DBS and StanChart lead Singapore-based carbon exchange

DBS and Standard Chartered have joined with Temasek, Singapore’s sovereign wealth vehicle, and SGX, the stock exchange, to launch a global carbon exchange and marketplace.

Climate Impact X is the first venture of its kind to be based on the principles of the Taskforce on Scaling Voluntary Carbon Markets, the body chaired by Standard Chartered chief executive Bill Winters and launched by former governor of the Bank of England Mark Carney.

While many efforts have been made to build viable carbon markets since the Kyoto Protocol pledged much of the world to limit greenhouse gas emissions in 1997, they have tended to struggle for relevance, trust or scale.

The hope of this initiative is that the size and standing of the partners, coupled with an attempt to build an entire ecosystem rather than a single element of one, will be sufficient to make it successful.

Characteristically for an entity that has Temasek and DBS among its backers, technology will be at the forefront. The exchange aims to leverage satellite monitoring to keep track of project progress, as well as machine learning and blockchain technology to ensure the transparency and integrity of carbon credits.

The exchange, which should open for business by the end of the year, will initially focus on Natural Climate Solutions, which is a category of green projects that seeks to protect or restore natural ecosystems, notably forests, wetlands and mangroves.

Since Asia accounts for around one third of the global supply potential in this field, with forestation particularly important in the largest southeast Asian nation of Indonesia, Singapore sees an opportunity to link the availability of suitable projects with its own status as a financial centre that has an established rule of law and advanced market infrastructure.

Aside from the exchange, CIX will include a marketplace within which potential buyers can find verified projects that meet their needs or enthusiasms.

“You might have a particular preference for a country or type of project, and you can buy that,” explains Mikkel Larsen, chief sustainability officer of DBS.

In order to verify the level of integrity of the projects, they will use a rating system – “we believe in a complex market with so much information to make a decision on, ratings are a very useful tool” – as well as satellite monitoring and price transparency.

The group will be guided by an international advisory council, which will be an independent expert body made up of non-governmental organizations, corporates and project developers, as well as academics.

It will also seek to build a coalition of global partners, including the Winters-led task force and the Natural Climate Solutions Alliance.

Piyush Gupta, chief executive of DBS, says the process started a year ago when the Singapore government launched a task force called Emerging Stronger, designed to help the country come out of the pandemic in the best possible shape. Doing so swiftly brought them to the subject of sustainability, which was then narrowed down to carbon.

“We figured there was a real opportunity to make and position Singapore as a carbon services hub and a carbon trading marketplace,” says Gupta, who was on the task force.

“Even though carbon credits have been accepted as a meaningful part of the system since the Kyoto Protocol, the reality is 25 years later markets are illiquid, fragmented and there is a degree of mistrust around the very viability of these projects, and whether they are a kosher thing to do.”

But there is no question that the urgency towards environmental change has become steadily more acute over the years.

“Timing is everything, and net zero is the new normal,” says Steve Howard, chief sustainability officer at Temasek. “It is the right initiative at this moment in time.”

Part of the challenge the exchange seeks to address is that while corporates recognize the need to change, it is not always within their ability to change quickly, particularly in Asia where the use of coal is still so widespread.

Additionally, the transition is sometimes not cheap.

“As we make this progressive shift to a lower carbon future, Asia will need a lot more transition financing than is available today,” says Ravi Menon, managing director of the Monetary Authority of Singapore. “To spur more green finance for transition, we need two things in place: a price on carbon and a market for trading carbon credits.

“Climate change is a result of the biggest market failure in history,” he adds. “For the longest time, the world did not put a price on the carbon emissions which have steadily degraded our environment.

“The challenge is to arrive at the right price that does not unduly impede economic development and is sufficient to drive decarbonization efforts.”

Menon says that globally there are 61 carbon pricing initiatives underway, roughly split equally between carbon taxes and emissions-trading systems.

CIX’s particular field of interest is voluntary carbon markets, rather than compliance-related markets in which companies are required to meet national or international standards.

“In the journey to a greener world, voluntary is expected to play a more impactful role,” Menon says.

Gupta adds: “There is massive growth in net zero commitments and voluntary carbon requirements, and there will be a huge, multi-billion dollar opportunity to create a carbon asset class. It seemed to us that Singapore has a possibility to play a distinctive role.”

Aside from its infrastructure and track record, Singapore has “the ability to put together a carbon-trading platform which addresses the key issues of trust, verification, transparency, integrity, and set a high bar on quality in a way that investors will find appealing.”

Winters learned a great deal from his chairmanship of the TSVCM.

“The concerns that have been expressed are legitimate,” he says. “There are questions about the way that carbon credits have been used, about underlying standards, about transparency of the market, and about what the actual price should be. That was the genesis of the task force on carbon markets.”

What he concluded from that, he says, was that “the missing piece was common standards and a universal governance framework.”

Boon Chye Loh, chief executive of Singapore Exchange (SGX), is confident that bringing all the partners together, hopefully to be joined by others globally, is a key to success.

“The single most important factor in running a successful exchange is the coming together of the ecosystem,” he says, “which we will have. Climate change mitigation requires a collective effort.”

Initial responses from financial professionals not involved in the exchange were positive.

“If you can build transparency and give investors comfort, you will get the scale,” says one, who added it was interesting to see such an initiative being driven from Asia rather than Europe or the US.

Another commentator suggests it will be a wake-up call to the UK, “as they were hoping to be the global market.”

In its early days, the enterprise will require several things to succeed. It will need to convince people that the projects it represents are quantifiably legitimate; it will need a degree of liquidity; and eventually it will need other partners to join it in order to give it global scale.

None of these will be easy. But the scale of the backers gives them weight.