Emerging markets need to find an additional US$94.8 trillion of transition finance to transition to net zero by 2060. The question is, ‘Where is the money coming from?’ asked Standard Chartered group chief executive officer (CEO) Bill Winters during Ecosperity Week 2022.
“When we look at the aggregate amount of money that’s been set aside for sustainable financing or ESG (environmental, social, and governance) funding, it is many multiples of that. But we know that money isn’t making its way into the neediest hands in a timely fashion,” said Winters on Jun 9, the third and final day of Ecosperity Week.
This US$94.8 trillion, based on a study by Standard Chartered, is on top of the capital already committed to each market and is in addition to the estimated US$44.4 trillion raised from emerging market carbon taxes. It includes the investment needed to transition the power sector, to make industry, transport and buildings more energy efficient, and other public expenditure including early scrappage schemes and environmental studies, said the bank in its Just in Time report.
That there is availability of funds is evidenced from Standard Chartered being “well on track to exceed” the target it set itself to mobilise US$300 billion in green and transition finance by 2030, said Winters.
“The reason we’re on track to succeed is ... the cash is there; it just needs some help getting to the right place. And what we’re finding is that as we identify that cash, as we structure the transactions in a way that is suitable for institutional investors or others outside the core banking system, they are able to provide this financing,” he said. “And the cost of funds for projects is perfectly reasonable. This is obviously a very encouraging sign that this trend can continue.”
The Net Zero Banking Alliance, which is a group that represents about 40 per cent of global banking assets in aggregate, is key to unleashing and identifying this US$95 trillion of required financing, especially in emerging markets, said Winters.
“The objective of this group is both to determine and get some consistency in terms of how we measure the different climate-related financing questions that float around, but also how we can put these tools in place to encourage, for starters, public-private partnerships,” he said.
“How can we use a combination of private capital (bank capital and capital markets) together with the public sector entities, whether it’s multilateral development banks or export credit agencies, or others that have set up funds that are facilitating and catalysing the provision of private capital, into these sustainable finance markets?”
The industry-led, United Nations-convened Net Zero Banking Alliance’s member banks are committed to aligning their lending and investment portfolios with net-zero emissions by 2050. The alliance was created in April 2021.
A growing industry
Another key will be carbon markets.
Carbon trading is essentially the buying and selling of credits that allow an entity to emit a certain amount of carbon dioxide and other related greenhouse gases.
Indeed, Singapore has its own global carbon exchange and marketplace. Climate Impact X (CIX) was jointly established last year by DBS Bank, Singapore Exchange, Standard Chartered and Temasek to facilitate the trade of carbon credits. It launched Project Marketplace, a digital platform which allows businesses to buy and sell carbon credits, in March this year.
CIX said quality is a core component in its project curation and that all the projects that are listed on the platform are verified by global registries, subjected to internal evaluations over various metrics, and checked against independent ratings.
According to Refinitiv’s Carbon Market Year in Review 2021, total turnover of global carbon markets grew by 164 per cent in 2021 to hit 760 billion euros (S$1.1 trillion). Traded volume reached 15.8 billion tonnes (equivalent to 15.8 gigatonnes of carbon dioxide), 24 per cent higher than the 12.7 million tonnes traded in 2020.
Europe is home to the largest carbon market by traded volume; other markets include South Korea, New Zealand, and North America. The United Kingdom emission trading system (ETS) was launched in January 2021 as a result of the British decision to leave the European Union, while China’s national emission trading scheme became fully operational in 2021 and began seeing transactions in July.
According to the financial markets data company’s carbon market survey which was published in June 2022, the some 300 respondents surveyed see voluntary carbon trading increasing. Over 70 per cent of the respondents said 2022-2023 transacted volumes will be higher than the already record amount traded in 2021.
But while carbon markets are an important driver of emission abatement, problems abound, including insufficient governance and a lack of unified standards.
Indeed, the survey revealed concern regarding operational challenges and difficulties with monitoring, reporting and verification (MRV) under the Chinese ETS. Key challenges include opaque fundamental data and lack of specialists in carbon trading, whereas respondents cited technical issues with MRV as well as lack of experience among third-party verification bodies as urgent problems for the national ETS.
This is “no surprise” given that actual transactions just started in July 2021, said Refinitiv.
On the issue of fragmentation, Winters noted: “For starters, it’s fragmented between a number of different compliance or government-run markets - the largest of which is in Europe, where there’s a particular set of policy objectives and constraints.”
He added: “And then the voluntary carbon market, which itself is fragmented and it has suffered from a lack of consistency of standard and approach and therefore a lack of confidence in the actual efficacy of these credits to ultimately translate into lower greenhouse-gas emissions.”
There are thus 2 main objectives around carbon markets: having an agreed set of standards which are governed through an independent governance process, as well as looking for convergence between the various markets.
“Ideally, there would then be a single price for carbon. That price would be transparent, it would be credible, and it would be used as a basis for people to enter into projects where they could look at the price of carbon in addition to other co-benefits of a particular project - biodiversity or employment or water safety or water access.”
Meanwhile, David Antonioli, CEO of Verra - who spoke on a separate panel entitled “Setting Carbon Markets Up for Success” - was more optimistic about the current state of play in carbon markets. Verra is the world’s largest certifier of carbon credits and administers the Verified Carbon Standard Program.
Even as he acknowledged that there is fragmentation, he argued that most standards in the market today meet “a certain threshold level of quality”. What is missing, he said, is an assessment from a third party, which is where the Integrity Council For The Voluntary Carbon Market can play a role.
An independent governance body for the voluntary carbon market, the Integrity Council was established in 2021. In March this year, they announced plans to launch The Core Carbon Principles and Assessment Framework in the third quarter of 2022. It is expected to set new threshold standards for high-quality carbon credits and provide guidance on how to apply the core carbon principles.
Antonioli is an elected market representative of the body, while Winters is on the distinguished advisory group.
In the longer run, it is important that the standards established continue to have integrity, said Antonioli.
“(There must be) a constant process for updating and revamping and rethinking our rules to make sure that we continue to follow best practices and best scientific evidence that continues to come out,” he said.
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