The Challenge of Making Carbon Credits Fungible

Fungibility refers to the property of a good or asset where individual units are interchangeable and indistinguishable.  In other words, each unit of a fungible asset is considered identical and can be exchanged or replaced with another unit of the same asset without any loss of value or change in quality.  Examples of fungible assets include money, commodities, and certain financial instruments.  In the case of money, a specific unit of currency, such as a dollar bill or a digital currency unit, is fungible because any unit of the same denomination is equal in value and can be used interchangeably.  Similarly, commodities like gold or oil are often considered fungible because each unit of the same type and grade is interchangeable with any other unit of the same type and grade. 

Fungibility is a key concept in economics and finance, as it simplifies transactions and facilitates the liquidity and trade of assets in markets.  Non-fungible assets, on the other hand, are unique and not interchangeable with other units.  Real estate, collectibles, and certain types of intellectual property are examples of non-fungible assets.  Fungibility is lacking in the carbon markets, even across compliance exchanges.  For the carbon market to move to next level, and be a distinct commodity to be traded and consumed, this is a necessity.  Just like in the commodities market, for it to function, the market must have confidence that all producers are working within the same regulatory framework, to the same standard, such that the market can reliably value all carbon credits of the same category to the same value, regardless of geographic origin.  There must also be enough of the market for there to be liquidity. 

The basis of the market is a carbon offset credit, or simply a carbon credit.  A carbon offset credit is a tradable certificate representing the reduction, the removal, or the avoidance of production, of one metric ton of carbon dioxide (CO₂) or its equivalent in other greenhouse gas emissions.  It is called CO₂e.  The intent is to mitigate climate change by incentivising and by financing projects that reduce or offset greenhouse gas emissions.  There are, broadly, two kinds of markets: the voluntary and the compliance.  Voluntary carbon credits do not meet the verification and validation requirements to be considered a financial instrument.  The key to the commodification of carbon credits is found in the compliance market. 

While I may refer to carbon credits as a commodity and a financial instrument, a financial instrument and a commodity are distinct concepts, but there can be overlap in certain situations.  A financial instrument is a broad term that refers to various contracts or assets whose value is derived from an underlying asset, index, rate, or instrument.  It represents a tradable asset that has monetary value.  Examples of financial instruments include stocks, bonds, derivatives such as options and futures contracts, currencies, and various investment funds. 

A commodity, on the other hand, is a raw material or primary agricultural product that is traded on an exchange.  Commodities are typically standardised and interchangeable with other goods of the same type.  Examples of commodities include gold, silver, oil, natural gas, agricultural products, and base metals. 

Financial instruments can be linked to commodities in certain cases. For instance, financial instruments like futures and options contracts can be based on the value of commodities.  Traders and investors use these derivatives to speculate on or hedge against price movements in commodities.  Some financial instruments are specifically designed to track the performance of a commodity or a basket of commodities.  Exchange-traded funds (ETFs) and commodity-linked notes are examples of such instruments. 

A financial instrument is a broader category that encompasses various tradable assets, while a commodity specifically refers to raw materials or primary agricultural products.  However, financial instruments can be created based on the value of commodities, allowing investors to gain exposure to commodity price movements or manage related risks.  In the case of carbon credits, it can become a commodity, and because of the nature of the contracts, and the possible derivatives, it can become a financial instrument. 

At the moment, however, there are key differences between the commodities markets and the carbon markets.  For example, commodities have defined rules on standards and regulations that must be adhered to.  The carbon markets lack that.  The standards are evolving, and there are different levels of credibility in the different markets.  This explains why the EU ETS alone takes up more than 90% of all the compliance carbon markets, despite there being around 30 such markets. 

Commodities are abundant enough that while changes in supply and demand will influence price, there is still liquidity in the market.  That is not the reality with carbon credits.  In fact, as we push towards a more stringent compliance regime, to pave the way for rated carbon credits, we will face an initial shortage oof such carbon credits because there are not enough compliance credits to meet the expected exponential rise in demand due to the implementation of the carbon tax globally. 

While we may refer to carbon credits a commodity, commodities are generally raw materials that may be consumed to produce finished products.  The commodity itself is a physical product.  That product may be tested, assessed, and validated, which creates confidence in its fungibility.  Carbon credits are smart contracts, sometimes on a blockchain.  They are intangible products based on a physical asset, the carbon sink.  It is because of this intangibility that the market confidence for carbon credits can only be based on the stringent compliance standards and regulatory framework.  It is this point that precludes voluntary credits from being considered either a viable commodity or a financial instrument. 

The intangibility of carbon credits is what feeds the inherent uncertainty of the product.  This is what needs to be addressed.  Analysts, experts, and market observers have advanced the idea that carbon credits are like bonds.  This is a conceptual comparison, an analogy used to highlight certain financial characteristics that carbon credits and bonds may share, such as tradability, market value, and the potential for generating returns. 

Like bonds, carbon credits can be bought and sold in markets, and their value can be influenced by supply and demand dynamics.  Both financial instruments have the potential to provide financial benefits, although the mechanisms through which they do so differ.  This leads to the debate whether carbon credits should be treated more like bonds.  This implies that market underpinnings such as ratings, compliance standards, regulatory audits, and insurance drive pricing and risk scoring.  They differ in significant areas.  Bonds represent debt issued by governments, municipalities, or corporations.  When an investor buys a bond, they are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. 

Investors in bonds receive periodic interest payments as income, and they are typically repaid the principal amount at maturity.  Carbon credits do not generate periodic income.  Their value is associated with their ability to offset or reduce greenhouse gas emissions.  Bonds are issued by governments, municipalities, or corporations to raise capital.  The issuer has an obligation to repay the principal amount and make interest payments according to the bond’s terms.  Carbon credits are generated by projects that reduce or offset emissions.  The entities undertaking these projects may sell the credits to generate revenue, but there is not a direct obligation to repay a principal amount as with bonds. 

In any case, whether we consider carbon credits a commodity or financial instrument or both, a key contention is the lack of trust in the quality of the carbon credits, and the associated reputational risk for buyers and investors.  Buyers and investors are forced to conduct extensive amounts of due diligence prior to executing any carbon credit transaction, which adds to cost.  Because of this variance in due diligence in the absence o framework, there is no fungibility.  There is also the challenge for buyers to align their due diligence requirements to wider message on net zero strategies, and Sustainable Development Goals (SDGs).  In the course of this, there is a lack of understanding, in many quarters, on the differences between reduction carbon credits, avoidance carbon credits and removal carbon credits. 

There are specific areas that need to be addressed, as we work towards fungibility in the carbon market.  We cannot achieve fungibility for all compliance carbon offset credits, but we can have fungibility within classes.  That means we have to class them according to type of project.  These include cookstove offsets, renewables, afforestation, reforestation, biochar, peatland, direct air capture, and green and blue sequestration, among others.  Some of these types are not suitable for the compliance market.  For example, cookstove offset projects are responsible for millions of junk credits. 

As part of the verification and validation process, we need to consider location, because that has a direct correlation to credibility.  From location, we can consider political risk, regulatory risk, local community engagement, benefit-sharing, relevance to buyer’s business; geological risk such as natural disaster, corruption, and even project viability.  This is especially important when we see this in light of the SSGs. 

In summary, we need to identify the types of carbon credits for the compliance market before we create a regulatory framework that encompasses the points of contention to be addressed.  We need to identify, qualify and quantify the risks.  We need a wide variety of strategic partners from regulators to central banks to project owners to buyers before traction can be achieved.  From this, we need to work towards a rating system for carbon credits, so that they can be rated, and eventually made investment-grade.  When we have that, we can apply for carbon credits to be recognised as financial instruments by elect central banks, and made fungible.

The Next Step for Carbon Credits

The following is the original draft of the article written for the Business Times, by Ng Kin Foong, Chief Executive Officer of Red Sycamore and I.  The article was polished by Gwen Wanda Ling Poon Wah, Communications Director of ADK Connect Singapore Pte. Ltd.  She was invaluable in getting the article to print. 

Twenty-six years after the Kyoto Protocol, efforts to end global climate change have been slow, because it is expensive, and politically unpopular.  Bloomberg’s green-energy research team estimated, in July 2023, that the cost of achieving a net-zero world would cost US$196 trillion in investments by 2050.  Governments have prioritised immediate concerns such as rising food costs and combating inflation over combating the climate crisis and meeting net zero targets.  As a result, climate commitments have not been kept, and we are experiencing the tragedy of the commons while facing an existential crisis. 

How then should the world move towards halting the climate crisis?  Enter carbon credits.  The clean development mechanism framework designed carbon credits to incentivise developing nations to protect the environment while pursuing economic growth.  The intent is to create a win-win model for saving the environment without short changing developing countries.  The premise of carbon credits is conceptually sound, but many feel that the implementation of carbon credits has been beset with problems. 

In recent months, the media has been awash with bad news on voluntary carbon credits, with hundreds of millions of dollars’ worth of credits generated from environmental projects being invalidated.  Detractors say that projects set up for creating carbon credits are often based on vague predictions, can cause community conflicts, and do not create additional climate benefits.  Yet, this does not recognise the reversed Greenhouse Gas (GHG) effect of such projects on the climate and its benefits.  The world still needs carbon credits, and proponents of carbon credits are still pushing for it.  After all, carbon credits are a vital part of the strategy to mitigate the growth in GHG that comes from economic development, incentivising businesses to adopt environmentally sustainable practices that save the environment.  Governments implement a carbon tax for companies that are heavy polluters, forcing them either to purchase carbon credits, reduce their GHG emissions, or pay hefty fines.  This compels companies to reduce their carbon footprint and helps those with greener processes become more competitive. 

Then why are governments not implementing carbon credit systems globally?  According to the National Climate Change Secretariat Singapore, only 47 countries have national jurisdictions with carbon pricing, or compliance markets. Countries are reluctant to implement carbon taxes amidst the current global economic climate of inflation, as the cost of business passes on to consumers.  As the world grapples with the more urgent concerns of keeping food affordable and keeping inflation manageable, implementing a carbon regime has taken a back foot, slowing down the investments in carbon initiatives and delaying legislation. 

To make things more complicated, countries worldwide do not have a unified carbon system.  This creates uncertainty, especially amongst companies which operate across national jurisdictions.  How can they partake in the carbon credit system if they do not have clarity?  To illustrate this point, shipping companies prefer to buy blue carbon credits locally as their business impacts the ocean where they sail.  Yet, if they sail between Europe and Singapore, where should their blue credits come from?  The lack of good projects with strict regulatory oversight across the jurisdictions where these companies operate definitely hinders the development of the private market for carbon credits. 

If governments are moving slowly, why does the private sector not step up?  With the lack of information, consensus, and clarity of the international community on the processes that create carbon credits, voluntary market development has been hampered by bad quality credits, poor regulatory oversight, and a lack of credit fungibility across jurisdictions.  For example, Verra, the world’s largest carbon credit certification company certifying 75% of all carbon offset credits in the market, was forced to invalidate billions of dollars’ worth of credits after an investigation by the Guardian and other agencies in January earlier this year.  Until these challenges are addressed, investment will not pour into carbon projects from the private sector. 

Yet, this does not mean carbon credits do not work.  These challenges faced by the carbon credits market are neither new nor unforeseen.  New financial mechanisms are often introduced voluntarily to gauge market reaction and its effects before legislation comes in to protect investors.  These legislated products then become the new standard from which the market develops.  Likewise, the development of the carbon framework is currently underway, and is far more important than many realise.  If we do not implement the carbon regimes properly, the entire carbon credit system will be discredited before it even has a chance to mature. 

New Carbon Exchange Mechanism Needed

What can we expect moving forward?  With more illuminating information gleaned from scientific research and best practices in ESG projects, regulations are expected to tighten while carbon credits evolve into financial instruments.  Carbon credits generated from such projects will be rated based on the project’s impact on both the planet and the people within the communities residing near the project, and those with the highest ratings will command the highest prices.  When we have investment-grade carbon credits, we will see the development of a secondary market to trade those carbon credits.  That means we will have investment-grade credits on a blockchain, futures, options, even ETFs.  A carbon credit, as an asset class, will generate the sort of revenue to fund the actions to fight climate change.  They will be the new standard, as voluntary credits become niche. 

For this to work, we need to see a new carbon exchange mechanism.  Currently, carbon credits are not fungible across the different jurisdictions due to a lack of consensus within the international community on the regulatory framework.  This discussion requires partners from the private sector, and private funders.  What we need right now is a deeper discussion on this, and a framework in place to move towards these investment-grade carbon credits.  Fortunately, finance is one of the themes that will be discussed at COP28 in Dubai in December.  We will expect to see a tightening of regulatory requirements, a single or unified verification and validation authority, and one unified international standard to lay the groundwork for this mechanism.  Moving in this direction also addresses accusations of greenwashing that plague many voluntary carbon projects, as the tighter regulations prevent a false declaration of value for each project.  At any rate, the certainty that investment-grade credits provide will incentivise the creation of good offset projects that benefit the environment, which is better than not having any offset projects at all. This will also create certainty for investors and catalyse the private sector to finance good projects, moving us closer to reaching our net-zero targets. 

As the market matures, the other argument that abatement is better than offsets will be resolved as different asset classes are created for different types of credits, with the pricing mechanism determining the value of different types of credits generated.  Credits are currently priced based on reliability, impact and cost, which can be made fungible across carbon credit classes.  To curb speculation, governments can give tax rebates to smaller firms in key affected industries, and regulate access to the market, slowing down price inflation caused by carbon taxation and protecting smaller firms. 

The inflationary impact of carbon taxes on the economy is inevitable, but this pales when compared to the cost of climate change.  According to Deloitte, inaction on climate change will cost the world US$178 trillion by 2070.  This must have spurred the European Union to launch the pilot phase of the Carbon Border Adjustment Mechanism, a scheme that will tax carbon-intensive goods imported from outside the bloc, on from 01^st October 2023. 

Implementing carbon taxes and the carbon credit system acts as an insurance policy for the future, because not having it costs way more.  The world is already losing arable land for food production from the USA to Australia, biodiversity in oceans and forests, and natural disasters are becoming more severe from Libya to Canada.  If we do not go green, the world will burn.  The only way we can stop this climate crisis is to have conversations, collaboration, and commitment to international climate goals. 

If handled properly, carbon credits might just be the catalyst for the 5^th industrial revolution: the carbon credit revolution.  

This article is contributed by Terence Nunis, Chief Executive Officer of Equinox GEMTZ, a strategic consultancy, and Kin Ng, Chief Executive Officer of Red Sycamore, which establishes carbon sinks for the creation of investment-grade blue carbon credits.  Both Terence Nunis and Kin Ng will be speaking at the upcoming COP28 in Dubai. 

Note: Essentially, carbon credits are certificates allowing the holder to emit a certain amount of carbon dioxide or other greenhouse gases.  One credit permits the emission of a mass equal to one ton of carbon dioxide.  With the market mechanisms on carbon credits agreed through the Marrakesh Accords, the goal was to limit the increase of carbon dioxide emission by incentivising companies and nations to curb their emissions.  Total annual emissions are capped, and the market allocates a monetary value to any shortfall through trading via an exchange, or through private placement or auctions. 

The original article may be found here: https://www.businesstimes.com.sg/opinion-features/next-step-carbon-credits.

COP28 Warm Up Event: “Taking Sustainability to the Next Level”

On Tuesday, 31^st October 2023, Red Sycamore, in collaboration with Think & Grow held an exclusive panel discussion at the Mandala Club.  The panel title was “Taking Sustainability to the Next Level”. 

The carbon market is evolving rapidly.  There are contentions on the direction the market should take, in accordance to the UN Framework Convention for Climate Change, and the various protocols and treaties.  The regulatory framework is playing catch up to the realities on the ground.  All this constitutes a massive grey market of opportunity for startups.  The panel aims to explore some of the opportunities at length, and tap on the experience of the panel.  It is possible to fight this climate crisis as well as make a return.  This was a summary by Ng Kin Foong, Chief Executive Officer, Red Sycamore. 

The Panellists

De’Angelo Harris (Moderator); Partner; Think & Grow

Eric Tanoto; Chief Executive Officer; USP Group

Tali Goldman; Founder & Managing Director; Market for Good

Terence Kenneth John Nunis; President; Red Sycamore

Introducing the Panel Session - ESG & Startups

On the 07^th December 2023, Ng Kin Foong, our Chief Executive Officer for Red Sycamore, will chair a panel discussion for the Institute of Electrical & Electronic Engineers GreenTech, Sustainability, & Net Zero Policies & Practices Symposium.  This is a programme in alignment with the United Nations Climate Change 28^th Conference of Partners (COP28), in the Green Zone, at Expo City, Dubai, United Arab Emirates.  The title of the session is “ESG & Startups.” 

The panellists for the session are as follows:

David Chen C. Y.; Chief Executive Officer; AgriG8

De’Angello Harris; Partner; Think & Gro

Dr. Victor Tay; Group Chief Executive Officer; RHT Consulting Asia 

The climate crisis is real, and several government and large multinational corporations worldwide have declared that they will be unable to meet their pledges.  Given that the top-down approach to solving climate crisis is not working as intended, we need to democratize the process by encouraging and enabling more people to be active stakeholders in solving the climate crisis, and explore this blue ocean of opportunity.  Many great ideas and solutions die undiscovered for several reasons.  These reasons include lack of funding, the lack of public acceptance because it runs contrary to common convention, or simply being too far ahead or behind the curve due to the rapid rate of technological advancement.  We need new perspectives from all stakeholders, not just those with access to resources. 

Yet, in the push towards renewables and saving the environment, we often fall short on the social aspect. Lithium batteries are championed for their role in EVs, but the outcomes on the people impacted by lithium mining have been discounted. If such climate initiatives negatively impact peoples’ livelihoods and health, we will lose support from people in the conversation to avert the climate crisis, especially from people on the ground. 

Our goal for this session to for us to have a discussion to arrive at more perspectives for all stakeholders to address problems of climate crisis by democratising the process of looking for solutions.  People need to be sufficiently excited by the opportunity to change the world for the better.  What we should address includes the uncertain international regulatory environment, political interference, and siloed economic agendas hampering funding efforts, as well as the social aspect of environmental initiatives.

Introducing the Panel Session - Carbon Credits: The Next Financial Instrument

On the 08^th December 2023, I will chair a panel discussion for the Institute of Electrical & Electronic Engineers GreenTech, Sustainability, & Net Zero Policies & Practices Symposium.  This is a programme in alignment with the United Nations Clmate Change 28^th Conference of Partners (COP28), in the Green Zone, at Expo City, Dubai, United Arab Emirates.  The title of the session is “Carbon Credits: The Next Financial Instrument.” 

The panellists for the session are as follows:

1.      David Chen C. Y.; Chief Executive Officer; AgriG8

2.      Dr. Vincent Lim Boon Heng; Chief Financial Officer, Asia-Pacific; DataLogic

3.      Dr. Victor Tay; Group Chief Executive Officer; RHT Consulting Asia 

According to the OECD Environmental Outlook to 2050: The Consequences of Inaction - Key Facts and Figures, climate crisis is expected to cost the global economy 5.5% of GDP by 2050.  The number varies according to sources, but as of COP21 according to the World Bank, US$23 trillion will be lost in lost GDP output.  At this point, emission reductions are not enough, and the world is looking for alternative solutions.  We need to find a way as a united world to make this work.  For carbon credits to work, we need to consider expanding the compliance market to include high-quality investment-grade carbon offset credits.  Given the recent greenwashing scandals, coupled with the existing rating agencies that are not uniform in their processes, established global financial rating standards need to be set up for carbon credits in both the compliance and voluntary markets. 

All stakeholders should work towards a sustainable framework to create investment-grade, rated carbon credits, so that we can support a secondary market as a source of revenue.  Carbon credit derivatives would generate interest in the trade, create a new class of financial instruments, and attract a new influx of funding.  The capital injection could be the start of the 5^th industrial revolution: a post climate change world.  We need the buy in of the private sector through an appeal to self-interest, not altruism, as we move away from traditional sources of energy into renewables.  One of the fastest ways to achieve this is through a mature carbon trading market. 

Our goal for this session is to provoke a deeper conversation with stakeholders on the need for investment-grade carbon credits, a unified global rating system, and pivoting carbon trading towards high-quality investment-grade offsets.

COP28 Goals & Agenda

From the 30^th November 2023 to the 12^th December 2023, the United Nations Climate Change 28^th Conference of Partners (COP28) will convene at Dubai.  Red Sycamore will be attending.  As President of the Board, and Chief Executive Officer of Equinox GEMTZ, I will be chairing a panel on “Carbon Credits: the Next Financial Instrument”.  Ng Kin Foong, Chief Executive Officer of Red Sycamore, will chair the panel on “ESG & Startups”.  The panels will be in the Green Zone, under IEEE. 

Hopefully, this event will be a milestone and address the contentions raised in previous iterations of this event.  We are past the point of “climate change”, and we should call it what it is: a climate crisis.  We are not meeting our climate goals, and this is the time for us to come together, get on track, and invest in coastal communities, ocean initiatives, and blue carbon.  The Red Sycamore position is that investing in blue carbon credits addresses many other issues such as preserving biodiversity, securing food security, and mitigating salination of water tables.  Blue carbon refers to the carbon stored in coastal and marine ecosystems. 

The intent is for our conversation to build on the developments of the Kunming-Montreal Global Biodiversity Framework.  The Kunming-Montreal Global Biodiversity Framework is a document that was adopted by almost 200 countries at the 15^th Conference of Parties to the UN Convention on Biological Diversity in December 2022.  It is a plan to protect and restore nature by 2050.  The framework includes targets for reducing threats to biodiversity, ensuring that ecosystems are resilient, and enhancing the benefits derived from biodiversity and ecosystems.  It also emphasises the importance of mainstreaming biodiversity across government and society, and the need for adequate financial resources, capacity-building, and technology transfer to implement the framework.  This should be addressed in tandem with the agreement on a new UN High Seas Treaty. 

COP28 is especially significant because we will have our first Global Stocktake (GST).  The GST is a critical process under the Paris Agreement that aims to assess the state of our planet and chart a better course for the future.  It is an inventory of everything related to where the world stands on climate action and support, identifying the gaps, and working together to agree on solutions pathways to 2030 and beyond.  The GST is intended to evaluate progress on climate action at the global level — not the national level — and identify overall gaps to achieve the Paris Agreement as well as opportunities to bridge them.  The first stocktake got underway at COP26 and will conclude at this COP28.  Each stocktake is a two-year process that happens every five years. 

The initial findings of the GST are that there has been limited progress on our climate goals, and significantly more financing, more action, and most importantly more political will, is needed if the world is to meet its Paris targets.  We are so far behind.  COP28 will also look to adopt a framework to implement the Global Goal on Adaptation.  The desire to see progress in the development of funding mechanisms and commitments for addressing Loss and Damage.  The Loss and Damage Fund is a significant focus at COP28.  This fund is intended to compensate vulnerable countries for natural disasters caused by climate change.  The concept of “loss and damage” broadly refers to economic or other losses caused by climate change that go beyond a country’s ability to adapt.  This could include sudden damage caused by extreme weather linked to climate change, or longer-term consequences of sea level rise.  We are hoping to see countries adopt a consensus proposal reached by negotiators earlier, but any country could choose to reopen the issue.  The current consensus relies on compromises on several issues that have divided developed and developing countries. 

The Loss and Damage Fund will be administered at first by the World Bank, and will draw on funding sources including large developing countries as well as the US, the EU, and the UK.  No firm target has been set for how much money the fund will disburse, but countries most affected by the climate crisis hope it will reach hundreds of billions of dollars within a few years.  Regardless, this is still inadequate when projections are that the cost will be in the trillions.  According to the Swiss Re Institute, the impact of climate change could wipe off up to 18% of the GDP of the worldwide economy by 2050, if global temperatures rise by 3.2°C.  The global economy could lose 10% of its total economic value by 2050 due to climate change.  The impact of climate change has been forecasted to be the hardest hit for Asian economies, with a 5.5% impact to GDP in the best-case scenario, and 26.5% impact in a severe scenario.  These projections are based on current trajectories and could change if more aggressive climate action is taken.  It is a reminder of the urgent need for countries around the world to take decisive action to mitigate the impacts of climate change. 

In light of these alarming figures, Red Sycamore wants to use its platform at COP28 to push for the prioritisation of blue carbon solutions, supported by concrete financial commitments and pathways.  There should be significantly scaling of finance commitments and an acceleration of climate finance initiatives to fund mitigation and adaptation actions that support the preservation and restoration of coastal areas within national jurisdictions. 

We also want to advocate for government commitments to new and more ambitious Nationally Determined Contributions (NDCs) and national climate action plans that include the rights of coastal communities.  We need to support these communities in helping to restore the maritime capacity to sequester and store blue carbon.  Seagrasses are marine plants that form dense underwater meadows in coastal areas around the world.  These ecosystems play a crucial role in sequestering carbon and providing various ecological benefits.  Seagrasses are considered one of the most effective blue carbon reservoirs.  Seagrasses, along with mangroves and salt marshes, are important contributors to blue carbon storage. Seagrasses sequesters carbon dioxide (CO²) from the atmosphere and store it in their biomass and in the sediments where they grow.  The carbon sequestration capacity of seagrasses is relatively high compared to other ecosystems.  Seagrasses capture and store carbon in their above-ground and below-ground biomass. The below-ground structures, such as rhizomes and roots, trap organic carbon in the sediment, preventing its release into the atmosphere.  The organic matter produced by seagrasses contributes to the accumulation of carbon in coastal sediments.  This stored carbon can remain locked away for extended periods, acting as a long-term carbon sink. 

Seagrass meadows help stabilise coastal sediments, providing protection against erosion.  This stabilisation helps to maintain the integrity of the carbon-rich sediments and prevents the release of stored carbon into the water.  Seagrass ecosystems are rich in biodiversity, providing habitats for various marine organisms.  The diverse community of organisms in seagrass meadows contributes to the cycling of nutrients and the overall health of the ecosystem.  Although seagrass meadows cover only a small percentage of the ocean floor, they are estimated to be responsible for a disproportionately large share of carbon sequestration in coastal areas.  Seagrass meadows are under threat from various human activities, including coastal development, pollution, and climate change.  When seagrasses are degraded or destroyed, the stored carbon can be released back into the environment.  Recognising the importance of seagrass ecosystems in carbon sequestration, conservation efforts are underway to protect and restore seagrass habitats. These efforts involve sustainable coastal management practices and the establishment of marine protected areas. 

Seagrasses are vital contributors to blue carbon storage, playing a crucial role in mitigating climate change by sequestering carbon in their biomass and sediments.  Protecting and restoring seagrass ecosystems is not only important for carbon sequestration but also for the overall health and resilience of coastal environments.  We need to ensure that the role of coastal blue carbon ecosystems is recognised.  That is why we are pushing for more ESG startups in this area, and the pivot towards the compliance market for the trading of what will eventually be fungible blue carbon credits.  For this to happen, these discussions need to be integrated across UNFCCC negotiations for the mitigation, adaptation, and growth of these initiatives.  This includes a bolstered understanding of financing options for restoration of coastal ecosystem, including through Article 6 of the COP, Article 6 which regulates voluntary cooperation among countries to achieve their NDCs to reducing emissions.  This Article incorporates market mechanisms and non-market approaches, including cooperation in areas such as finance, technology transfer and capacity building.  As an extension for preserving the ocean, we support a moratorium on deep-seabed mining, pending further study on their effects on the environment and the carbon footprint caused from releasing CO₂ sequestered in the seabed. 

In summary, there is much work to be done.  There is much riding on this panel discussion, and how we shape this conversation, and bring it back to Singapore.  To address this climate crisis, to advocate for true sustainability, it is necessary for us to save the oceans, because that is the key to our continued quality of life.

Questions on ESG Leadership

The following were some of the questions submitted during the upGrad session.  I thought it would be helpful to gather them, and answer them. 

In your experience, how does ESG market leadership contribute to achieving market dominance?

We have to consider that with the tightening of legislation pertaining to climate change, we will see a greater emphasis on the compliance carbon credits.  There are not enough compliance credits.  The foundation of market leadership is for companies to take stakes in viable carbon sink projects so that they have access to carbon credits.  If they have the carbon credits, and competitors do not, they can sell the excess at a premium.  This is a direct source of revenue at the expense of competitors. 

Can you provide examples of companies that have successfully leveraged ESG practices to gain a competitive edge?

Tesla is a good example.  In 2022, Tesla’s revenue from automotive sales was US$67.2 billion, while its revenue from the sale of regulatory credits to other automakers was US$1.8 billion.  How much does it cost to create those carbon credits, versus the cost of producing one car?  The carbon credits are created incidentally, meaning we can argue that almost all of that US$1.8 billion revenue is profit.  The same cannot be said for the US$67.2 billion from automotive sales.  Tesla has secured an ESG leadership position and made billions over the years by taking advantage of the system. 

Tesla positions itself as a leader in the electric vehicle market and the carbon credit market.  Tesla claims its solar panel installation business and its EV business generate carbon offset credits by reducing greenhouse gas emissions.  These credits are sold to other firms, primarily automakers, which struggle to meet emissions standards set by regulatory bodies like the California Air Resources Board (CARB).  Strategically, what does this mean?  It means Tesla is actively taking money from its competitors to fund itself, depriving these competitors the funds to develop products, services and marketing campaigns to compete.  That is the sort of market leadership we are looking at.  It is a brilliant strategic position where they have strengthened themselves at the expense of competitors. 

How does ESG market leadership impact market access for businesses?

As we near 2030, countries will continue to enact legislation to help them meet their climate pledges.  This directly translates into an increase in carbon taxes, and incentives for abatement and reduction of carbon footprints.  Companies that fail to take advantage of this will be at an inherent disadvantage because this translates into a material impact on revenue and market access. 

We must also consider the optics of a company that is viewed as primarily culpable for an increased carbon footprint.  Eventually, we will see more adverse weather conditions.  Rising sea levels will mean movement of people, loss of access to amnesties, and loss of homes.  As these events put pressure on society, it is only logical that the public need someone to blame.  Governments are in the business of winning elections.  Who wants to be the first executive leadership sacrificed, while revenue tanks? 

Are there specific market segments or industries where ESG practices have a more significant influence on market entry or expansion?

There are four main industries that will be immediately most impacted by rising carbon taxes: maritime transportation, airlines, mining and the oil and gas industries.  They are statistically the largest polluters, with the biggest carbon footprints.  As we pivot towards a compliance regime for the cap-and-trade, these industries are expected to bear the brunt of newer carbon taxes, across multiple jurisdictions. 

From a personal perspective, how can individuals incorporate ESG market leadership principles into their own professional journey?

The executive leader is a strategic leader first, and an operational leader second.  We hire management for the latter.  We need visionaries for the former.  Part of the strategic landscape is to understand where legislation and other revenue pressures are moving, and pre-empt them by advancing initiatives that address the underlying contentions.  For major corporations, it is the carbon footprint, because international pressure will ramp up.  Companies need to look into methods to abate the carbon footprint, or invest in carbon sinks. 

An executive leader is thus exercising the visionary leadership needed to navigate this impending challenge.  The same principles we apply to do this are the same principles we apply in other aspects of our lives: reading the situation, identifying challenges, and addressing the underlying contentions. 

What are some practical steps one can take to align personal values with corporate ESG initiatives?

Revenue and growth aside, it is in our interest to protect the environment and create a sustainable growth model.  No company grew by killing its market.  In this case, rising global temperatures is an existential threat to our civilisation.  We need to remember that, instead of focusing on immediate shareholder value, because the wider society is a greater stakeholder here. 

How do companies integrate ESG market leadership into their overall corporate strategy?

Any corporate strategy is about one thing: winning.  And the market is essentially a zero-sum game.  To win, someone else must lose.  There are three basic kinds of market leaders: lowest overall cost, greatest innovation, and greatest customer intimacy.  Regardless of the type of market leadership, we need sustained market growth.  That means the continued existence of some semblance of society is necessary.  Climate change is a threat to that.  As long as we can remember that at an executive level, any and all corporate strategy will seek to address that. 

Are there any challenges or roadblocks they commonly encounter during the implementation process?

The greatest roadblock to implementing any form of ESG policy is this unfortunate myopia that bedevils many leaders.  They see their immediate success, and forget the process that brought it was years in the making.  What got us here is not what will bring us to the next peak.  Too many companies prioritise short-term growth over long-term success.  Any other form of challenge, whether it be legislation, tax exposure, political exposure and environmental challenges are second to this because this myopia is inclement to formulating a proper response to these challenges.  This is akin to people painting the deck of the boat instead of fixing the leak while a storm threatens from across the horizon. 

Can you share any insights on how ESG market leadership affects investor perception and decision-making?

In the US, the concept of ESG has been politicised.  Fortunately, I believe the rest of the world is saner, and understand that climate change is not something to be taken lightly.  There is a growing movement of activist investors all over the world, putting pressure on many companies, from oil majors to mining concerns.  No company wants that sort of scrutiny because it does eventually affect market exposure and share price. 

How do investors evaluate companies’ ESG practices and incorporate them into their investment strategies?

Generally, there is a requirement for companies to report their carbon footprint as part of the assessment of their carbon tax exposure.  This can be found in their audited reports, in the amount of carbon credits they purchase, the provision set aside to purchase carbon credits, and their declared projects.  All this is made available to investors, and evaluated. 

In terms of sustainability reporting and disclosure, what are some best practices that companies should follow to effectively communicate their ESG market leadership to stakeholders and the wider market?

Firstly, this should be part of the mission statement.  Secondly, this should be made an intrinsic part of the branding.  These statements should be found in the annual report and other forms of documentation, as part of the company disclosure.  Finally, it is important that the company is seen to be an active participant in ESG initiatives that involve the community.  It is not enough to be heard; we must be seen to embrace ESG. 

Are there any emerging trends or developments in the field of ESG market leadership that attendees should be aware of?

The primary emerging trend is the pivot towards the compliance market, at the expense of the voluntary market.  Voluntary credits, and companies such as Verra, have had to deal with controversies that affect the credibility of voluntary credits. 

The second emerging trend is the increased carbon tax that will be implemented all over the world.  As regulations tighten, and the regulatory framework coalesces into a binding international framework, the price of carbon credits will rise exponentially. 

There is also the issue of carbon capture.  The cost of the technology will eventually drop as adoption spreads, but the cost of keeping all that carbon captured will not likely drop significantly.  This means, in the long term, carbon sequestration is more economically viable.  Carbon capture is the use of mechanical or chemical processes to trap carbon dioxide and other greenhouse gases.  Carbon sequestration is the utilisation of natural processes. 

How do these trends impact businesses and their competitiveness?

These trends directly impact businesses because the cost of abatement, or paying the carbon tax will directly raise the cost of doing business, and impact revenue in the short term.  In the long term, should these measures fail, we will be dealing with the loss of productivity due to climate change itself, which has an actual human cost.  Either scenario is an environment of rising costs and uncertain revenue. 

What are some potential risks or pitfalls companies should be mindful of when pursuing ESG market leadership?

The greatest pitfall is the fact that many businesses are simply throwing money into any project that has the “ESG” label, without understanding what these projects actual do to help them, and assess their efficacy.  In the short term, it is a cost and a loss.  In the longer term, it affects the credibility of ESG projects as a whole, and creates resistance in the organisation, among stakeholders, against taking real action. 

How can they mitigate these risks and ensure long-term sustainability?

Firstly, there must be an actual ESG strategy that involves consultation with experts, who understand the carbon tax framework, the direction of regulation and legislation; and whether abatement or the cap-and-trade is the preferred option.  There are a lot of conversations to be had before that ESG policy becomes part of corporate culture. 

Secondly, for most businesses, the cheaper option is carbon sequestration through carbon sinks, and the focus on the compliance market.  Taking the wrong direction, and throwing millions in the wrong direction is not only a waste of funds and resources, but also sets the company back when we are racing to meet national climate pledges for 2030 and 2050.  Those that lag behind will bear the brunt of the carbon tax. 

How can organisations foster a culture of ESG market leadership among employees and stakeholders?

The first is education.  There is a lot of talk, but little understanding on what ESG actually is, and what is at stake.  Without this understanding, we cannot expect corporate leadership take the lead in driving an ESG policy. 

The second is the translation of that statement of intent into an actual strategy in order to secure carbon credits, and secure a lead in tackling climate change, while lowering the carbon footprint.  Being a first mover has monetary risk.  Being a late mover has all the risks of a first mover, in addition to regulatory risk and political exposure.  From a branding perspective, no one wants to be seen as the villain, especially in an age of activist investors and consumers. 

Are there any specific initiatives or programmes that can help drive this cultural shift?

Because I believe in this, I actually founded a company solely for the purposes of creating carbon sinks to sequester carbon.  In the process, we create investment-grade blue carbon credits, to be traded on a compliance exchange.  The intent is to drive the creation of a secondary market, with carbon credits as financial instruments.  Normalising carbon credits as another type of commodity and class of financial instruments will create the value needed to pivot the market, and fund further ESG initiatives.  That company is Red Sycamore. 

From a global perspective, how does ESG market leadership vary across different regions and markets?

It does not only vary across regions, but also according to industry.  Different industries have different types of credits, most for the voluntary market.  Even compliance credits cannot be traded across exchanges, because we do not yet have a truly global clearing house.  The national emphasis on ESG partially explains the vast discrepancy in prices and quality of these credits.