The focus on environmental, social, and governance (ESG) issues in financial services has received a boost in Singapore this past week, with two announcements underlining the importance of addressing these challenges. Firstly, DBS Bank, Singapore Exchange (SGX), Standard Chartered and Temasek have announced their intention to join forces to take climate action. Through a joint venture to be established by the four parties, Climate Impact X (CIX) aims to be a global exchange and marketplace for high-quality carbon credits.

CIX will leverage satellite monitoring, machine learning and blockchain technology to enhance the transparency, integrity and quality of carbon credits that deliver tangible and lasting environmental impact.

Global efforts to address climate change have been driving demand for solutions to help corporates effectively reduce their carbon emissions. However, today’s low-carbon technologies including current renewable energy solutions are unlikely to be enough in the near term.

Research from BCG shows that such technologies may only reduce two-thirds of global emissions, which may not be sufficient to achieve the goal under the 2015 Paris Climate Agreement to limit global warming preferably to 1.5 degrees Celsius. High-quality carbon credits can provide a practical solution to bridge this gap, particularly in the near term, and will play an important role in a holistic climate mitigation strategy.

"Climate Impact X will provide a solution for corporates to address unavoidable carbon emissions in the near term and propel the development of new carbon credit projects worldwide," said Mikkel Larsen, interim CEO of Climate Impact X and chief sustainability officer at DBS. "With an initial focus on Natural Climate Solutions, the carbon credits will also create impetus to address another grave risk of biodiversity loss and help serve local communities. CIX will build on collective action by global governments, corporates and individuals to achieve a net-zero economy."

Driven by corporate climate commitments, global demand for high-quality carbon credits in the voluntary carbon market is estimated to increase at least fifteen-fold by 2030, up to 1.5 to 2 gigatons of carbon dioxide (GtCO2) annually, according to a report by McKinsey. Despite this forecast, there are still challenges to address in today’s market. For example, trust among investors and buyers may still be limited by a lack of transparency over the risks and effectiveness of carbon projects. As a result, suppliers may face challenges in developing new carbon reduction projects, resulting in liquidity issues.

Larsen added: "By facilitating a well-functioning marketplace with strong impact and risk data, CIX will enable efficient price discovery and catalyse the development of new projects."

Inside CIX

CIX will offer distinct platforms and products that cater to the needs of different buyers and sellers of carbon credits. These include the Exchange and the Project Marketplace, which are expected to be launched by end 2021. The Exchange will facilitate the sale of large-scale high-quality carbon credits through standardised contracts - catering primarily to multinational corporations (MNCs) and institutional investors.

In addition, the Project Marketplace will cater to a broader spectrum of corporates seeking to participate in the voluntary carbon market, offering them a curated selection of NCS projects that can help meet their sustainability objectives. Each project on the Project Marketplace will be supported by transparent environmental impact, risk and pricing data.

To start with, CIX will focus on helping to catalyse the market for NCS, which involve protection and restoration of natural ecosystems such as forests, wetlands and mangroves. NCS are cost effective and provide significant benefits by supporting biodiversity and generating income for local communities. Asia houses a third of the global supply potential and is therefore one of the largest suppliers of NCS globally, according to a World Economic Forum report. CIX will feature carbon credits from various high-quality NCS projects around the globe on its platforms. It is also in conversations with global rating agencies to provide independent ratings to these projects.

In addition, CIX will be guided by an International Advisory Council - an independent expert body comprising non-governmental organisations, leading corporates and project developers, and academics and thought leaders. CIX will also work with an ecosystem of global partners and international working groups, including the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) and the Natural Climate Solutions Alliance, to align on leading standards for quality and integrity.

The joint operation of CIX by DBS, SGX, Standard Chartered and Temasek will be subject to all required regulatory approvals/consents to be obtained. The contributions by the parties into CIX will include cash, technical expertise, networks, thought leadership, IT architecture, and other intangibles.

Singapore infrastructure's role in promoting ESG

CIX will be headquartered in Singapore and will leverage the country’s internationally-recognised financial, legal and commodities hub infrastructures. These infrastructures are foundational to nurturing a trusted ecosystem of partners required to scale the global voluntary market. In addition, Singapore has been supportive of initiatives that strengthen the trust and verifiability of carbon credits, as part of the nation’s ambition to become a global carbon services and trading hub.

CIX is an initiative born out of Singapore’s Emerging Stronger Taskforce’s Alliance for Action (AfA) on Sustainability. The Emerging Stronger Taskforce (EST) was formed under the Future Economy Council (FEC) in May 2020 to review how Singapore can stay economically resilient, and build new sources of dynamism to emerge stronger from COVID-19. The Alliances for Action formed are in the areas of AgriTech, Digitalising Built Environment, EduTech, Enabling Safe and Innovative Visitor Experiences, Facilitating Smart Commerce, MedTech, Robotics, Supply Chain Digitalisation, and Sustainability. The AfA on Sustainability aims to position Singapore as a hub for carbon-related services and nature-based solutions, transforming the country into a “Bright Green Spark”.

Another financial institution hoping to benefit from Singapore's rise as an ESG hub is Deutsche Bank, which has just announced the establishment of an ESG Centre of Excellence (COE) in the country. The ESG COE will work across all the business divisions of Deutsche Bank, focusing on execution of ESG transactions, new product development, and advisory services, including sharing of global best practices with Asian regulators and regional bodies such as ASEAN and APEC. It will also focus on innovation at the nexus of ESG and Fintech to develop new products addressing gaps in the ESG market, including impact monitoring, data management and payments to un-banked communities.

The ESG COE will house a sizable team with deep ESG expertise and work with coverage and product teams to implement the following activities and programmes:

• Core Activity: ESG transactions across all business divisions, including Investment Bank, Corporate Bank, International Private Bank and Asset Management (DWS).
• ESG Leadership Lecture Series in partnership with academic institutions.
• ESG Fellowship Program for graduate students at top global MBA programmes.
• ESG Internship Program for undergraduate students at top global universities.
• Partnership with research institutions and global think tanks on ESG research.
• ESG Policy Seminars for sovereign and sub-sovereign governments.

"The transition of Asia towards sustainable practices requires ESG transaction models, products, solutions and regulatory measures which meet international standards while supporting on-the-ground realities in Asia," said Kamran Khan, Head of ESG for Asia Pacific at Deutsche Bank. "By establishing this ESG Centre of Excellence in Singapore, we aim to set standards for evidence-based, data-driven transactions which can substantiate ESG impact and support sustainable growth."