Institutions warm to carbon trading even as questions linger
Singapore is pushing ahead with its plan to become a carbon credit trading hub via the Climate Impact X (CIX) carbon exchange, which launched last week to strong support — but some investors remain wary of the logistics and methods involved in carbon credit calculations.
Institutional investors in Singapore and further afield, however, have indicated their willingness to engage with companies to push for greater decarbonisation.
The first day’s trading on CIX (7 June) saw seven transactions totalling 12,000 tonnes of emissions. The initial price for carbon credits was $5.36 per tonne, four times that for similar products at the Chicago Mercantile Exchange (CME), the world’s largest futures exchange.
CIX -- established jointly by Temasek, DBS, Standard Chartered, and Singapore Exchange -- aims to scale the voluntary carbon market, facilitating the sale of large-scale, high-quality carbon credits through standardised contracts that cater primarily to multinational corporations and institutional investors.
Compared to the direct purchase of credits from a specific project, standardised contracts enable the pooling of a high volume of credits across multiple projects.
COMMON CONCERNS
While welcoming the CIX initiative, some investors say there are many unanswered questions on the concept of carbon trading.
Private financier Edward Foo told AsianInvestor the issue for any exchange is the authentication of buyers and sellers: “It’s not just about the exchange per se, but also a way to ensure one unit of carbon credit isn’t rehypothecated many times over.”
At this stage, Foo is unsure if family offices and investing institutions can engage meaningfully with carbon credit trading.
“Even though it has been talked about for some time, there are specific operational aspects of the certification process that are still in the refinement stage. The carbon exchange is merely the front end. There are some middle office and back office processes that, globally, need to be better handled, and I think Singapore is making a strong play for that.”
“If, for example, an oil and gas company buys 10 years of carbon credits for offset, one needs to be able to authenticate and verify that the seller of the carbon credit is able to meet that obligation.
"Should anything happen mid-way, what is the recourse? Suddenly the buyer of the carbon credit has a hole to fill in their netting-off plans.”
The pressure falls on the issuer of the carbon credit, said Foo, and verification is especially important for long duration issues. “Spot or short-term obligations might be okay. But long-tail duration is an uncomfortable question to dive into.”
The concept is clearly still evolving and there are also concerns about costs and pricing of offsets.
EVOLVING BENCHMARKS
“Preserving a mangrove and rainforest is not zero-cost of operations,” said Foo. “And renewable power-derived credit offsets are questionable once you drill down on the supply chain and life cycle.
“So whilst today may be okay, tomorrow a research team can easily publish a report to debunk or hit back on a specific ESG claim that ‘Action A’ generates one unit of carbon credit.”
Foo said there are more questions than there are readily available answers.
“Does Species ‘A’ tree absorb more carbon than the next species? How do you map a rainforest for all the species? How do you determine the net carbon credit? You think the large consulting firms will send their [teams] to live in the Sumatra rainforest for 6 months to figure this out?”
As with much of the science around measurement and benchmarking of a company’s or a portfolio’s green-ness, there is still much scope for the system to be gamed, or simply exploited by consultants and service providers jumping on the climate bandwagon.
“What Singapore is working on, and I recognise it's a work in progress, is to create an exchange [where] buyers can have a higher level of confidence that each carbon credit purchased is solid,” said Foo.
STAYING ENGAGED
Institutional investors in Singapore and in other regional markets have indicated their willingness to engage with companies to push for greater decarbonisation.
Like many asset owners, NZ Super attempts to reduce emissions generated by its corporate operations wherever possible, purchasing carbon credits to offset the remainder.
“Last year, we actually purchased sufficient credits to offset our operational carbon emissions for the year, plus 20% of the rolling average for the previous five years,” senior investment strategist Lucas Kengmana told AsianInvestor.
He added that NZ Super does not offset emissions generated by investee companies. Instead, it focuses on reducing both the carbon emission intensity of the fund, and the potential emissions from fossil fuel reserves held by the fund.
“By June 2022, we had reduced these by 49% and 91% respectively, compared to our 2019 reference portfolio," said Kengmana.
Meanwhile, Morningstar Sustainalytics is warning that at current rates of decarbonisation, companies in Asia Pacific are likely to cause the world to warm by close to 3 degrees Celsius, double the Paris Agreement target.