A version of this article was first published on FinanceAsia.
Singapore-based asset management firm, Gunung Capital, started its transition towards net zero in late 2019. It began with a review of its main portfolio asset: Indonesian steelmaker, Gunung Raja Paksi (GRP), which at the time was one of the largest privately owned steel groups in Indonesia.
Together with an overhaul of the asset’s management, the Gunung team considered the stark reality of its carbon footprint. Their decision later that year to list GRP on the Indonesia Stock Exchange (IDX), formalised regular disclosure of the asset’s activities in the public domain.
Steelmaking is a big contributor to carbon emissions, with nearly 2 billion tonnes of the metal produced every year contributing to 8% of the global total, according to the Leadership Group for Industry Transition (LeadIT).
“We are fighting an uphill battle, but we recognise through our research, that there’s really no option for us but to adapt quickly,” Kelvin Fu, co-founder and managing partner at Gunung Capital told FinanceAsia.
The firm is currently completing a carbon footprint study and plans to release its roadmap this year to track annual progress. Fu explained that the company’s carbon footprint is low at 20% compared to other traditional steel businesses, as its steelmaking process employs an electric arc furnace which recycles scrap metal, and it has installed solar panels on its roofs. But the team will continue to look at ways to further reduce its carbon outflows.
Gunung Capital is transforming its main portfolio asset in several ways, starting with changing the energy mix right at the source. Fu recognises that the biggest influence across this endeavour will be “to tap a reliable source of green energy” and that this process will take time, depending on how long it may take to build out green power capabilities.
The firm is investing in new, energy-efficient equipment and is sourcing high-quality raw materials when it comes to the scrap metal and hot briquetted iron it relies upon. Additionally, it is drawing upon artificial intelligence (AI) and technology to make its entire value chain run more efficiently. In fact, the Gunung team aims for its sustainability roadmap to be sufficient for application across other companies, and across other industries.
“If you look at specific industries like forestry or some conglomerates that have multiple business lines, they don’t necessarily have an experienced sustainability team.”
“As we talk to these companies – potentially to invest in them, we’re also saying that we have a sustainability playbook and we can be their on-ground team to support their energy transition,” said Fu.
Supporting the global transition also requires huge amounts of capital and earlier this year, Gunung Capital committed to investing up to $500 million to decarbonise its assets. According to Bain and Temasek’s Southeast Asia Green Economy 2022 Report, $3 trillion in sustainable infrastructure investment is needed by 2030 to facilitate Southeast Asia’s carbon transition – a figure that far overshadows the mere $9 billion that was invested in green business endeavours and assets in 2020.
But energy transition is just one piece of the puzzle for teams like Gunung Capital. Carbon mitigation is also central to the team’s investment strategy. As Fu puts it, “the delta is very big because the holy grail for carbon is ultimately its removal”.
This is where the voluntary carbon markets come into play.
Corporates typically buy carbon credits to offset the emissions that they cannot eliminate. They do so by investing in environmental projects that are designed to avoid or contribute to the overall removal of carbon emissions, with each carbon credit representing one metric tonne of carbon dioxide emissions.
The establishment in May last year of a Singapore-based global exchange and marketplace for voluntary carbon credits, Climate Impact X (CIX), is a testament to interest in the voluntary market. The joint venture, which unites the expertise of DBS, the Singapore Exchange, Standard Chartered and Temasek, provides a solution to the trust and transparency problems that have previously plagued the construct of a viable carbon market.
“There's a lack of trust in paying for a piece of paper that says a tonne of carbon is sequestered. Even if you trust the piece of paper, what is a fair price to pay? Markets are effective in solving the pricing sensibility problem, as well as drawing that forward curve to help figure out what this might be worth in three, five or ten years,” said Genevieve Soh, head of Platforms and Ecosystems at CIX.
In November, CIX conducted its first auction of voluntary nature-based carbon credits, which saw participation from 19 global buyers across various industries. 170,000 tonnes of carbon credits were transacted as part of a curated portfolio of eight natural climate solution projects, at $8 per tonne.
Gunung Capital was one of the firms that took part in the pilot auction, which Standard Chartered CEO, Bill Winters, described as “a critical step in unlocking billions in funding needed to achieve our shared climate goals”.
In the first quarter of 2022, CIX launched Project Marketplace to allow businesses and carbon project developers to buy and retire credits. Explaining this concept, Soh offered up the analogy of a can of soup, which nobody can benefit from unless it is opened and consumed: equally with carbon credits, there is no benefit unless they can be retired, and it is only through a marketplace that this can happen.
The firm plans to launch an auction platform in the third quarter, with a spot exchange to follow. These multiple trading venues address what CIX sees as a “diverse set of needs”.
“The auctions platform is where the projects to sequester carbon will sit. Auctions tend to be very effective at sending pricing signals for new products, and we set this out to be an in-between to the marketplace and the spot exchange,” said Soh.
New kid on the block(chain)
Meanwhile, the AirCarbon Exchange (ACX), is capturing a different approach to voluntary carbon credits, by putting them on blockchain.
The concept is simple: to form a carbon market in Singapore by pairing the best attributes of traditional commodity market architecture with blockchain, in order to create a digital ledger. After all, by nature, carbon credits are intangible digital assets.
The approach came from what ACX co-founder and CEO, Thomas McMahon, considered to be a flaw in the commodities markets. “The management of underlying assets and how they are stored and custodised, is challenging. While this challenge remains, blockchain works to fix it, by allowing for the acquisition and deposit of carbon credits as an asset class, defining beneficial ownership and removing transaction friction.”
Before setting up ACX in 2019 alongside William Pazos, the firm’s managing director, McMahon, served as CEO of the Singapore Mercantile Exchange, worked as deputy chairman of the Hong Kong Mercantile Exchange, and spent over two decades at the New York Mercantile Exchange. In tandem with the team’s efforts, his experience has brought over 330 members to the exchange, comprising a client base of both buy- and sell-side constituents.
In March this year, Deutsche Börse made a substantial investment in ACX, marking a partnership to accelerate further the development and scale of the voluntary carbon markets. In May 2021, the firm became the world’s first carbon negative exchange by offsetting carbon emissions for the year ahead, through its Onil Stoves Guatemala Uspantan project.
The state of play
A growing ecosystem of players is emerging in Singapore to facilitate carbon trading. With digital marketplaces such as CIX and ACX, the city-state is asserting itself as a global leader of carbon fintech services, adding to its recently acquired reputation as the location of choice for carbon trading desks, which has attracted the likes of commodities trader, Trafigura, and oil majors like Shell and BP.
“Singapore has one key competitive edge – the ability to commoditise carbon and simplify its trading process through carbon exchanges and standardised contracts,” said Ivy Yin, energy transition and carbon specialist, at S&P Global Commodity Insights.
But there are roadblocks to Singapore’s future vision. In the short term, geopolitical events including Russia’s invasion of Ukraine are raising questions around energy security, which are subsequently impacting the prioritisation of cutting emissions. Across the longer term, there is a question around how to standardise carbon trade in the region.
“This involves development across the entire carbon market and the resolution of the deep-seated issues of poor quality and regulation that have accumulated over decades,” said Yin.
Despite the challenges, there is velocity behind carbon market developments in Southeast Asia. With discussions on the transition to net zero just warming up among countries and corporates, market commentators consider Singapore well positioned to realise its vision in scaling up its contribution towards cutting carbon.