Trusted marketplaces key to meeting the climate challenge

June 04, 2021 09:50
Chinese President Xi Jinping last September announced a national goal to attain carbon neutrality by 2060, making China the first major economy after the European Union to set its own deadline for such an ambitious target. Photo: Reuters

As countries around the world attempt to turn the corner on the COVID-19 crisis, the climate challenge looms ever larger as our next global reckoning. With the priority of economic repair and recovery across all major economies, it is heartening to see that vital momentum has been sustained in the transition towards a low-carbon future state.

The transition pathway requires solutions to an enormous collective action problem, riddled with difficult tradeoffs and leaps of faith. Internationally the immediate urgency (and solidarity of consequences) over the past year led to unprecedented collective actions to halt the spread of COVID-19. Similarly, commitment to the climate challenge demands sustained cooperation between governments, businesses and individuals. And mutual trust will be key to unlocking our collective resolve to develop sustainable solutions and deliver sustainable environmental outcomes.

In seeking to bind purposeful actions with outcomes through capital markets financing, the challenges are complex when it comes to meaningful disclosure of positive and negative externalities. Herein lies the power of the market mechanism in coordinating resources and syndicating change at a global scale. And hence harmonisation and comparability of data in environmental, social and governance (ESG) reporting has emerged as a concern, with companies using different criteria to report on their most material issues to investors and other stakeholders. This undermines trust in the usefulness of ESG standard-making.

This is an acknowledged concern, and there is progress being made in consolidating ESG reporting standards. Finding consensus will take time; it took the accounting world decades to align on reporting standards. The International Financial Reporting Standards foundation, with support from leading global organisations such as IOSCO, recently stepped up efforts to address this issue and established a sustainability standards board.

Commitments and Tradeoffs

To be sure, a clear shift in environmental policymaking is signaling that governments understand the urgency to act. Chinese President Xi Jinping last September announced a national goal to attain carbon neutrality by 2060, making China the first major economy after the European Union to set its own deadline for such an ambitious target; the U.S. has also since announced a net-zero target by 2050. Support in Asia is particularly crucial, given the region’s growing heft in the world economy: Japan, South Korea and Singapore have all made pledges of net-zero emissions.

Every sustainability journey also comes with commitments and balancing of interests, and long-term solutions based on collective action can only be sustained by trust. There are inherent tradeoffs even in the United Nations Sustainable Development Goals, with the quest for improvement in basic living conditions sometimes coming at the cost of environmental degradation.

In Southeast Asia, where the 10 ASEAN members collectively make up the world’s fifth-largest economy, there is constant calibration to balance economic development and carbon footprints. Singapore, with no natural resources of its own, faces a unique challenge in food and energy security. The country has set a goal of producing 30% of its nutritional needs locally by 2030 – an outcome that could also lead to an increase in carbon emissions. Real-world sustainability is formed within a complex calculus.

By 2050, the planet must satisfy the needs and desires of more than 9 billion people, of which over 5 billion are expected to reside in Asia. Building a global economy fit for the 21st century is a significant challenge and reshaping this sustainable future requires widespread social and political buy-in.

Purpose-Led Marketplaces

This is the context within which a purpose-led market operator makes the difference. As businesses bring innovation and creativity to solve problems, a quality market mechanism enables capital supporting those ideas to flow, to create impact. A purpose-led marketplace can pioneer pathways to achieve sustainability commitments and co-opt active citizenry through products, platforms and technology. Through its established regulatory and developmental functions, a trusted marketplace and exchange works to optimally resource against tradeoffs and objectives – both “green premia” and “brown discounts” are valuable coordinating signals in the action of the Invisible Hand.

With such existential stakes at the table, Singapore seeks to play its role in service of the Asia regional decarbonisation challenge. As an internationally trusted and recognised markets jurisdiction, Singapore recognises the importance of having in place the right frameworks and working with the right partners. We are building a carbon services and trading hub, bringing together green finance, sustainability consultancy, verification, credits trading and risk management.

Singapore Exchange, DBS Bank, Standard Chartered and Temasek will jointly launch Climate Impact X (CIX), an international marketplace guided by the core carbon principles of enhancing transparency, integrity and the quality of carbon credits. Even as companies actively seek to reduce their carbon footprint, the use of high-quality, large-scale carbon credits plays a key role in neutralizing and compensating for emissions that companies are unable to fully eliminate.

Markets must be part of the climate-change solution, through sustainability-linked products and solutions to manage risk and return. A credible marketplace will enable companies to access funding and support for their transition efforts. Strengthening capacity building for the broader financial ecosystem is also vital to catalyse change and deliver growth in a sustainable manner.

Mutually Reinforcing

As a tiny coastal city-state, Singapore is among island nations susceptible to rising sea levels in the coming decades. Perhaps this vulnerability has honed our belief that economic growth and sustainability are not mutually exclusive but are in fact interdependent, mutually reinforcing and beneficial.

To balance growth and build a high-quality living space, the Singapore government is doubling efforts to be a leading centre for green finance in Asia and globally. It is supporting the financial sector’s resilience to environmental risks, developing green-finance solutions and markets, building knowledge and capabilities, and leveraging innovation and technology. And through an organised public market, we can further strengthen the international community’s efforts to deal with the impact of climate change.

This article is published on the St Gallen Symposium website as a Topic Brief.

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Head of Equities at Singapore Exchange