration section of this document there is a need for further clarification of the term "legal proceedings"so that it is clear that it encompasses both civil and criminal legal proceedings. In the same way it would also bethorough to add “bankruptcy proceedings” to this list.

In the accompanying Annex document there is a reference to the possibility of requesting references from legalrepresentatives, which is certainly an extra level or rigour, however, in large scale IDD it is often considered bestpractice to ask for three independent references for each director.

It is worth including in the "years in business" description that any previous company names used by the Applicantshould be included and likewise, for a holding company, if relevant.



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5) ANSI VCS

Two documents for ANSI Accreditation were reviewed, the “Preliminary Application for ANSI Accreditation under ISO 14065”(to be referred to as DOC 703) and the “Criteria Checklist for Evaluation of Third Party GHG Validation/Verification Bodies”(DOC 705). The findings are listed below in the order the text analysed appears in the document being reviewed, with sub-headings within the text included in the review for ease of reference.

DOC 703: Preliminary Application for ANSI Accreditation under ISO 14065

The term “due diligence” is not used in any section of this document.

Under the General Information section about the Verification/Validation Bodies (hereafter “V/VBs”) limited

information is requested and upon initial review it is missing the following key pieces of information: Country of

registration/incorporation, company registration number, registered address, date of incorporation, previous

company names, shareholder and director information. (NB an organisational chart is requested later in the

document in the “confirmation of the third party status of the V/VB”.)

Under “confirmation of the third party status of the V/VB” there is a seemingly vague request that the “interests

represented on the (managing) committee should be identified along with a description of the committee’s

independence from the governing board”. This is very ambiguous and doesn’t request specific details.

Supporting documentation required in this section must act as “evidence of conflict of interest, impartiality and

confidentiality procedures”. There is a marked absence of any specific examples of the type of documents that are

required. In addition to not assisting the applicant, it does also leave the question of how the evidence is assessed

open to ambiguity.

Additional information about the V/VB is requested on page 3 under “Description of the V/VB’s status as a legal

entity”, however, in the interests of information not being omitted, it is always preferable to collate these details in

a clear and simple box format rather than including the detail in a free text box, which is also to be used to answer

additional questions within the same section.

This observation about the free text format of the form applies to all sections of this document. It increases the

chances of key information being omitted and does not assist in ensuring the clarity and thoroughness of responses.

There is no specific request for further information about directors, shareholders or board members, which is crucial

for determining the control and ownership status of a company or group of companies.

This documents states that the submission of annual reports or shareholder filings is not required, only the

certificate of incorporation. If due diligence is not conducted to confirm documents provided by the applicant then

this is an omission and does not provide a full picture.

There is no obligation on the applicant to make any statements about financial or legal standing, including

bankruptcy or pending legal action. Without additional IDD it is therefore entirely possible that an applicant with

integrity concerns progresses through the accreditation process.

The subsequent sections in this document are focused on the applicant’s proposed program and activities within the

sector as opposed to its integrity, financial probity and impartiality.

It is also noted that there is no declaration or signature required to sign off on the truthfulness of this document.



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DOC 705: Criteria Checklist for Evaluation of Third Party GHG Validation/Verification Bodies

The term “due diligence” is not used in any section of this document.

General Information

Further to DOC 703, no additional corporate information is requested in the General Information section, e.g. annualreports, shareholdings, detailed information about directors etc.

5.1 Legal Status

With a view to seeing if this document covers any of the omissions highlighted above in the review of DOC 703, thefirst section covering Legal Status does to an extent by requesting ownership information and importantly, it does soin a way that distinguishes between ownership and controlling partners.

There is a requirement for a number of legally enforceable agreements to be submitted; however, nowhere on thisform are the details for the legal representatives of the Verification/Validation Body (V/VB) requested. This shouldbe requested so as to ensure a registered legal representative has signed off these documents. It could also beimportant in order to potentially request a reference if this is part of the due diligence.

5.3 Governance and management commitment

Under the “Governance and management commitment” section there is a requirement for the V/VB to identify “topmanagement having overall authority and responsibility for” a number of different areas including “supervision offinances” and “contractual arrangements”. Though these are important pieces of data to collect, analyse and verify(through due diligence or otherwise) it is not clear from the layout of the form how or where this information is tobe collated. As noted in DOC 703 the free text format is open to information being omitted.

There is then a requirement that the “validation or verification body shall document its organizational structure andrelevant mechanisms showing duties, responsibilities and authorities of management and other validation orverification personnel. If the validation or verification body is a defined part of a legal entity, the structure shallinclude the line of authority and relationship to other parts of the same legal entity.” It is unclear if this is goingfurther than the information requested in DOC 703, or if this is repetition. It could also be observed that the wordingis a little misleading and full clarity is required when establishing the organizational structure of a V/VB.

There is also a requirement for the V/VB to “document the responsibilities of other personnel involved in thevalidation or verification process.” This is important; however, a more rigorous request for information aboutpersonnel for examination (e.g. dates of birth, other directorships and shareholdings held) would be a moreeffective due diligence measure.

There is also a requirement for the V/VB to “establish a development process for each new validation or verificationcriteria in which it wishes to operate” and that this should include the “identification of key stakeholders and theirexpectations and requirements as applicable to the outcome of validation or verification”. This could be interpretedas a key due diligence step, i.e. investigation of stakeholders and their potential investment/profit expectations,however, the text does not substantially point to this interpretation and indeed, it could be interpreted in manydifferent ways.

5.4 Impartiality

Under section 5.4.1, which relates to the “Commitment to impartiality” there is a requirement that “The validationor verification body shall act impartially and shall avoid unacceptable conflicts of interest.” The use of the word“acceptable” could be viewed as indicating that a certain level of conflict is permissible.

There are a number of ways that the V/VB is expected to manage conflict and ensure impartiality, however, theyappear to be mostly self-certified as opposed to due diligence based or tested. It is considered best practice whenassessing an entity’s impartiality to have an unbiased third party to make that assessment alongside evidence ofpolicy and training within the organisation from top-level management down.



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Under section 5.4.2. Avoidance of conflict of interest it states that V/VBs shall “not use personnel with an actual orpotential conflict of interest”. How is this assessed? Does this infer that the V/VB needs to prove that pre- and post-employment screening is used? This would certainly be considered best practice.

There are also a number of provisions about the V/VB not verifying or validating an applicant where there is anexisting relationship between the V/VB and the applicant. How is this determined or investigated? Is it again “self-certified” or is the potential of a relationship interrogated by external due diligence consultants?

In Note 1 of this section there is a helpful note regarding what constitutes a relationship for the purposes of avoidingconflict. This is fairly comprehensive.

However, in Note 2 it describes what does not constitute a relationship. Here it is considered that “arrangingtraining and participating as a trainer is not considered a GHG consultancy service” which in turn does constitute anexisting relationship. It is subjective whether training should or should not create a conflict, however, for thepurposes of the ANSI Accreditation it does not. As part of this process, which aims to identify potential areas lackingtransparency (where IDD could assist) it was considered worthwhile flagging this up.

Under section 5.4.3 “Mechanism for oversight of impartiality” it states that “the validation or verification body shallensure through a mechanism independent of operations” that impartiality is achieved. This could refer to theengagement of IDD specialists. However, under the associated Note 2 it states that the independent mechanism isan independent committee, a GHG programme or non-executive directors.

5.5 Liability and financing

Section 5.5 Liability and financing is surprisingly small (one paragraph) considering that it covers the important issueof financial risk. Again, it does not elaborate on how a V/VB is to “demonstrate that it has evaluated financial risksassociated with its activities”. This is certainly an area that would be covered by due diligence, though there is noobligation here for it to be employed.

There is no request for personal or professional information about financial controllers within the company.

6. Competencies

There is a requirement under 6.1 Management and personnel to “demonstrate that management and supportpersonnel have appropriate competencies in activities associated with the validation or verification”. The ideal andmost transparent way to assess and demonstrate that is by pre-employment screening being done at the time ofemployment, or as a “second best” alternative, post-employment screening by an independent provider.Employment screening can (and should) assess competency as well as integrity of personnel.

Screening (or due diligence) could also satisfy the requirement that the V/VB shall “periodically monitor theperformance of all persons involved in the validation or verification”.

It is assumed that when it states, that “the V/VB shall have personnel evaluated by a competent evaluator” that thisrefers to a technically competent evaluator as opposed to an independent IDD provider.

With reference to section 6.4 Use of contracted validators of verifiers, though this section refers to the use ofcontractors engaged to carry out validation or verification activities, it could be interpreted or extended to cover theuse of IDD providers.

6.6 Outsourcing

There is a reference to the outsourcing of the validating and verification activities, if not prohibited from doing so.There is a concern here that additional due diligence would be required on the contracted party in order to ensurefull transparency, lack of conflict and impartiality. There is no express provision to ensure this in this section.



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7 Communication and records

Under section 7.3 Confidentiality, there is a reference to the V/VB having policy and mechanisms in place tosafeguard confidentiality. It states that these must meet legal requirements but how is this checked? Due diligenceshould be considered when also assessing internal processes relating to information security.

8 Validation or verification process

In section 8.2 Pre-engagement and specifically under 8.2.1 Impartiality it states that the V/VB shall “reviewinformation received from prospective clients to determine potential risks to impartiality”. This refers to the processdiscussed above under Impartiality and raises the same questions; which documents are being reviewed? And whatmakes those assessing impartiality qualified to do so?

Interestingly, in this section about the validation or verification process there is no mention to reviewing thecorporate information requested (proof of incorporation, organisational structure etc.) or even analysing thedocuments supposedly handed over proving that it is a legal entity and explaining the organisational structure etc.This indicates that due diligence (either by an external third party or by the V/VB) does not feature as a separatestep in this process is given.

Section 8.2.4 refers to the appointment of a team leader (in line with requirements in section 6.3.7); however thereis no elaboration here (or in 6.3.7) about why or how someone is chosen above others. It would be prudent to carryout, at the very least, some background checks or screening of this person hand in hand with competency andtechnical assessments. Likewise, this methodology could apply to the selecting of the validation or verification team(section 8.3.1)

One general observation about the text in Section 8 Validation or verification process is that it is a very thoroughexplanation of what should be collected, analysed, documented and then monitored. For such a rigorous system ofvalidating and verifying, it would be considered appropriate to align or complement this with IDD at the appropriateearly stage in order to ensure full integrity and transparency from the outset, not just in the actual validation andverification process.



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SECTION SEVEN Comparative Review of ISEAL Alliance’s Code of Practice

The International Social and Environmental and Labelling Alliance (ISEAL) was founded in 2002 by a group of sustainabilitystandard-setting organizations with the goal of being “a young and dynamic organisation with an influential global reach”based on “a belief that credible standards can help to make this vision a reality”.4

History of ISEAL

At the end of the 1990s, four environmental certification organisations: the Forest Stewardship Council (FSC), theInternational Federation of Organic Agriculture Movements (IFOAM), and the Fairtrade and the Marine Stewardship Council(MSC) began to discuss the feasibility and benefits of working in closer collaboration as they identified areas in which theircertification systems overlapped, despite being prominent in very diverse sectors. In November 2000 they established aformal organisation and were shortly joined by four more organisations – International Organic Accreditation Service, theMarine Aquarium Council, Rainforest Alliance and Social Accountability International. In 2002 this organisation took itscurrent name and was registered in the UK as not-for-profit organisation.

For ten years since, ISEAL Alliance has had as its aim the facilitating and enabling of “collaboration between its members andcoordinate and represent their common interests to government and other key stakeholders”.5

The ISEAL Alliance is the Global Association for Sustainability Standards

The ISEAL Alliance now works with numerous established and emerging sustainability standards in many different sectorsincluding agriculture, fishing, carbon, and water to develop and deliver guidance focused on strengthening their social andenvironmental impacts. In doing so the ISEAL Alliance regularly reaches out to the governments and businesses, which areusing or potentially considering the use of standards, and sharing the knowledge and tools employed across these sectors sothat credible sustainability standards are promoted and are effective in meeting sustainability targets.

Codes of Good Practice written by ISEAL Alliance are internationally regarded as bars against which standards are measuredand developed. ISEAL members fully meet, or are working towards meeting the requirements of these codes. Through themembership base, which includes leading standard systems such as Forest Stewardship Council, Fairtrade International, theMarine Stewardship Council, Rainforest Alliance, UTZ Certified and many others, ISEAL strive to make sustainability standardsas effective and impactful as possible.

A commitment to continuous dialogue with members and with businesses, governments, NGOs and researchers, has meantthat ISEAL are well placed to promote learning and collaboration in standards.

Important Footnote:

The Authors of this Report believe (and analysis confirms) that there is an important correlation between the high qualityof accreditation applications coming from members of NGO based Groups such as ISEAL, versus the generally poor qualityof Inspection Agency and Accountancy based Applicants. For example, members of ISEAL, a group composed ofEnvironmental Standard Owners themselves, substantially experienced in setting, accrediting and complying withenvironmentally based standards, are more compliance based and focussed versus some of the Private GHG Standards , newto the Environmental standards Industry and owned, controlled or heavily influenced by Financial Institutions and/or largecorporates who may be deemed to avoid compliance in favour of quicker financial returns, therefore a, Compliance approachversus a compliance avoidance approach.

We illustrate this point by providing two examples:

a) An application from a mid-sized DOE, andb) An application from an NGO

4 Source: http://www.isealalliance.org/5 Source: http://www.isealalliance.org/



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Reaching a Common Understanding of Best Practice

The creation of an independent organisation, like ISEAL Alliance, serves as an opportunity to develop a common and sharedunderstanding of the best practices for setting sustainability standards. In the case of ISEAL this resulted in a Code of GoodPractice and then a follow-up Standard-Setting Code in 2004.

Later in 2010, the ISEAL released their so-called “Impacts Code” which aimed to provide “a process for how standard systemscan effectively measure and evidence their contribution to social and environmental impacts on the ground”. According tothe ISEAL Alliance’s website they are also currently undertaking the development of a third code to be called the ISEALAssurance Code, which will “provide guidance on how to ensure that certification to standards is both rigorous but alsoaccessible and affordable to small scale enterprises.”

In order to become a full member of ISEAL, standard-setting and accreditation bodies must demonstrably satisfy all therequirements of the ISEAL’s Standard-Setting Code and must meet or “come close to meeting” those in other ISEAL Codes.Membership is also dependent on compliance with other applicable international recognised guidance, e.g. ISO Standard ISO7011 for Accreditation Bodies.

Current full members come from a cross section of sectors, including fisheries, agriculture, forestry and biofuels. From anoutsider’s perspective it is easy to see why ISEAL Alliance members are considered too at the heart of the sustainabilitystandards movement because of this shared commitment on credibility, good practice and commonality in the developmentand implementation of social and environmental standards systems. It should also be highlighted that ISEAL is a proactiveorganisation insofar as it works with members to strengthen their effectiveness and the impact of their standards systems.

Comparative Review of ISEAL Code of Practice within Voluntary Carbon Standards

Acknowledging the unifying, supportive and proactive role ISEAL Alliance plays in developing, promoting and acting as anoverseeing control system over sustainable standards, thus improving commonality, a review of the ISEAL Code of GoodPractice for Setting Social and Environmental Standards was conducted and a comparison of its requirements made withthose currently missing in voluntary carbon standards:

1. This Code of Practice fulfils a fundamental role that is missing in voluntary carbon standards highlighted in thisReport, i.e. "to evaluate and strengthen voluntary standards, and to demonstrate their credibility on the basis ofhow they are developed."

2. The Code of Practice aims to ensure a win-win scenario for all parties involved in projects based on the followingprinciple: "By adhering to procedures that constitute good practices for setting standards, standard-settingorganizations help to ensure that the application of their standard results in measurable progress towards theirsocial and environmental objectives, without creating unnecessary hurdles to international trade". It goes withoutsaying that a review of this document does not confirm if this is being achieved or not, however, with regard to thevoluntary carbon market this common aim, or even singular aim in the individual carbon standards discussed in theReport, does not appear to be proactively pursued.

3. The Code of Practice acts as a Good Practice "Super Standard", which serves as a minimum bar against which tomeasure voluntary standards. This does not exist in the voluntary carbon market and there are many subsequentproblems as a result, as is discussed in this Report.

4. In the Background Information section of this Report, when outlining the history of private standards, the Authors ofthis Report made reference to a number of international standards that were to guide and provide structure tovoluntary standards. Two of these international standards are referred to in this ISEAL Code of Practice as“normative documents from which this Code” is drawn up against. These documents are ISO/IEC Guide 59 Code ofgood practice for standardization, and the WTO Technical Barriers to Trade (TBT) Agreement Annex 3 Code of goodpractice for the preparation, adoption and application of standards.

5. The ISEAL Code can be seen as a measure of credibility, which from many angles appear to be missing in voluntarycarbon standards as highlighted by the Report. Put simply in the code itself: "Compliance with this Code means thatthe process by which a standard is developed is credible"



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6. This Report discusses in Section Three how the VCS Accreditation introduced three types of categories without anypublic review or documentation of the changes. These categories – Major Must, Minor Must, Recommended –created a system whereby an Applicant could fail certain areas of accreditation (classified as Recommended) but stillsucceed as long as all Major Must categories are met. Analysis in this Report highlighted the many downfalls of thissystem and the ISEAL Code goes someway to suggest that standards should not follow this structure, stating that"this Code shall only be applied in its entirety” thus suggesting by example that Recommended categories shouldn’tbe an option. Furthermore, with regard to this Report’s observations about how the VCS categories were introducedwith no review or documentation of the planning, ISEAL's Code calls for a minimum of documented procedureswhen compiling standards. "Documented procedures for the process under which each standard is developed shallform the basis of the activities of a standard-setting organization. These procedures shall be developed with theactive involvement of a balance of interested parties.”

7. ISEAL's Code goes far to ensure commonality by stating that a “standard-setting organization that applies this Codeto a relevant standard shall include a statement to this effect... The standard-setting organization shall also notifythe ISEAL Alliance of their intention to apply the Code."

8. With reference to the above section about commonality, it also follows that there is an implied increase in integrityand transparency, as they are essentially ensuring that all standards are managed in a way that is subject to thirdparty and public scrutiny.

9. The ISEAL Code provides for an open and objective complaints procedure: "Where a standard-setting organizationthat has accepted this Code receives a complaint regarding its compliance with the provisions of the Code, it shallmake an objective and documented effort to resolve the complaint, based on a publicly documented complaintsresolution mechanism." This is missing from the voluntary carbon market, where most standard-settingorganizations determine and manager their own potentially subjective complaints procedure.

10. The ISEAL Code calls standards to be structured: "For each standard listed in the work programme, a briefdescription shall be included of the scope of the standard, including the objectives and rationale for the standard."As was commented on in both technical and due diligence reviews of each different voluntary carbon standard inthis Report, there is a comparative lack of structure, detail and there is too much ambiguity. This Code appears towant to minimise this.

11. The Authors of this Report have consistently commented on a lack of communication and consensus among thestandard-setting organizations. The ISEAL’s Code goes some way to ensure that this is not a scenario which occursamong their members: "The standard-setting process shall strive for consensus among a balance of interestedparties. The standard-setting organization shall establish and document procedures to guide decision-making in theabsence of consensus. These procedures shall ensure that no group of interested parties can dominate nor bedominated in the decision-making process."

12. As highlighted in this Report, transparency is of utmost importance and this is a notion shared and supported byISEAL’s Code. Accordingly the Code states that any costs or burden for this is to be promptly handled by thestandard-setting organisation. "Other final standards shall be available at as low a cost as possible, and provisionsshould be made to assist parties with legitimate financial constraints to obtain the relevant documents. On therequest of an interested party, the standard-setting organization shall freely provide an electronic copy of itsstandard-setting procedures, most recent work programme or draft standard. Procedures shall be in place to enablehard copies of notices, standards and other related materials to be made available upon request at as low a cost aspossible, and covering only reasonable administrative costs. Where requested, organizations that have setinternational standards shall, within their means, provide translations of draft and final versions of these standardswhen relevant." Though many of the standards reviewed in this Report publish reports and various other documentspublicly on their website it's not known how quickly and how thoroughly this is done.

13. ISEAL’s Code states "…where international standards are designed as the basis for national or regional standards,they shall be accompanied by clear guidance or related policies and procedures for taking into account localeconomic, social, environmental and regulatory conditions where the standard is applied." This is certainly missingfrom the practical application of the standards reviewed in the Report, i.e. the lack of prioritising those fromdeveloping communities that our Report identifies as being overlooked.

14. The ISEAL re-emphasizes the importance of ridding standards’ requirements of: "International standards that are tobe interpreted at the local level and/or by certification bodies shall avoid language or structure that may create



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ambiguities in the interpretation of the standard." This Report has raised a number of concerns about the seeminglyhigh level of ambiguity in many voluntary carbon standards

15. In Section Six of this Report, a reference is made to the lack of a clear structure in the CDM’s application form,standards subject to the overseeing scrutiny of ISEAL’s Code are required to address this: "Standards shall beexpressed in terms of a combination of process, management and performance criteria, rather than design ordescriptive characteristics."

16. One of ISEAL’s roles is to ensure a “harmonisation of standards” as expressly referred to in this Code: "In order forstandards to be mutually consistent and free from contradiction for the largest number of user communities,standard-setting organizations shall actively pursue harmonization of standards and/or technical equivalenceagreements between standards, where there is a possibility to do so without compromising the rigour of thestandard." There is little evidence of this within the voluntary carbon market.

17. Additionally the ISEAL Code calls for transparency as to the background of members of a standard settingorganization. "Where a standard-setting organization has members, membership criteria and application proceduresshall be transparent and non-discriminatory." This should be seen as a preventative measure against potentialconflicts. It is unclear if similar standards of transparency are employed across voluntary carbon standards. "Where astandard-setting organization has members, membership criteria and application procedures shall be transparentand non-discriminatory."

18. Though this ISEAL Code addresses a number of the issues raised about private voluntary carbon standards, it doesn'taddress the concern raised in this Report a number of times to do with compliance with updated versions ofstandards. The ISEAL Code states reviews and updates are to be expected and should occur at least once in everyfive years, however it is unclear if subsequent re-assessment is then required. One could argue that it is implied as"goes without saying" that organisations have to then be compliant with the latest version, however it is notpossible to confirm this.

19. There is also, sadly, no direct reference to due diligence or what Good Practice is when verifying the background ofparties and project partners.

20. One aspect that the ISEAL’s Code does not cover is the expectations on standard-setting organizations with regardto their funding. It also doesn't lay down any guidelines on how standard setting organisations make their moneyand if this should/shouldn't be directly related to the number of accreditations awarded, which as highlighted in thisReport, has the potential to question the impartiality of an accrediting organization.

21. Throughout ISEAL’s Code of Good Practice for Setting Social and Environmental Standards there is a clearexpectation of focus on developing communities and SMEs by standard-setting organisations. By comparison, manyvoluntary carbon standards profess to share the same goals in the public domain (i.e. on their websites or in pressmaterial) however, analysis in this Report has found many occasions when this isn’t technically or logisticallyaddressed in the detail of the standard. Certainly when an organisation’s funding is dependent on a "no win no fee"commission based model, this potentially actively contradicts any support for developing communities and SMEs.



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CONCLUSION

This Report seeks to define continuing areas of concern related to the Private “Standards” that drive theVoluntary Carbon Markets. This Report also seeks to clarify for the reader exactly what these voluntary standardsare and what they are not, and continue to question if the claims made by these standards are reflected in theiroperational integrity?, what is the reality of the often claimed non-conflict of interest?, what are the motivesbehind the people that are ultimately influencing these standards and why?, what role should Governments andthe National Accreditation Boards be playing to ensure, non-conflict of interest, transparency and rigour ofprocess .

Accreditation granted to a DOE is a licence to authorise and issue financial Instruments, in mainstream financethis activity is a tightly controlled activity carrying with it substantial requirements of the fitness (integrity) of theindividuals involved and active compliance with a comprehensive set of rules and Governmental regulations, allsubject to constant audits and oversight. The DOE Community must be subject to similar requirements via muchincreased due diligence related to their fitness to operate linked to suitable on-going sampling of Validation andVerification audits and fitness to act tests.

Clearly, without introducing greatly increased ISO compliance and substantial oversight and fitness to actrequirements in respect of all GHG Standards, in tandem with quantitively based Environmental, Social andGovernance, (ESG) requirements, the current combination of Private Standard activities as illustrated in thisreport in tandem with similar unverified environmental and social protocols used to support claims ofenvironmental upliftment and social benefits, will become a toxic contagion of the Climate Change Industry,exactly mirroring the subprime mortgage model, which had such a disastrous impact that spread across somany sectors, industries and economies.

French bank Société Générale projects that “European carbon permits may fall close to zero should regulators failto set tight enough limits in the market after 2020″. Without much prospect of that, the bank therefore loweredits 2012 forecasts by 28%. A 54% crash for December 2012 carbon futures sent the price to a record low, justslightly more than €6 a ton. An additional oversupply of 879-million tons was anticipated up to 2020, partly as aresult of a huge inflow of United Nations (UN) offsets: about 1, 75-billion tons.

Every analyst concedes that carbon prices will be far too low to catalyse the transformative innovationsnecessary in energy, transport, production, agriculture and disposal to achieve a solid post-carbon footholdseeing as most cost more than €50 a ton (the EU peak was just more than €30 a ton five years ago.

The carbon emissions trade was anticipated to reach a global value of $3-trillion by 2020; the reality has been thatthe market has now peaked at $140 Billion in annual carbon trades. Most of these trades are in the EU where theEmissions Trading Scheme was meant to generate a cap on Emissions and a steady 1.4% annual reduction. Thespeculative unregulated character of these markets has bred rampant fraud, VAT Scams and similar practices thatresulted in the EU Emissions Market being closed for two weeks.

Continuing to fund a broken and potentially corrupt system is not viable. Taking into consideration the cost andtime it would take to fix the system, a better answer is to develop a lower cost, more stakeholder-encompassing,rigorous set of standards. These would focus on addressing the key problems as outlined within this Report whilealso ending speculative gambling with the lives of poor nations and instilling structure, transparency and integrity.Ensuring that even the poorest are able to find a place at the table of Carbon Offset is a priority. Therefore, thedevelopment of low cost but no less substantial and rigorous scalable Carbon Offset Standard(s), which alsofacilitate affordability at even micro project level, is required.



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Probus Sigma gratefully acknowledges the valuable contributions of:

Nichole Afonso: Assistant to the Managing Partner Lisbon Office

Stefania Silla: Project Manager Lisbon Office

Frances Thompson: Consultant, Specialist Compliance Amsterdam

Ian Edwards: Technical ISO Specialist London

Alexandre De Mathelin: Research and Analytical Support Bruxelles

Amanda Petre: Intern Technical Research Lisbon & Malaga



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Cimate Change-Investment Grade-Standards-v-Private Special Interest Group "Standards".

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