The scientists of the Intergovernmental Panel on Climate Change (IPCC) have observed that global greenhouse gas (GHG) emissions must peak by 2025 at the latest if we were to restrict global temperature rise to 1.5°C by 2100. This would help the world achieve net zero emissions by 2050 and avoid the worst impacts of climate change.

But even with current polices and pledges, we are still far from reaching that goal, according to the latest analysis by the Climate Action Tracker.

To restrict global warming before irreversible changes are made to the environment, voluntary carbon markets (VCM) and nature-based solutions (NBS) are critical. VCM allows companies or other entities to purchase offsets generated by activities that remove or reduce GHG, in order to compensate for their carbon emissions. Meanwhile, NBS are activities that protect, sustainably manage or restore natural ecosystems. These solutions can generate carbon offsets for VCMs.

The VCM and NBS are especially relevant in Southeast Asia, which is likely to be the hardest-hit region economically due to climate change based on various scenario models. A 37% GDP loss is expected in the worst-case scenario, according to Swiss Re Institute.

But at the same time, the region has a wealth of natural resources that can be used to generate carbon offsets. Between 15% and 20% of the world’s tropical forest cover is in Southeast Asia, and countries in the region are developing regulations and taxonomies to support these activities.

In fact, Maybank Investment Banking Group expects the VCM to grow between 2025 and 2040 before evolving into a compliance market. In that time, countries and corporates will have a clear visibility of their carbon mitigation and reduction plans, and would want to offset their emissions. This would spur the growth of VCMs and NBS.

“The launch of Bursa Malaysia’s VCM and the volume at the recent VCM exchange in Singapore will be critical for the scale-up of this market. If these VCMs develop a reputation for high-quality removal credits, there will be a huge demand because in the absence of aggressive decarbonisation activities in the near future, most large global corporations would be happy to buy or develop high-quality removal offsets,” says Maybank Investment Banking Group CEO Michael Oh-Lau.

VCMs would enable the transfer of resources from companies and developed countries towards developing countries that disproportionately face climate impacts. Some of the benefits that Southeast Asian countries could experience include a reduction in deforestation, increase in mangrove restoration and less frequent floods as a result.

“The benefits to Asean companies would be in the form of reduced risk of missing emission reduction targets, surplus credits inventory, acceptance and adoption of carbon pricing and formulation of a robust strategy to get to net zero,” says Jigar Shah, regional head of ESG Research at Maybank Investment Banking Group.

Companies in the “hard-to-abate” sectors, such as oil and gas, steel, cement, transportation and power will need a proper offset strategy because it would not be possible to reduce all their emissions through decarbonisation. Financial institutions that have high “financed emissions” would also need to do the same.

“Large retail and consumer companies also generate huge Scope 3 emissions, which they need to offset through VCM to get to net zero. All these industries need to pay attention to the potential of VCM by using avoidance or removal credits,” says Jigar. Scope 3 emissions refer to indirect emissions that occur in a company’s value chain. This could include business travel, purchased goods and services and investments.

At the moment, forestry and land use and renewable energy are the largest contributors of carbon offsets in VCM globally. Going forward, independent research estimates that NBS could form between 65% and 85% of the potential carbon credit supply to help meet the deficit in emissions reduction. That’s because of the premium attached to NBS, which is priced at double that of renewable energy. This is a meaningful opportunity for country like Malaysia with its sizeable tropical forest.

This high value on NBS is due to its ability to mitigate climate change. Studies have shown that it can provide over a third of cost-effective climate mitigation needed globally to achieve net zero emissions by 2050 and keep global warming below 2°C.

It can address the threats posed by climate change and biodiversity loss, while delivering benefits to society. The benefits that nature provides have an estimated global value of US$125 trillion to US$140 trillion per annum, according to the Organisation for Economic Co-operation and Development (OECD).

However, since the industrial revolution, over two-thirds of the world’s oceans have been polluted and over 85% of wetlands destroyed, based on studies by the Intergovernmental Science-Policy Platform for Biodiversity and Ecosystem Services 2019. Meanwhile, Asean is ranked highest in biodiversity loss due to deforestation and conversion of forests to plantations.

Restoration of degraded land and ecosystems that can store carbon dioxide through NBS could make a huge difference. A study by the British High Commission estimates that NBS projects in Southeast Asia have a potential of US$27.5 billion per year, yet only 3% of green finance is spent on it.

Despite this potential, there are concerns by buyers and potential buyers about the environmental and reputational risks connected with carbon offsets. This is particularly the case with NBS, which can be difficult to monitor.

To ensure the quality of these carbon credits, certifications by reputable organisations like Verra and Gold Standard are needed.

“The VCM industry associations are also working on improving the quality of credits based on rules that would be harmonious across the globe and allow its fungibility anywhere,” says Jigar.

“A critical development would be the use of technology to provide evidence on the carbon removal and sequestration in forests using light detection and ranging, sensor and geospatial mapping technologies. These removal credits form a low percentage of total credits now, but as they increase in volume, the problem will get addressed and pricing will improve.”

The number of corporates that have set net zero goals is increasing. Meanwhile, most Asean countries have committed to achieve net zero emissions by 2050 or 2060. In Malaysia, 10 companies with a cumulative revenue of US$57 billion have declared net zero targets by 2050.

To meet these goals, carbon offsets are likely needed, as existing decarbonisation technologies are not sufficient to help certain sectors completely eliminate their carbon emissions.

This is where Maybank would like to play an active role in supporting clients across sectors as they transition to a net zero plan. The group has developed a Sustainable Product Framework, the first ever by a Malaysian bank to enable greater development of sustainable products. Maybank has taken a leadership position by introducing the framework into its business to allow for products and services to be designed based on the needs and readiness of customers

“Maybank Investment Banking Group can help clients in their net zero plans by supporting them in their transition journey. For example, we can help by financing their decarbonisation initiatives including a transition to renewable energy. Our customers are at different stages of the sustainability journey. We want to be able to work with our customers and offer them dedicated sustainable, sustainably-linked or transitory solutions based on their needs,” says Oh-Lau.

The bank can also provide financing to develop infrastructure for the low-carbon transition, such as electric vehicle charging stations, solar panels, green hydrogen and carbon capture technologies.

“Lastly, the bank can forge industry coalition or partnerships to carry out large industry-wide transition initiatives, such as green buildings,” he says.