Reflections on the upGrad ESG & Leadership Masterclass

Most webinars are a waste of an hour.  You join, you endure forty-five minutes of someone reading their own slides aloud, you leave having learned nothing that you could not have gleaned from a two-paragraph Google search.  The organisers congratulate themselves.  The speaker adds “thought leader” to their LinkedIn profile.  Everyone goes home none the wiser.  The KnowledgeHut upGrad masterclass on ESG and Leadership held on 1st June 2023 was not that.  It was the kind of session that is uncomfortably rare in the professional development space, one where the speaker had actual operational knowledge, actual skin in the game, and an actual opinion about what matters and what does not.

As the then Chief Executive Officer of Equinox Zenith and President of the Board of Red Sycamore, I was tapped to deliver a masterclass on my thoughts on corporate leadership in the ESG industry.  We are living in the age of climate change, and the primary risk exposure for any business operating on an intermediate to long-term horizon is carbon taxes and carbon credits.  Not reputational risk.  Not consumer sentiment.  Not the annual sustainability report that your communications team writes and nobody reads.  Carbon taxes.  The hard financial impost that governments are legislating into existence at an accelerating pace and that will determine whether your business model survives the next decade.  This is not a point the industry has failed to make.  It is a point the industry has made badly, repeatedly, in language so laden with jargon and moral earnestness that the average CFO closes the tab within thirty seconds.  The upGrad session made it differently.  It made it as a financial argument, not an ethical one.

The Tesla Example, Revisited with the Benefit of Hindsight

The Tesla example is worth dwelling on because most commentators who cite it get it wrong, and the years since have made the correction considerably more interesting than it was in 2023.  Tesla Incorporated is routinely discussed as an electric vehicle manufacturer.  For years it was, more accurately, a regulatory credit arbitrage business that also happened to make cars.  In 2022, Tesla reported US$1.78 billion in regulatory credit sales.  In 2023, that figure was US$1.79 billion.  In the first quarter of 2024 alone, it reported US$595 million.  Tesla’s competitors, General Motors, Ford, and Stellantis, were paying Tesla to exist, funding their most dangerous competitor because they had failed to meet the emissions standards Tesla exceeded by design.

That revenue stream has since collapsed, and the collapse is the sharpest lesson in this entire argument.  Tesla’s credit revenue fell 28% in 2025 to roughly US$2 billion.  By the second quarter of 2026, it had cratered to just US$146 million, down 67% year-on-year, after the 2025 Working Families Tax Cuts Act reduced the American civil penalty for missing Corporate Average Fuel Economy standards to zero, removing rivals’ incentive to buy Tesla’s credits at all.  In Europe, Toyota and Stellantis withdrew entirely from Tesla’s CO₂ pooling arrangement for 2026, with Stellantis instead building its own compliance pool alongside its Chinese partner Leapmotor.  Tesla did not lose this revenue because carbon regulation weakened.  It lost it because rivals stopped needing to rent compliance from a competitor once the political and structural conditions shifted.  The lesson from 2023 was correct.  Carbon markets are a market to be captured.  The lesson the intervening years added is that a revenue model built on renting a regulatory gap is only as durable as the regulation itself, and regulation is precisely the variable a competitor’s own government can legislate out from under you.

The Immediate Takeaways, Tested against What Actually Happened

The session’s immediate takeaways were three.  ESG market leadership translates into market dominance.  ESG market leadership affects market access.  ESG market leadership is part of personal and corporate branding.  None of these are new ideas.  The ESG consulting industry has been saying variations of them for years.  What distinguished the upGrad session was the specificity of the argument and the absence of the usual hedging.  Most ESG presenters will tell you that sustainability is important and that you should consider doing more of it.  This session told you why, with numbers, and what happens to businesses that do not.

As we approach 2030, every signatory to the Paris Agreement remains under increasing domestic political pressure to demonstrate measurable progress on their climate pledges.  The mechanism most governments are reaching for is the carbon tax, and what was transitional in 2023 is now live.  The European Union’s Carbon Border Adjustment Mechanism entered full operation from January 2026, and the definitive regime now imposes an actual carbon cost, rather than a reporting obligation, on imports from countries without equivalent carbon pricing.  For any Southeast Asian manufacturer exporting to Europe, this stopped being a future problem two years ago and is now simply an operating cost.

The CBAM is not alone.  Singapore introduced its carbon tax in 2019 at S$5 per tonne.  It rose to S$25 per tonne in 2024, and is on schedule to reach S$45 per tonne in 2026 and S$50 to S$80 per tonne by 2030.  Companies that had not begun decarbonisation planning by the time of the original masterclass were not behind the curve.  They were off the map, and the map has only become less forgiving since.

Leadership as a Structural Observation, Not a Values Statement

The point about leadership was equally unambiguous.  Leadership is not the art of commanding.  It is the exercise of influence to effect preferred outcomes.  Corporate leadership without ESG leadership is inadequate corporate leadership.  This is not a values statement.  It is a structural observation.  A chief executive who does not understand their company’s carbon exposure, who cannot articulate a credible decarbonisation pathway, and who treats ESG as a communications function rather than a strategic one, is not fit for purpose.  The market has continued to agree, and more emphatically than in 2023.  A study that year found 77% of Asia-Pacific firms included ESG metrics in evaluating senior executives’ remuneration packages, up from 63% the year before.  The board is watching.  The shareholders are watching.  The regulators, now armed with CBAM’s fully operational enforcement regime, are watching with considerably sharper teeth than they had two years ago.

What the upGrad session did, and what very few ESG presenters manage to do, was land the argument without losing the audience to either despair or boredom.  The carbon market is not a threat to be managed.  It is a market to be captured.  Every industry has exposure to it.  The businesses that are ahead of this are not the ones that hired a Chief Sustainability Officer and issued a glossy annual report.  They are the ones that built carbon strategy into their revenue model, though Tesla’s own subsequent collapse in credit revenue adds a crucial refinement: the model must be built on genuine, durable environmental value, not on a regulatory arbitrage that a rival government can dismantle in a single tax bill.

Red Sycamore, for what it is worth, is doing exactly this, building investment-grade blue carbon credits for the compliance market across up to 500,000 hectares of seagrass coastline in the Siargao region of the Philippines, with further access to coastline near the Bay of Siam in southern Thailand.  It is not a charitable endeavour.  It is a financial instrument backed by measurable, verifiable environmental impact, calibrated using Reef Aquaculture Conservancy MRV methodology, and structured to meet compliance-market documentation standards rather than the voluntary-market self-certification that collapsed so publicly elsewhere in the industry.  That distinction, compliance-grade and durably verified versus voluntary and cheaply revocable, is precisely what the upGrad session was advocating, and precisely what the market has since demanded of every serious corporate player, whether they were ready for it or not.

Most of them were not.  The gap between where corporate ESG strategy stood in 2023 and where it needs to be today is not a gap that gets closed by webinars.  But it helps, occasionally, to hear someone make the argument without apology, without hedging, and without the insufferable self-congratulation that has become the signature register of the sustainability industry.  The upGrad session was that.  It should have had a larger audience.  It should have been recorded and circulated to every senior management team in Southeast Asia.  It was not.  That, too, is a data point about where the industry actually is.

---

Terence Nunis | Executive Chairman, Equinox Zenith & Red Sycamore | Author, The 1% Playbook: The Billionaire Cheat Code

The Next Industrial Revolution from AlterCOP29

The following are notes of the presentation delivered at AlterCOP29, on the 14^th November 2024.  These are my opinions, as President of Red Sycamore. 

I said this at COP28, and I am repeating it here, carbon credits are the new oil.  With the proper strategic framework, it becomes a strategic asset that can influence energy and financial policy of related nations.  These are the steps that I believe we should work at, which democratises the process. 

We need to encourage private players to run carbon exchanges, in the same way that the cryptocurrency market has grown.  We should create the hype, and ride it, instead of stifling it.  Perhaps an offshore compliance exchange is an option. 

This is my controversial opinion: Fold the voluntary carbon credit market into the compliance market.  This is inevitable anyway.  As we develop carbon credits as financial instruments, I foresee increasingly more comprehensive compliance and regulatory frameworks.  There is no space for the laissez-faire approach of the voluntary market. 

We need to work towards creating rated, investment-grade compliance carbon credits, as a first step towards having them recognised as financial instruments.  The best carbon credits projects to create the necessary volume for trade is blue carbon credits from seagrass projects.  This is why Red Sycamore is in this space. 

The strategic intent for this is to create a secondary market for carbon credits.  When we have carbon credit futures, ETFs, and other derivatives, we have speculation and a viable secondary market that is a means to create the liquidity and encourage investment into more sustainability projects globally. 

This is how we address the funding gap, and bring in more players into the market.  If there is money to be made, there will be investment.  An appeal to self-interest is far more realistic than an appeal to altruism.  Major corporations and funds are beholden to self-interest.  Any claim of altruism is cynical and hypocritical.

Enhancing Market Confidence from AlterCOP29

The following are notes of the presentation delivered at AlterCOP29, on the 14^th November 2024.  These are my opinions, as President of Red Sycamore. 

To enhance market confidence, the obvious next step is establishing clear, standardised criteria for what constitutes a high-quality carbon credits.  From a financial perspective, we need to agree, across financial institutions, on the status of carbon credits, whether commodity, options contract, or something different.  The independent verification by accredited third parties should be made more stringent.  Gold, Verra and similar organisations are not the answer.  We need something that functions just like rating agencies like Moody’s and Fitch.  Perhaps, we need something similar for the carbon market. 

Projects need a better, legally enforceable framework for transparent, publicly available information about their methodologies, results, and impacts when reporting.  This framework needs to be standardised across projects, as far as practicable.  What we have is nowhere near enough.  Also, considering the different kinds of credits, even in the compliance market, we need a mechanism for convertibility.  This is a step towards fungibility. 

At COP29, there is a push to mobilise US$65 billion annually from the private sector to complement public funding for climate projects.  I am sceptical. The answer is not found in philanthropy and localised private funding.  This is publicity, not reality.  This level of coordination is not going to compete with the energy lobby, the mining lobby and other special interest groups.  The way forward is the appeal to self-interest, not altruism.

Regional Developments in Sustainability Finance from AlterCOP29

The following are notes of the presentation delivered at AlterCOP29, on the 14^th November 2024.  These are my opinions, as President of Red Sycamore. 

Regulators are setting minimum standards for sustainability reporting and disclosures to introduce more transparency and accountability on climate issues.  One of the discussions is the legal responsibilities of Chief Sustainability Officers (CSOs).  Some companies are pushing for the appointment of people with legal backgrounds.  Others, including myself, are pushing for CSOs to have an accounting background, because this is not primarily about legal compliance, but financial compliance. 

Countries are developing green taxonomies to standardise what qualifies as a green or sustainable investment.  The ASEAN Taxonomy Version 2 was released in June 2023, to provide a science-based framework to classify sustainable activities.  It includes four environmental objectives: mitigation of climate change risks, adaptation to climate change, protection of healthy ecosystems and biodiversity, and promotion of resource resilience and a transition to a circular economy.  The ASEAN Capital Markets Forum (ACMF) has released a roadmap for sustainable capital markets, focusing on strengthening infrastructure and improving access to financial products.  This roadmap aims to promote sustainable finance and support the region’s transition to a low-carbon economy. 

The ASEAN Taxonomy aims to ensure interoperability with other widely used international taxonomies, such as the EU Taxonomy and the Green Bond Principles.  Indonesia, Malaysia, The Philippines, Thailand and Vietnam are developing national taxonomies to align with the ASEAN Taxonomy.  Here, in Singapore, we have introduced a carbon tax and are developing its taxonomy to support sustainable finance and decarbonisation efforts. 

Issuance of green bonds has increased, with a cumulative value of over US$4 trillion since 2018.  Sustainability-linked bonds have gained traction, as they link financial performance to sustainability targets.  Despite a drop in net inflows from US$161 billion in 2022 to US$63 billion in 2023, sustainable funds continue to attract significant investments.  Environmental, Social, and Governance (ESG) funds are becoming more popular.  Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs) provide funding and support for sustainable projects.  These institutions help to implement policies that promote sustainable finance.  The sustainable finance market in SEA is still relatively small, which indicates significant potential for growth.  Several countries in the region are considering or implementing carbon pricing mechanisms to incentivise emission reductions. 

Discussions at COP29 are focused on establishing a new climate finance goal to replace the previous commitment of US$100 billion annually by 2020.  Developing countries, including those in SEA, are advocating for a higher annual commitment of at least US$1.3 trillion from wealthy nations to support climate action.  Singapore has pledged up to US$500 million to support Asia’s decarbonisation and climate resilience through the Financing Asia’s Transition Partnership (FAST-P).  They aim to raise US$5 billion with international partners to make climate action less financially risky.  That is extremely ambitious. 

The Economic Development Board (EDB) has launched a new grant to support carbon project developers and finance activities that can generate high-quality carbon credits aligned with Article 6 of the Paris Agreement.  This grant aims to spur the development of more carbon projects in the region. 

Several countries in Southeast Asia are considering or implementing carbon pricing mechanisms to incentivise emission reductions.  Singapore introduced its carbon tax on 01^st January 2019, under the Carbon Pricing Act (CPA).  The initial tax rate was set at S$5 per tonne of CO₂ equivalent (tCO2e) for the first five years (2019-2023) to provide a transition period for businesses to adjust.  To support its net zero target, the carbon tax will be raised to S$25/tCO2e in 2025, S$45/tCO2e in 2026 and 2027, and is expected to reach S$50-80/tCO2e by 2030.  The carbon tax applies to all industrial facilities with annual direct greenhouse gas (GHG) emissions of at least 25,000 tonnes of CO2 equivalent (tCO2e).  This covers about 80% of Singapore's total GHG emissions from around 50 facilities in sectors such as manufacturing, power, waste, and water. 

From this year, companies can use high-quality international carbon credits (ICCs) to offset up to 5% of their taxable emissions.  These credits must comply with rules under Article 6 of the Paris Agreement and meet seven principles to demonstrate high environmental integrity.  A transition framework has been introduced to support emissions-intensive trade-exposed (EITE) companies as they work to reduce emissions and invest in cleaner technologies, while managing the near-term impact on business competitiveness. 

Malaysia is considering implementing a carbon tax, with discussions ongoing about the appropriate rate and coverage.  Indonesia has introduced a carbon tax on coal, with the revenue intended to fund renewable energy projects and reduce emissions.  The Philippines has implemented a carbon pricing mechanism through its Renewable Energy Act, which includes incentives for renewable energy projects.  No Southeast Asian (SEA) countries have implemented a national Emissions Trading System (ETS) similar to the European Union ETS. 

The global carbon credit framework is a system designed to reduce greenhouse gas emissions by allowing countries and companies to trade carbon credits.  Article 6 enables countries to pursue voluntary cooperation to reach their climate targets.  It allows for the trading of carbon credits between countries, helping to finance climate action in developing nations.  Credits traded under Article 6 come with corresponding adjustments to ensure that emissions reductions are not counted twice.  The Core Carbon Principles (CCPs) set rigorous thresholds on disclosure and sustainable development, ensuring that carbon credits meet high-integrity standards.  These principles serve as a global benchmark for high-quality carbon credits.  The supervisory body for Article 6.4 has established standards for how international carbon crediting projects will work.  This includes a dynamic mechanism to update these standards as needed.  This framework is expected to direct resources to the developing world and help save up to US$250 billion a year when implementing climate plans. 

The Monetary Authority of Singapore (MAS) introduced a concept called transition credits to help accelerate the phase-out of coal-fired power plants in Asia.  Transition credits are a new class of high-integrity carbon credits generated from the emissions reduced through the early retirement of coal-fired power plants (CFPPs) and their replacement with cleaner energy sources.  These credits aim to provide financial incentives for asset owners to retire coal plants earlier than their operational lifetimes, serving as a complementary financing instrument to bridge the economic gap for early coal plant retirements.  The Asian Development Bank, the International Energy Agency, and the World Wide Fund for Nature (WWF) Singapore are also involved.  According to the International Energy Agency (IEA), Southeast Asia will need an estimated US$12 billion in concessional finance by the early 2030s to support the accelerated uptake of clean energy technologies.

Overview of Major Trends in Sustainability Finance in SEA from AlterCOP29

The following expands on notes from a presentation delivered at AlterCOP29 on 14^th November 2024.  These remain my opinions, as Executive Chairman of Red Sycamore.

The Timeline of Failure and Compromise

November 2023, COP28, Dubai.  The Loss and Damage Fund launched with pledges of just over US$600 million.  This sum was smaller than the cost of building the Dubai Expo City venue hosting the conference itself.  Parties also agreed, for the first time, to transition away from fossil fuels and triple renewable capacity by 2030.  We were there at the launch.

September 2024.  The Loss and Damage Fund’s pledge total reached US$702 million from twenty-three contributors.  France, Italy, Germany, and the UAE each gave at least US$100 million.  Actual need, per UN estimates, was US$300 billion a year by 2030.  The gap between pledge and requirement was already running at 400 to 1.

November 2024, COP29, Baku.  Parties set a new climate finance goal of US$300 billion annually by 2035, against developing countries' own request for US$1.3 trillion.  The Loss and Damage Fund reached full operational status.  COP28’s fossil fuel transition language simply vanished from the final text, a documented reversal of the previous year's hard-won commitment.

5^th November 2024.  The Network for Greening the Financial System published its Phase V climate scenarios, tripling its prior damage estimates.  This detail matters more than any pledge total.  The central banks and regulators who build the models governments and insurers rely on had, until this date, been understating the economic risk by a factor of three.

February 2025.  The United States rescinded US$4 billion in pledges to the Green Climate Fund, the first country ever to formally withdraw a commitment already made.  Germany and Sweden asked wealthier developing nations to help cover the gap.  Saudi Arabia called the request “unacceptable.”

Early 2026.  The United Kingdom halved its own Green Climate Fund pledge, from £1.6 billion to £815 million.

June 2026.  The World Bank dropped its 45 per cent climate co-benefits target, the same month it had already been exceeded at 48 per cent, under pressure from the United States, Russia, and Saudi Arabia.

November 2025, COP30, Belém.  Parties called for mobilising US$1.3 trillion annually by 2035, and confirmed Loss and Damage Fund replenishment cycles.  A planned pledging event for the Least Developed Countries Fund and Special Climate Change Fund was cancelled outright, because of lack of contributor interest.  More than eighty countries backed an explicit fossil fuel phase-out roadmap.  It did not survive the final hours of negotiation.

That is the full arc, in eight steps, across two years: launch, undershoot, reversal, quiet model correction admitting the risk was worse than stated, formal withdrawal, halved commitment, target abandonment, and a cancelled pledging event.  Every step moved in the same direction.

The Cost of Doing Nothing

Planning for the worst case means using the most severe published figures, not the most comfortable ones.  Swiss Re Institute’s own stress test, covering forty-eight economies representing 90 per cent of global output, found that under a 3.2°C warming scenario, the world economy loses 18 per cent of GDP by 2050.  China loses 24 per cent.  Asia’s hardest-hit economies lose up to 26.5 per cent.  Against a 2024 global GDP of US$100 trillion, an 18 per cent loss alone is US$18 trillion.

The NGFS revision of November 2024 is worse.  It found climate damage could reach 15 per cent of global GDP by 2050 from just 2°C of warming, the temperature ceiling the Paris Agreement was built around as a success scenario, not a failure one.  Extended to 2100 under 3°C, the loss reaches 30 per cent, three times the NGFS’s own prior estimate.  These are not fringe activist numbers.  They come from the network of central banks and financial regulators whose models set capital requirements for the global banking system.

Academic modelling goes further still.  Research compiled by CEPR, drawing on multiple published damage functions, finds a plausible range running from 2 per cent to 45 per cent of global output lost by the end of the century, depending entirely on which damage function is used.  Bilal and Känzig’s 2024 modelling found the global economy could grow by only 125 per cent by 2100, after accounting for climate losses, against a hypothetical three hundred per cent growth path with no further warming.  That is not a loss confined to one bad year.  It is a permanently smaller economic trajectory, compounding every year between now and the end of the century.

Even these figures may understate the true tail risk.  The NGFS’s own scarier revision still gives a false sense of accuracy, because standard economic models rely on historical data patterns.  Climate change is invalidating those patterns as it unfolds.  Treating these models as reliable is like assuming the iceberg that sank the Titanic was an ice cube dropped by a previous ship, a known, bounded hazard, when the actual risk profile is less predictable and potentially worse.

This Justifies the Secondary Market Argument

Article 6’s rulebook, finalised at COP29, and the Paris Agreement Crediting Mechanism, operational following COP30, remain the only mechanism in this entire timeline that grew stronger rather than weaker across these two years.  The EU Emissions Trading System has already proven the model at scale, cutting covered emissions 51 per cent since 2005 while raising over €265 billion in revenue, funded by market pricing rather than pledge conferences.  Sustainability finance needs to be democratised specifically because every government-pledge mechanism examined in this timeline has moved backwards, while the one market-based mechanism built on private capital and enforceable pricing has moved forward.

Compliance Carbon Credits as a Financial Instrument

A secondary market needs more than good intentions and a UN logo.  It needs standardised units, verified supply, a registry preventing duplication, and price discovery liquid enough for institutional capital to enter without fear of buying nothing.  Article 6 has spent two years building parts of this.  The weakest part sits at the very first step: verification.

Verification Fails before a Credit Ever Reaches the Market

Verra, the world’s largest voluntary carbon credit registry, does not employ its own auditors.  Project developers hire and pay their own validation and verification bodies directly, the same firms responsible for confirming the developer’s own claimed emission reductions.  A Science magazine editorial, “Auditors Can’t Save Carbon Offsets,” said, “Auditors are unlikely to stay in business if they disapprove credits at the high rates that research suggests would be appropriate today.”  A researcher reviewing 95 Verra-certified projects later found to have overstated their climate benefit found that twenty-one of the thirty-three accredited auditors active in 2024 had signed off on one or more of those projects.  This is not a handful of bad actors.  It is a structural feature of a system where the auditor’s own revenue depends on the developer’s continued business.

Transparency International US described the resulting arrangement: “Some of the project developers, seeking maximum value for their work, also sit on the Boards of Directors of the standard setters.  It is as if the students are designing their own assignments and grading their own papers.”  Verra itself was founded in 2007 by the International Emissions Trading Association, the World Economic Forum, the World Business Council for Sustainable Development, and the Climate Group, organisations Transparency International notes carried strong ties to high-emitting industries from the outset.  In 2024, Brazilian police arrested five people linked to Verra-certified Amazon projects following a raid, one of several enforcement actions exposing how far this conflict can run in practice.

The Myanmar cookstove case fits this pattern.  Verification could not conduct site visits due to security concerns; the project operated through institutions controlled by the military junta, and Carbon Market Watch found it was approved for seven times more credits than its actual emission reductions warranted.  PACM’s own Article 6.4 Supervisory Body is closer to Verra’s model than to an independent auditor, since it inherited both the CDM’s institutional legacy and a similar reliance on accredited third-party validators chosen and engaged by the project itself.  Building a secondary market on top of this verification layer, without an independent check on the check, means institutional capital would be pricing a UN registry entry rather than a verified tonne.

The Mechanism Gaps

Four gaps remain before compliance carbon credits function as a genuine financial instrument.

First, standardised secondary trading venues, exchanges, or clearing platforms where credits trade with published, continuous pricing rather than bilateral, opaque deals negotiated project by project.

Second, and most urgently given the verification problem above, independent credit rating infrastructure, genuinely separate from both the registry and the project developer, scoring permanence and additionality risk the way a bond rating agency scores default risk, without being paid by the entity it is rating.

Third, derivative instruments, futures and forwards referencing credit prices, giving buyers and developers a way to hedge exposure the way any mature commodity market allows.

Fourth, custody infrastructure letting credits sit inside a regulated financial account, transferable and reportable, rather than existing only inside a registry interface built for compliance reporting rather than portfolio management.

Every credit traded under Article 6.2 must carry a corresponding adjustment, a formal acknowledgement from the host country that the transfer has been recorded in its own national emissions inventory, preventing the same reduction from being claimed twice.  A host country must also issue a Letter of Authorisation naming the specific project before a credit can be sold and retired internationally.  Both steps function as legal title clearance.  Neither one checks whether the underlying tonne was ever avoided in the first place.  We are far from a verified secondary market to address the gap in the Loss and Damage Fund.

---

Terence Nunis | Executive Chairman, Equinox Zenith & Red Sycamore | Author, The 1% Playbook: The Billionaire Cheat Code

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.