Carbon in early stages of development as asset class: Standard Chartered

The carbon market is facing challenges typically seen in the early development of an asset class and more guidance and standardization are needed to get to the desired level of maturity, Standard Chartered Bank's Chief Sustainability Officer said March 7 at a forum.

"We are not at where we need to be today. We do need much more guidance of what [the carbon market] could look like or should be," Marisa Drew said when asked whether ESG (environmental, social and governance) standards and carbon market frameworks were comprehensive enough.

"That is also very much consistent with the early development of a market. We have seen these [challenges] in every asset class that has been developed over time," Drew said.

"As markets begin to develop, you begin to adopt common sets of principles and standards, [starting from] those first types [of their kinds] around and getting better over time. That's sort of where we are in the carbon space."

The Integrity Council for the Voluntary Carbon Market, which has attracted a broad scope of public and private sectors' stakeholders, and its guidelines and principles have been widely used nowadays to determine how to identify high quality carbon credits and use them in a proper way, Drew noted.

"And the key to me is, when you have such market-adopted principles, you create that confidence and then trades begin to flow. We are in the middle of that journey right now, but there is enormous will and momentum behind it. I am optimistic that we will get to something that will help the market to be less fragmented."

"This [uniformly accepted set of standards and principles] is the muscle that we should build in every sustainable finance organization," Alex Manson, Head of SC Ventures, said at the forum, adding there were also commercial opportunities.

SC Ventures is a business unit of Standard Chartered that supports disruptive financial technology and explores alternative business models.

The business unit is working on harmonizing the current carbon emission reporting and ESG reporting practices, facilitating Scope 3 or supply chain-wide emission disclosures, as well as enhancing the management of nature-based carbon credits -- which were criticized recently due to controversial quality and insufficient monitoring measures, SC Ventures told S&P Global Commodity Insights on the sideline of the event.

Chaos in ESG

The fragmentation in the carbon market reflects the bigger environment of ESG reporting by companies and ESG-related assessments made by financial institutions, speakers said at the forum.

Given there were lots of different standards, it will be difficult to understand which ones to use and which ones represent best practice, Brice Richard, Associate Principal, Global Strategy Skills Leader at consultancy firm Arup, said.

Richard noted the initiatives under IFRS, a non-profit organization established to develop accounting and sustainability disclosure standards that are uniformly accepted across jurisdictions.

"Uniformization is not the only inflection point. The other one is enforcement. If there are uniform standards but there is no sanction to those that do not follow them, then you have a problem," Richard said.

Richard said ESG-related reporting and disclosures were largely voluntary with no sanction or punishment element for most companies that do not report or fail to meet their sustainability targets.

"Regulators are mandating how you report. TCFD is a version of that. It is again part of the evolution," Standard Chartered's Drew said.

Under the Task Force on Climate-Related Financial Disclosures (TCFD), there has been a broadly applied framework on disclosing the financial implications of climate-related risks as well as opportunities.

"What is more challenging is that every regulator has a different standard. TCFD is largely adopted now globally. But the difficult thing is, if you are a global organization, whether a company or a bank, you may have regulators in five different markets with different green taxonomies," Drew said.

Drew noted that countries were coming together under one umbrella -- the International Sustainability Standards Board, set up by IFRS and which targets a comprehensive and uniform set of standards in ESG reporting and make the reports by different companies in different countries eventually comparable.

"It is still early days. But this is exactly what we expect to see happen," Drew said.