Alexandra Tracy, Green Finance Advisor of Friends of the Earth (HK)

Investors around the world are looking at ways to decarbonise their portfolios and setting targets for themselves to meet over the next ten, twenty or thirty years.

The number one strategy for most investors must be to reduce emissions across the portfolio by reallocating capital among higher and lower carbon assets, and working with investee companies on their own transition to a greener business model.

Some industries, however, are going to be more challenging and very costly to decarbonise, and will continue to be emissions heavy in the short to medium term.  This will probably mean that by 2030, say, there will be residual emissions remaining in companies in the portfolio.  One response is to divest.  Another is to use carbon offsets to neutralise the greenhouse gases that they are creating.

Offset markets still have a way to go

Mandatory carbon markets have been around for years (see the European Union, North America and now China).  But the voluntary carbon credit market has really grown significantly in just the last few years, as large companies like IBM, Amazon and Microsoft have looked to carbon offsets as part of the solution to meeting their net zero targets.

Given its relatively early stage of development, the voluntary carbon market today faces big challenges in attracting investors.  Carbon credits (generated by activities as diverse as renewable energy, forestry, sustainable farming or preserving landscapes and coastlines) are not standardised.  Collecting data from these projects can be difficult, the methodology for verifying the credits is not consistent and the benefits are often not well defined.

A lack of trust in the market causes investors to be cautious about participating.  This, in turn, means that the market will continue to lack the liquidity necessary for efficient trading.  Greater transparency and oversight will be very important for building investor appetite, as will the development of better risk management services and financing alternatives.

But the future could be huge

McKinsey estimates that the need to meet corporate commitments could push global demand for high quality carbon credits in the voluntary carbon market up by at least fifteen times by 2030.  Indeed, if the current structural issues can be addressed, and substantially more liquidity created, the market size by then could be as much as US$50 billion, according to the Taskforce on Scaling Voluntary Carbon Markets, a private sector grouping.

Climate Impact X

A new venture in Singapore aims to tackles the shortcomings and create a voluntary carbon marketplace with the necessary transparency and liquidity to attract investors at scale.  The four partners behind the new platform – the Singapore Exchange, Temasek, DBS Group and Standard Chartered – will leverage their own expertise and Singapore’s strong regulatory reputation to develop a global exchange for trading trusted, high quality carbon credits.

CIX will offer two digital platforms tailored to the needs of different buyers and sellers.  Its carbon exchange will facilitate the sale of carbon credits in large volumes through standardised contracts, mostly to multinational corporations and institutional investors.  Alongside this, a project marketplace will enable the purchase of carbon credits directly from specific projects developing natural climate solutions.

The marketplace will allow a broader range of project companies to participate in the voluntary carbon market by offering credits to global buyers, including corporates looking to meet their sustainability objectives.  Every transaction will be backed by detailed information on the additionality, benefits and carbon impact of the underlying project.

For both platforms, CIX will utilise satellite monitoring, machine learning and blockchain technology in order to increase transparency and ensure the availability of trustworthy data on the quality of the carbon credits being traded.

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