Banks’ carbon credit offerings will not turn the tide for the struggling market

WHILE banks in Singapore have started to offer carbon credit-related products and services as part of a suite of decarbonisation solutions for their corporate clients, it is not a panacea for South-east Asia’s fledgling carbon market – which has been affected by the global slump in carbon trading after several greenwashing scandals.

Ultimately, ensuring that carbon credits generated and sold are of high quality – through regulatory framework and universal standards – is what will eventually reverse the fortune of the market, said market observers.

The three local banks have followed in the footsteps of their global counterparts, having set up emissions trading desks and offering carbon financing or trading for their clients in the last few years.

However, The Business Times understands that there has not been sustained demand for such services from their clients yet.

For one thing, there is no clear signal from global bodies or regulators to drive demand among corporates.

The Science-Based Targets initiative, whose framework for companies to achieve net-zero emissions is the most widely referenced and is seen as the gold standard in scientific rigour, has not been able to decide on the use of carbon offsets by corporates.

In the context of South-east Asia, there is hardly a compliance market that would drive up the demand for companies to purchase carbon offsets.

Singapore is the only market so far that has put in place a scheme that allows large emitters to use carbon credits to offset 5 per cent of their taxable emissions. Even then, it covers only industrial facilities with direct greenhouse gas emissions of at least 25,000 tonnes of carbon dioxide equivalent every year.

This means that the majority of companies in Singapore have no incentive to purchase credits, except out of their climate commitments.

Banks themselves are also cautious about financing the development of carbon projects, given the reputational and liquidity risks to which they could be exposed.

Developers need to first show that their projects are of high quality, transparent and verifiable before banks will step in and act as an intermediary, said Anton Ruddenklau, partner and head of financial services at KPMG in Singapore.

“Banks only want to be involved in projects that have got really strong governance, risk and control management. They don’t want to be involved in things that are somewhat flaky,” he said.

“With some of the frauds and the scams and the poorly conceived projects, the banks will say the jury is out. So they’ll be looking for really good evidence on verification – some type of rating or some type of feasibility and ground truth around the carbon credits that can be generated,” he added.

That being said, banks’ participation in the sector could help accelerate the development of a more robust ecosystem in South-east Asia, said Lee Bing Yi, a partner specialising in financial services assurance, sustainability and climate change at PwC.

This would ultimately benefit the region, which is home to a huge potential supply of carbon credits due to its rich natural carbon sinks and renewable energy sources.

“However, this development will take time as the necessary regulatory frameworks for carbon trading gradually develop and mature,” said Lee.

Edwin Seah, lead for the non-profit group Southeast Asia Climate and Nature-based Solutions Coalition, also believes that local banks entering carbon markets is a positive development, and is an indication of their confidence in the growth potential.

“Banks provide a level of credibility and assurance, which could help further build credibility and demand in carbon credits generated from high-quality nature-based solutions projects in the region. These developments should support the growth of carbon markets and contribute to rebuilding trust, confidence, and integrity within them,” he said.

Despite the lack of demand in credits and credibility concerns on their supply, banks here see the need to build up the capabilities in this space first, so that they are able to quickly take advantage of the opportunities that may arise if the market eventually does turn the corner.

So while banks are interested, the onus is on the developers, verifiers and standard setters to give financial intermediaries that assurance.

“They want to see the numbers. They want to see the controls and the quality in the governance. And they want evidence that these things will produce what they need to, and then they will be ‘game on’,” said Ruddenklau.