Singapore banks building up capabilities in carbon markets despite low demand and greenwashing concerns

SINGAPORE banks are setting up carbon trading desks and building up capabilities in carbon credits, despite the small size of the voluntary market, which has also been plagued by greenwashing scandals.

But banks and market watchers told The Business Times that the carbon market will eventually grow in importance to support the decarbonisation needs of Singapore and the wider South-east Asian region.

Demand for carbon credits to offset companies’ residual emissions is expected to increase, said Benedict Tan, head of global markets trading at OCBC. And the demand would not just be from companies looking to voluntarily offset their emissions, but also driven by compliance requirements set up by governments taking steps to fulfil their national climate targets, he added.

Concerns around the integrity of carbon projects are also being addressed, noted Conrad Kwok, head of forex derivatives, commodities and emissions reduction for global financial markets at DBS.

The adoption of global carbon trading rules at the United Nations COP29 climate summit in Baku, Azerbaijan, at the end of last year has renewed hopes that there will soon be a universal standard carbon projects must comply with to be seen as credible.

Under its transition finance framework, UOB is offering financing for clients developing carbon projects, or helping clients looking to purchase carbon credits to offset their emissions.

OCBC established an emissions trading desk in 2023 and is offering compliance and voluntary carbon credits as well as energy attribute certificates.

As for DBS, it provides trading and structuring capabilities for its clients not just for voluntary carbon credits, but also for companies that have to comply with the European Union’s emission trading system, which is the world’s largest carbon market.

DBS’ Kwok added that its ability to buy and store carbon credits provides clients the flexibility to tailor their purchases and retirements according to their needs, compared with carbon exchanges and platforms that have fixed predetermined transaction sizes.

This would provide smaller businesses – which may not have the scale to open accounts directly with exchanges, registries and platforms – access to credits, he added.

These are some of the carbon credit-related products and services that banks have been adding to the suite of decarbonisation solutions for corporate clients, in addition to the more mainstream sustainable financing services, including sustainability-linked loans or green bonds.

The offerings by Singapore banks follow that of other global banks, such as Citi, Goldman Sachs, JPMorgan and Barclays, which have also been building up carbon trading and finance desks. HSBC, however, has abandoned plans to set up a similar team, according to a Bloomberg report in November last year.

Getting a foot in

While the size of the voluntary market is still small at US$1.4 billion according to index provider MSCI – compared with the sustainable bond market which is approaching US$1 trillion – banks that manage to get a foot in the door and build capabilities in this space will have created a competitive advantage for themselves as trusted intermediaries, said market watchers.

By offering services in this space, banks can position themselves as key players in the transition to a low-carbon economy, as well as tap into a new and expanding asset class with significant long-term growth potential, said Edwin Seah, lead for the non-profit group Southeast Asia Climate and Nature-based Solutions (Scene) Coalition.

Given that carbon projects and markets are complex, banks need to develop competencies in identifying and sourcing high-quality projects, as well as in risk management, noted Lee Bing Yi, a partner specialising in financial services assurance, sustainability and climate change at PwC.

Banks can also establish relationships with ecosystem players and position themselves to capture opportunities in offering carbon trading, hedging and structuring solutions for clients as the market evolves, he added.

It’s not just about leveraging the opportunities arising from Singapore’s aspirations to be a carbon services and trading hub. Financing and investing in carbon credits generated from nature-based solutions could help mitigate the impact of climate change in South-east Asia, said Anton Ruddenklau, partner and head of financial services at KPMG in Singapore.

South-east Asia’s huge potential in unlocking revenues from carbon credits is well-known, given its abundant forest and coastal ecosystems.

“There is a lot of validity in the fact that if you invest in nature and do that in the right way, there is a better, longer-term benefit to be had. But this is part of the challenge. We’re still trying to work out what is the right set of pathways for net zero and transition,” said Ruddenklau.

“There’s no debate that carbon credits will become much more valuable or viable in the future. But again, we’re without any consistent standards and policies and without enough evidence that these work over a long period of time. We are very much iterating as we go,” he added.

Risk management

Given the lack of standardisation, liquidity and transparency of the market, Lee noted that carbon credits are subjected to permanence, leakage and additionality risks as well as policy and regulatory risks arising from evolving government regulations.

They also carry unique risks related to environmental outcomes, community impact, and long-term sustainability, unlike other asset classes, noted Seah.

Banks need to ensure thorough due diligence of both projects and developers, including ensuring that projects meet or even exceed existing carbon project standards and that the credits are priced in a way that reflects the true cost of developing high-quality projects, he added.

Although integrity concerns over carbon credits have not fully subsided, OCBC’s Tan said that these are growing pains that are currently being worked out by the market.

“Rather than abandoning carbon credits and similar mechanisms due to these challenges, the focus should be on improving their integrity through robust standards, enhanced verification processes, and greater transparency,” he said.

Bonar Silalahi, head of sector solutions group at UOB, said that the bank conducts stringent reviews of carbon credits project design documents, and obtains independent validations by acceptable monitoring, reporting and verification auditors during the initial review and on an annual basis.

Auditors also would be required to confirm that the carbon credits are in line with best practices and recommendations from the Voluntary Carbon Markets Integrity Initiative and the Integrity Council for the Voluntary Carbon Market.

“As carbon markets continue to grow, we are monitoring the development of international standards and benchmarks for carbon credit issuance, monitoring, reporting and verification. Such standards will be instrumental in providing clear and objective guidelines on how credits are being measured,” he added.

DBS’ Kwok said that the bank includes reputable third parties, such as carbon exchange Climate Impact X and carbon-credit rating agencies, into the decision-making process when assessing eligible registries and credits.

Ruddenklau added that banks would have to hire professionals with a combination of skill sets including science, economics, capital and regulation – some of which are relatively new for financial services.