Competition in carbon exchanges heats up

Without delving into the intricacies of carbon credits and carbon markets, DBS Group Holdings together with Standard Chartered Bank, Singapore Exchange (SGX) and Temasek Holdings have launched a carbon exchange, Climate Impact X (CIX), which will be a Singapore-based global exchange.

According to the launch announcement, CIX offers distinct platforms and products that cater to the needs of different carbon credit buyers and sellers. The exchange will facilitate the sale of large-scale, high-quality carbon credits through standardised contracts that cater primarily to MNCs and institutional investors.

CIX plans to build “an ecosystem of partners, leveraging satellite monitoring, machine learning and blockchain to enhance transparency, integrity and quality of carbon credits”. This will empower corporations to take effective action and complement carbon reduction efforts as part of a holistic climate mitigation strategy, it adds.

A second exchange, Cyberdyne Tech Exchange (CTX) received an MAS Capital Market licence in May. Its co-founder and executive chairman Bai Bo says the exchange will focus on being “regulated, digital and green”. CTX also claims to be the first exchange to require carbon emission disclosure for all assets for both issuers and investors.

The third, AirCarbon Exchange (ACX), brings commodity exchange infrastructure to carbon markets. Like how commodity trades take place based on receipts representing commodities in warehouses, AirCarbon securitises carbon credits into tradable carbon asset classes based on the markets they serve. It is backed by Enterprise Singapore, Sustainable Energy Association of Singapore and the Digital Exchange Association.

The CIX differentiator

Each exchange has different focuses, most likely different customers and products, and, of course, different shareholders.

“The sponsors here make a difference because each of us has a unique strength in terms of customer outreach, technological solutions, the exchange process and ecosystem; and you need liquidity, the right kind of partners and sponsors such as getting global players to crowd in upfront,” explains Piyush Gupta, CEO of DBS, during the launch of CIX. “A lot of questions have been around integrity and we must have world-class people. Anchored in Singapore makes a difference, with its good financial and legal infrastructure. A couple of banks and tacit support of Singapore Inc will distinguish this exchange,” he adds.

SGX CEO Loh Boon Chye agrees, adding that the local bourse operator brings to the table its unique understanding of market infrastructure. “We understand what it takes to create an ecosystem around trading, settlement, registry and post trade,” he tells The Edge Singapore in an interview.

This is a tough act for CTX to follow but Bai is unfazed. “We are convinced that the future of exchanges is digital and green, and we want CTX to be the driving force for green financing,” he says. Bai is also chairman and CEO of the Asia Green Fund — a significant shareholder of CTX. The fund is a green impact private equity firm focusing on Chinese industrials and business services as well as technology-enabled green impact with around RMB15 billion ($3.1 billion) worth of assets under management.

“Tokenising” green assets make sustainable investment more accessible to investors and allow issuers to raise funds more cheaply, quickly and simply than via IPO or bond offering. Meanwhile, advances in digital technology — particularly in the blockchain sphere — have also made investors more confident about putting their money into such assets.

Bai also notes that digital information associated with such assets can serve as a rich pool of data that can be analysed to help investors better make investment decisions within this space. A digital exchange, he says, helps capture and analyse data associated with participating assets for the benefit of investors.

Bai does not see CTX intervening against firms that are found to be unsustainable in terms of carbon emissions. Besides trading in green assets, CTX also trades less sustainable assets like cryptocurrencies, which require large amounts of energy to mine. The goal of CTX is not to be a watchdog but rather an exchange of information to allow for transparency regarding prevailing ESG standards.

“We’re not trying to be a police ... because that’s really for the market to decide,” Bai tells The Edge Singapore. He notes from his decades of experience in the sustainable investment space that there is a growing interest in ESG from the markets. With investors increasingly realising that ESG investments tend to outperform non-ESG investments, he is confident that given sufficient information, investors will favour assets that comply with ESG requirements and shun those that perform poorly on this front.

ACX has engaged the British Standards Institution to perform token & carbon credit verification. It says that the process “provides confidence to clients that the reported information and associated characteristics of a carbon credit are a faithful, true and fair account of the carbon credits in question and that they conform to the token specifications from AirCarbon”.

Every token is backed by a one tCO2e carbon credit that sits in the Exchange’s trust. For instance, the AirCarbon Corsia Eligible Token (CET) is backed by the International Civil Aviation Organization’s Carbon Offset & Reductions Scheme for International Aviation (Corsia). Its AirCarbon Global Nature Token and AirCarbon Renewable Energy Token are backed by Verified Carbon Standard (VCS) tokens.

Resembling how commodities are held in escrow and traded using receipts, ACX claims to offer the lowest transaction cost on the market at 1% of the transaction notional. The industry standard pricing is typically between 10%–20% of the transaction notional. Users enjoy built-in diversification through a managed portfolio of carbon-mitigating projects, reducing concentration risks to clients.

“This allows investors to gain exposure to the underlying commodity without being pigeon-holed into specific carbon projects. By bringing this architecture to the carbon markets we eliminate opacity, increase accessibility and unleash previously alienated investment dollars,” says ACX co-founder Bill Pazos.

Regulation versus laissez-faire

A major differentiation with CIX and Bai’s CTX — in addition to not being under pressure to yield a profit within a narrow time frame like CTX — is that CIX will be the first carbon exchange anchored in the framework of the Task Force on Climate-related Financial Disclosures (TCFD). This framework was established by the G20’s Financial Stability Board to identify financing risk related to climate change.

“We aim to open doors for trading by end-year and there is a need for corporations to buy carbon credits. In terms of [numbers], there are the 1,800 companies who’ve committed [to climate change]. Among them, there are a couple of hundred buyers [of carbon credits]. They are not necessarily banks because the largest buyers of carbon credits are in hard-to-abate industries like steel and cement,” noted Mikkel Larsen, DBS’s chief sustainability office, during CIX’s launch in May.

Bill Winters, chief executive of Standard Chartered, says there is a need to go beyond listed companies. “We have stakes in private companies and many are our clients,” says Winters, referring to companies that are ready to purchase carbon credits from CIX.

“SMEs are the ones which find it hardest to understand the complexities around carbon credits. We see increasing interest for corporates to provide neutral projects to customers,” Larsen adds.

Bai highlights that his exchange is for now only open to institutional and accredited investors, ruling out retail investors in the foreseeable future. There is some evidence that the investing behaviour of institutional investors is more likely to be influenced by ESG concerns than “mom and pop” investors. Bai believes that there is a critical mass of participants from this demographic willing to vote with their feet for ESG.

Assets traded on CTX include not just cryptocurrencies but also non-fungible tokens (NFT) and asset-backed tokens. Investors can use asset-backed tokens to invest in alternative assets such as artwork and diamonds. Infrastructure, shares and real estate-backed tokens also provide an alternative to accredited investors seeking more esoteric investment options relative to more mainstream offerings like REITs or bonds.

According to Bai, alternative assets present an attractive proposition for accredited investors as inflation jitters spread through the global economy. As people fear the devaluation of currencies, demand has risen for real assets as an inflation hedge. The existence of digital assets like NFTs has also increased opportunities for investors to buy fractionalised units of alternative assets, opening up a new opportunity for growth in a more accessible alternatives market.

CTX provides trading, settlement and custody services for both cryptocurrencies and asset-backed tokens. It also provides institutional bank-grade security for all levels of its trading platform such as robust penetration testing and managed defence and response to cyber threats. Part of the reason it cites for only taking accredited clients is to ensure rigorous “know your client” and anti-money laundering processes for all who use its services.

ACX targets its services to financial, corporate and airline clients. It offers widgets and API tools to help corporate clients calculate the carbon they need to offset and is planning the creation of a Futures Carbon market this year. Airline clients also enjoy zero storage costs for their carbon credits, paying for them only on physical delivery.

Carbon project developers also enjoy significant benefits when trading over AirCarbon. When tokens backed by their carbon credits are traded on the exchange, the project developer enjoys a cut of the ongoing trade fees through blockchain. The upcoming futures market will also provide more sophisticated methods for developers to raise capital on the exchange.

A more established player, ACX has its own existing portfolio of clients. In April, it announced that it had helped Hong Kong-listed FinTech firm BC Technology Group offset carbon emissions from 2018–2020. Viridios Capital, meanwhile, securitised 500,000 tonnes of Corsia eligible carbon credits with ACX.

“We have great confidence in their cutting-edge blockchain technology. It’s also a competitive advantage that they’re located in Singapore, given the country’s leadership and drive toward becoming a carbon-trading hub in the world,” says Eddie Listorti, Viridios’ founding partner and CEO.

While Bai’s CTX is likely to be flexible and secure, CIX has the edge with its established shareholders, long client list from two of Asia’s leading banks, and the ability to recognise liquidity and regulation are among two of the many factors needed for a successful exchange. But ACX’s strong engagement with regulatory standards and carbon credit issuers, and the creation of well-backed in-house tokens present it a unique niche in the carbon exchange space. — Additional reporting by Jeffrey Tan

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