Executive Leadership Seminar 2024: Scaling New Heights, Built on More Than a Slogan

Executive Leadership Seminar 2024: Scaling New Heights, Built on More Than a Slogan

Toastmasters is a programme that boldly states this is where leaders are made.  This programme exists to make good on that promise.  Inspirational leadership is a skill that can be acquired.  Leadership itself is an active, continual process of incremental improvement and striving.  It does not merely happen.  It is a culmination of accumulated work and experience, the sum of applied experiential knowledge.  Leadership is the art of providing direction, giving people a vision, and inspiring them to work toward it.  The best leaders develop other leaders, nurture talent, and inspire them, and the best teams are built from precisely this kind of leader.  To that end, our group of Toastmasters organised the Executive Leadership Seminar 2024 on the 21st of June 2024, at One Farrer Hotel’s Grand Ballroom.

Why Leadership Cannot Be Reduced to a Single Style

There is no one type of leader or leadership style.  What exists are broad, theoretical definitions of leadership, and even these bear little relation to leadership as it is practised, since they interpret reality without nuance.  Every person carries their own history, their own talents, their own prejudices.  Leadership is developed by finding the common denominator of humanity underneath all of that and building something new from what each person already is.  Leadership begins with values, not with a formula.

The Centre for Creative Leadership’s well-established 70-20-10 model reflects this same conclusion from a different direction: roughly 70% of leadership development comes from challenging, real-world experience, 20% from relationships and mentorship, and only 10% from formal instruction.  A single seminar, however well designed, was never going to hand anyone a finished leadership style.  It exists to sharpen the 20% and point people toward the 70% they still have to earn on their own.

Why “Scaling New Heights” Was the Right Theme for the Moment

The theme was “Scaling New Heights,” addressing leadership in a new era: post-pandemic, having just exited an unprecedentedly high inflationary period, and grappling with the onset of the climate crisis.  Median global inflation rose from 1.9% in the third quarter of 2020 to 8.7% by the third quarter of 2022, its highest level since the mid-1990s, a shock that reshaped how every organisation planned its next five years.  A leadership seminar convened in mid-2024 was not addressing an abstract, hypothetical disruption.  It was addressing a disruption every participant in the room had already lived through, personally and professionally, within the preceding two years.

The Sustainability Thread Running Through Every Session

The sub-theme of the programme was sustainability, addressed, in part, at every panel.  Four panel sessions ran across the day, each covering a distinct aspect of leadership congruent with the programme’s overall title.  Each session ran for sixty minutes, moderated by one facilitator, with up to four speakers contributing throughout the hour.  Building sustainability into every panel, rather than isolating it as a single dedicated session, forced every speaker to confront the theme from their own specific vantage point: leadership under resource constraint, leadership across generational shift, leadership through economic disruption, rather than treating it as a subject someone else was responsible for covering.

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Terence Nunis, DTM | Division Advisor, District 80 Division M | Club Advisor, AIA Toastmasters | Past President & Founder, Awesome Toastmasters

Opening Address of Executive Leadership Seminar: “Scaling New Heights” (21st June 2024)

The following was my opening address as event chair of the Executive Leadership Seminar 2024, held on the 21^st June 2024. 

Our Guest of Honour, Ms. Yeo Wan Ling; Chief Executive Officer of AIA Singapore, Ms. Wong Sze Keed; Keynote Speaker, Dr. Roslina Chai; our eminent Speakers, distinguished guests; dear friends from Singapore and around the region.  A very good morning to all of you.  Welcome to the Executive Leadership Seminar: “Scaling New Heights”. 

Thank you for gathering here today.  It humbles me to see all of you here.  Leadership is not just a term we throw around.  It is the foundation of all that we build.  It shapes our reality.  It realises our ambitions.  It drives us to 1% better than yesterday. 

As we peer into the horizon of leadership, we find ourselves at a critical juncture.  The landscape is shifting, and the compass points toward new challenges and opportunities.  Strategic leaders must cultivate strategic fitness.  This involves setting clear direction, while remaining agile enough to recalibrate when necessary.  To paraphrase André Paul Guillaume Gide, we cannot discover new lands unless we have the courage to lose sight of the shore. 

When I spoke at COP28, in Dubai last year, I said that carbon credits is the new oil.  I said that we are entering the fifth industrial revolution.  Artificial Intelligence was the fourth industrial revolution.  We are still grappling with it, and its ramifications on society.  But we are facing a climate crisis, an existential threat to our way of life.  That strategic equation is going to change.  What does that mean? 

Consider this: as of 2022, the carbon credit voluntary market is valued at around just over US$2 billion.  According to carboncredit.com, the global compliance market for carbon credits was US$850 billion in 2021.  If we fail to meet our sustainability targets, damage to farming, infrastructure, productivity, and health from climate change will cost an estimated US$38 trillion per year by 2050.  At COP28, the pledges to the Loss & Damage Fund for climate change is only US$700 million.  That is about 0.2% of what we need to address this climate crisis. 

After flying all over the region, meeting governments, sovereign wealth funds, investors, partners, stakeholder; I have concluded that not enough of us realise what is at stake.  After sitting in on dozens of meetings and private discussions at COP28, I have seen that after all that is said and done, a lot was said, but not enough is done.  We can change that. 

I believe that the voluntary market, with its credibility issues, will eventually be folded into the compliance market.  I believe that the next step for carbon credits is to have a rated carbon credit that will be recognised as a financial instrument.  This is inevitable.  Carbon credits are not bonds.  They are not commodities.  They are a means of addressing the cost of preparing for climate change, not a fee to pollute.  A rated carbon credit, traded across exchanges, is fungible.  This opens up a vast secondary market.  We need that, because we need a means to raise the capital to fund the cost of climate change. 

This is my strategic vision, as President of Red Sycamore.  Each and every one of us, we are leaders.  We must lead.  We must shape the conversation.  We must fight for our seat at that table.  We must seize for our right to that blue ocean and grey market.  This is our planet.  This is our world.  We are not islands of misery, in an ocean of humanity.  We are here to be examples, stalwarts in the march of civilisation.  We want to be a voice in that vision of being something greater than ourselves.  I urge you to pin me in this, and make our work, our striving, our time matter. 

Thank you.

The Accident of Scale

English has a remarkable talent for acquiring words from incompatible sources and then presenting them to the world as if they belong together.  The word “scale” is the most elegant demonstration of this tendency available in the language.

English contains three entirely separate words spelt identically, pronounced identically, following identical grammatical rules, and sharing absolutely no etymological relationship.  They are not false cognates in the conventional sense — false cognates are usually pairs of words from different languages that look alike.  These three are false cognates of each other within the same language.  This is a category of linguistic accidents so specific it barely has a name.  The technical term is homonyms — but that word does not adequately convey the absurdity of the situation.

Scale the First: Fish and Flakes

The first scale is the biological one — the thin, overlapping plates that protect the skin of fish and reptiles, the flaky deposits on heated metal, the white mineral crust inside your kettle.  To scale a fish is to remove these plates.  A scaled surface has had its coating removed.

This word entered Middle English as a shortening of the Old French “escale”, itself from a Germanic base.  It is, at its root, a word about protective layers, coverings, and the removal thereof.

Scale the Second: Weighing

The second scale is the instrument for weighing.  Originally, a simple balance, and now any device with an internal weighing mechanism.

This word has an entirely different origin: Middle English from Old Norse “skál”, meaning bowl, of Germanic origin, related to the Dutch “schaal” and German “Schale”, both meaning bowl.  The connection to weighing is obvious once you know it: the original balance consisted of two bowls suspended from a central point.  The bowls were the scales.  The bowls became the instrument.  The instrument became the word.

Scale the Third: Measurement and Climbing

The third scale is simultaneously the most complex and the most productive.  It is the graduated system of measurement, the ratio on a map, the musical series of ascending and descending notes, the mathematical notation system, the photographic exposure range — and also, as a verb, the act of climbing something high and steep.

This one comes from Latin “scala”, ladder; arriving through Old French “escaler” or medieval Latin “scalare”, both meaning “to climb”, from the Latin root “scandere” — to climb.  The connection between a ladder and a graduated measurement system is, once stated, obvious: both involve regular intervals ascending from a lower point to a higher one.

The musical scale ascends and descends.  The map scale represents proportional intervals.  The mathematical scale represents positional values in ascending powers.  All of these are ladders of a kind — regular steps from one level to the next.  This is also the scale you use when you “scale up” a business, “scale” a mountain, or produce a drawing “to scale.”  None of these uses has any connection to fish skin or weighing bowls.

The Grammatical Convergence

All three words — arriving from Old French Germanic, Old Norse Germanic, and Latin, across different centuries, with entirely different original meanings — converged in English and adopted precisely the same grammatical behaviour.  Each functions as a noun with the plural “scales.”  Each functions as a verb with the third person present “scales,” the past tense “scaled,” the past participle “scaled,” and the gerund “scaling.”  The grammatical forms are not merely similar.  They are identical.  Three unrelated words wearing the same grammatical clothing.

This is linguistic convergent evolution — the same phenomenon that produces wings independently in birds and bats, echolocation independently in dolphins and bats, and the camera eye independently in vertebrates and cephalopods.  Different origins, identical functional form.

English did not plan this.  English does not plan anything.  It absorbs vocabulary from whatever language its speakers encountered — Latin from the Church and scholarship, Old Norse from Viking settlement, Norman French from conquest, Germanic from its Anglo-Saxon foundations — and the resulting mass of adopted words sorts itself into grammatical patterns without any concern for whether the words sharing those patterns are related to each other.

The result is a language with an extraordinary vocabulary — the largest in the world by most estimates, with the Oxford English Dictionary containing approximately 600,000 words — and an equally extraordinary capacity to produce confusion, ambiguity, and the specific comedic situation of three entirely different concepts sharing a single word.

The Practical Consequence

The practical consequence is that English speakers navigate constant implicit disambiguation.  “He scaled the fish before scaling the wall, checking the scale to ensure the portions were correct.”  This sentence is grammatically impeccable and semantically coherent.  It uses all three “scales” in a single sentence without ambiguity, because context performs the disambiguation that etymological identity cannot.

Context is always doing this work in English.  It is one of the reasons English is simultaneously easy to begin learning and extraordinarily difficult to master.  The beginner acquires vocabulary quickly because English words are short, largely uninflected, and grammatically flexible.  The advanced learner discovers that the same word carries multiple entirely unrelated meanings and that only extensive cultural and contextual knowledge allows reliable disambiguation.

The three scales are not the only example.  “Bank” is a financial institution, a river edge, and the tilting of an aircraft.  “Fair” is equitable, a pale complexion, a travelling market, and tolerably good.  “Bear” is the animal, the act of carrying, and the act of tolerating.  English is full of these convergences — words that look and sound alike, follow the same grammatical rules, and share no etymological history whatsoever.

The linguist, Dr. Ferdinand Mongin de Saussure, of the University of Geneva, whose Cours de Linguistique Générale, published posthumously in 1916, founded modern structural linguistics, established that the relationship between a word’s sound and its meaning is arbitrary.  There is no natural connection between the sounds of “scale” and the concept of fish plates, or weighing instruments, or measurement systems.  The connections are purely conventional — the result of historical accident rather than any inherent fitness between sound and meaning.

The three English scales are his argument made manifest.  Three historical accidents, three separate etymological journeys, one identical destination.

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Terence Nunis, DTM | Division Advisor, District 80 Division M | Club Advisor, AIA Toastmasters | Past President & Founder, Awesome Toastmasters

The Difference between Being Correct & Sounding Correct

Any interaction is a negotiation, and any negotiation is about the power dynamics of interaction.  Being correct does not get you anywhere.  Sounding correct does.  Being correct and sounding correct guarantees success. Knowing when to merely sound correct, and when to be correct and sound correct, is what makes you influential.  It is not what you say, it is what they hear.  Do this well, and you can sell any person anything, and convince them it was their idea in the first place.

Economic Outlook for 2024

The following are some thoughts about the market outlook for the first quarter, 2024.  I am quietly optimistic that we are looking at the start of a long-term recovery after the challenges of the last few years.  At the very least, we have seen off the worst of the high inflationary environment brought about by the confluence of events, such as the logistics bottleneck at the supply side, the concerns about the war in Ukraine and the aftereffects of the pandemic. 

J.P. Morgan’s Global Investment Strategy Group (GIS) believes the US economy could see a growth slowdown in the first half of 2024.  However, it will likely avoid a recession this year.  As it is, the expected recession of 2023 never materialised.  The higher bond yields and the reasonable stock valuations mean that forward-looking returns look more promising than they have been in more than a decade.  The lower likelihood of an economic downturn bodes well for your investment portfolio going into the new year.  As the market consolidates, we are going to see market growth in the 2^nd half of the year. I think it unlikely, because of the presidential cycle.  Politics is still the major driver of economic uncertainty in 2024.  This includes the US presidential election which could have unpredictable consequences for geopolitics, trade, and the wars in Ukraine and the Mideast. 

The reduced risk of a recession is just one element in a shifting financial landscape.  Emerging from the pandemic over the past few years, the markets experienced a historic increase in bond yields.  It is critical to recognise of the impact of higher interest rates.  There is a shrinking gap between job openings and unemployed workers in the US.  The cooldown in US wage growth to less than 5% from a peak over 7% suggest that the Federal Reserve is making progress in its fight to reduce inflation. 

It is estimated that the Federal Reserve could start cutting interest rates sometime in the second half of 2024.  If the rate cuts come in response to normalised inflation rather than a recession, the cutting cycle will likely be slower than during the early 2000s, Great Financial Crisis (GFC) and pandemic.  US inflation has fallen to between 3.5% and 4% on an annual basis, down from its highs of over 8% in the summer of 2022.  Inflation is expected to continue declining towards the Federal Reserves’ target, likely settling between 2% and 2.5%.  The normalised labour market, and lower impact of energy price swings on the overall price basket should help keep inflation in check. 

In March, the FDIC took over Silicon Valley Bank after it experienced a classic bank run.  Higher interest rates made its bond portfolio less valuable, threatening its balance sheet and spooking its customers.  Signature Bank and First Republic failed shortly thereafter.  Higher interest rates have been working their way through the economy, denting the balance sheets of bondholders, and raising the cost of borrowing.  This is also an indictment of the poor US regulatory framework, allowing banks to put so much of their reserves in long-term bonds, and not diversify.  This lack of liquidity caused the collapse more than the market conditions.  Corporate bankruptcies rose sharply in the US, in 2023, but are still well below the highs of the GFC.  Again, it was a liquidity issue. 

However, there are still several inflationary pressure points to consider.  Industrial policy and the transition to clean energy could support higher commodity prices.  We need to consider the impact of the carbon tax, which will drive prices of some sectors up.  GIS also predicts a challenging macro backdrop for equity markets in 2024, due to sluggish growth and stubborn inflation.  They estimate S&P 500 earnings growth of 2% to3%, and a price target of 4,200, with a downside bias.  GIS expects U. and global growth to slow by the end of 2024, since geopolitical risks remain high, and equity volatility is expected to generally trade higher in 2024 than in 2023.  Meanwhile, the US continues to command a quality premium over other markets, given its sector composition and cash-rich mega-capitalisation stocks. 

GIS foresees a bumpy start to the year is expected for Emerging Markets given high rates, geopolitical developments, and lasting US dollar strength considering the aforementioned geopolitical tensions. However, Emerging Markets should become more attractive through 2024 on Emerging Markets -Developed Market growth divergence, demand for diversification away from the US, and low investor positioning. 

BlackRock sees quality stocks in a strong relative position as the rate hikes end.  The greater market breadth is creating stock-picking opportunities.  BlackRock’s overall strategy is to retains focus on quality and lower-beta equities, because they sees attractive stock selection opportunities in 2024 amid a Federal Reserve pause and outlook for broadening market breadth. 

Goldman Sachs Research’s baseline assumption is that the US economy continues to expand at a modest pace and avoid a recession.  They project an earnings rise by 5%, and the valuation of the equity market equals 18x, close to the current P/E level.  They expect the Federal Reserve has finished its hiking cycle and Treasury yields have peaked.  They forecast most of these ownership categories will be net sellers of stocks in 2024. They expect positive returns to equities, but a 5% return risk-free in cash remains a competitive alternative. 

GIS believes the Federal Reserve’s dovish pivot has tipped the odds away from recession and toward a soft landing.  The sub trend growth is now the base case probability at 60%, and they have dropped the likelihood of Recession to 25%.  They favour the higher yielding credit sectors of the bond market: corporate bonds and securitised bonds, including agency pass-throughs, non-agency commercial mortgage-backed securities and short-duration securitised credit. 

Morgan Stanley contends investors need to pay close attention to monetary policy if they want to avoid a variety of potential pitfalls and find opportunities in a cooling but still-too-high inflation and slowing global growth.  2024 should be a good year for income investing, with Morgan Stanley Research strategists calling bright spots in high-quality fixed income and government bonds in developed markets, among other areas. 

Following interest rate hikes by central banks, global inflation has moderated from a peak of close to 10% in mid-2022 to a current pace of less than 5%.  While geopolitics and energy prices pose a risk, we see more gravity weighing down inflation than buoyancy pushing it up.  Higher yields have also been a headwind to the broad global economy.  As such, global multi-asset portfolios have not gained much ground since November 2020, and investment-grade debt has posted negative total returns for three years in a row.  High rates may be beneficial in some ways, but there has been relatively underwhelming returns in global portfolios as a result. 

Other themes for 2024 include a potential boost in productivity from artificial intelligence (AI) and governments incentivising politically important industries.  The US is amidst a presidential primary.  It is in the interest of the incumbent administration of President Joseph Robinette Biden Jr., to roll out initiatives to grow the economy.  The Bipartisan Infrastructure Bill, CHIPS Act and Inflation Reduction Act have contributed to an unprecedented surge in manufacturing construction over the past two years.  We will be better placed to assess how successful they have been this year.  Artificial intelligence (AI) may see a potential boost in productivity, with governments incentivising certain industries like financials, airlines and healthcare.  Governments around the globe are also incentivising investments in important areas like national security, the energy transition, semiconductors, infrastructure, supply chains, and anything exposed to climate change. 

The higher interest rates mean bonds are now as competitive with stocks as they have been since before the GFC.  US aggregate bonds should deliver 5%-plus returns over the next 10-15 years with just a quarter of the volatility of large-capitalisation stocks.  Because of the added volatility, US large-capitalisation stocks should reward investors with returns of 7% over the same time frame.  For conservative investors, in order to lower downside risk, and limit the range of potential outcomes, I suggest a shift towards more bond exposure.  However, for those aiming to maximise upside potential, they should keep their portfolio tilted toward equity. 

In a higher-yield environment, some of you might be considering cash and money market, while waiting for better opportunities later.  However, cash is expected to underperform most asset classes in 2024.  We must consider currency and interest rate exposure for global portfolios. 

Looking at China, while many expected a surge in consumer spending and a big spike in oil prices, once China eased travel restrictions, this did not happen.  For one, there is the trade conflict with the US.  The Chinese government is also adjusting the economy by balancing GDP away from the real estate sector, which once stood at almost 30% of GDP, and by curbing other industries  such as tuition.  These are wise measures for long-term growth, but the result is short-term pain.  Otherwise, Chinese growth would not be sustainable. 

China is pivoting to investing in levels of manufacturing capacity to seize a long-term strategic advantage.  This includes electric cars, batteries, solar panels, renewable energy developments, high-end manufacturing, precision engineering, and metallurgy.  China is no longer the factory of the world for mass-produced goods only.  We should expect disruption in the short-term, but substantial long-term growth. 

Asia is expected to account for 60% of global GDP growth in 2024.  Despite the higher risk attached to geopolitics and China’s economy, it remains the main region for growth opportunities.  Bangladesh, and ASEAN are likely to see accelerated growth in the medium term.  The anticipated robust growth and a relatively promising outlook in Asia could present attractive potential for discerning investors in 2024.  A significant theme is the potential for disruptive technological innovation, providing investors with rewarding and untapped opportunities in companies well positioned to benefit from ongoing transformations.  Asia’s continued strong growth momentum and relatively promising outlook should provide attractive potential for selective equity investors in 2024. 

Goldman Sachs Research predicts a resurgence in the Japanese equity market in 2024, driven by robust global economic growth and reforms in the stock market.  The TOPIX, a gauge of Japanese stocks, is expected to climb by about 13%, reaching 2650 by the conclusion of 2024. 

In summary, after considering the various factors, and reading the extent economic reports, I personally recommend a slight overweigh on US equity and bond in the near-term, before reviewing at the start of the 3^rd Quarter.  Areas of growth include healthcare, and technology.  East Asia and Southeast Asia remain important growth regions, and still look good for long-term investment.

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.