KUALA LUMPUR (Oct 24): Carbon credits from voluntary carbon markets (VCM) should still be considered as a solution to address climate change, despite criticisms surrounding the integrity of VCM currently, said speakers during a panel session at the JC3 Journey to Zero Conference 2023 in Sasana Kijang, Kuala Lumpur on Tuesday.

This is because the goal to keep global warming to below 1.5 degrees Celsius and limit the negative impacts of climate change might not be achievable by the expected timeline, said the speakers at the panel titled “Elevating VCM: Prerequisites for mobilising private finance in the climate mission”.

“We are very dangerously poised when it comes to meeting any of the climate scenarios given by the Intergovernmental Panel on Climate Change and other bodies. We are heading towards a much warmer world,” said Jigar Shah, head of environmental, social and governance (ESG) research and chief executive officer (CEO) of Maybank Securities India.

The conference, organised by the Joint Committee on Climate Change (JC3), brings together various stakeholders to discuss climate and nature finance. 

The JC3 was established in 2019 to build climate resilience within the Malaysian financial sector, and is co-chaired by Bank Negara Malaysia (BNM) and the Securities Commission Malaysia. JC3’s members comprise senior officials from Bursa Malaysia and financial industry players.

VCMs allow entities to purchase carbon credits — generated by projects that reduce, avoid or remove carbon emissions — and use it to offset their own emissions. It is often pitched as a solution to channel funds towards projects that need financing, and to enable action for companies that find it difficult to reduce emissions directly due to technological or cost constraints at the moment.

“VCM is one of the best tools to facilitate and implement the common but differentiated responsibility (principle) in the sense of providing funding from developed to developing economies,” said Dr Ali Izadi-Najafabadi, head of Asia-Pacific for BloombergNEF.

However, the credibility of carbon credits is often questioned, as entities are accused of greenwashing. To address this, standards and methodologies that govern the supply and demand for carbon credits are critical. 

The Voluntary Carbon Markets Integrity Initiative (VCMI) and the Integrity Council for the Voluntary Carbon Market are currently playing this role by setting out global thresholds and frameworks for assessing carbon credits. 

The VCMI, for instance, released a Claims Code of Practice in January, that serves as a guide for companies that want to engage with VCMs.

“It is designed to provide a tool for companies that want to do the right thing and protect their reputation [and] not be liable to criticism [by] the public, or in extreme cases, be litigated against because of potentially misleading claims,” said Mark Kenber, executive director of the VCMI. 

Another module of the Claims Code of Practice will be released in November and provide companies with more insights on what are the good practices when utilising carbon credits.

In Malaysia, the Bursa Carbon Exchange (BCX) by Bursa Malaysia launched its first auction of carbon credits this year. Dr Wei-Nee Chen, head of carbon markets at Bursa Malaysia, said that capacity building is important to support high-quality carbon projects. 

“At the exchange level, we have an obligation to develop a credible carbon market offering. For BCX, we developed our standardised contracts very carefully. It is intended to send a signal that we only want to admit high-quality carbon credits into our platform,” she said. 

“For instance, we are not accepting any carbon credits older than 2016; we are providing pricing transparency; we publish our trading activities on our website; and we screen these carbon credits prior to admission.”

Safeguards around the VCM to ensure the emissions reduction or removals are not counted by more than one entity, will be discussed at the upcoming United Nations Climate Change Conference, among other issues. 

This is important to prevent the same problems that plagued the Clean Development Mechanism (CDM) under the Kyoto Protocol from occurring again, said Ali. “The challenge with the CDM is [that] you had issues around a potential for unlimited supply of projects but also, double counting of emissions reductions,” he said.

More structure is needed to support the smaller and riskier sustainability projects. This is where blended finance — where public and private capital are combined — can support projects that commercial banks would not normally fund. This is especially needed in developing countries.

“Developing parts of Asia is such that a lot of [projects or assets] present a level of risk [that commercial investors or commercial financers] are not ready to take,” said Marat Zapparov, CEO of Pentagreen Capital, at the panel titled “Unveiling success: Extracting insights from projects flourishing through blended finance structures”.

Adam Ng, the Asia-Pacific regional and technical lead for the Greening Financial Regulation Initiative at World Wildlife Fund (WWF) Malaysia, shared how blended finance has helped with WWF’s “un-bankable” projects.

Projects like turning natural resources to health products like oils and balms brought some revenue to villages in Eastern Malaysia. “We are looking at how we can scale up this kind of (village-based industry) in the East coast to [transform] them into SMEs (small and medium-sized enterprises),” said Adam.

Youths are part of the vulnerable population due to climate change impacts, and a just transition will have to consider their needs. Mogesh Sababathy, Youth Climate Champions Consultant for UNICEF Malaysia, said youths must be included in decision-making processes on climate-related issues. 

Additionally, financial resources should be allocated to meet climate targets and deployed over longer time frames. 

“The implementation of long-term climate budget involves setting transparent, legally-binding emission reduction targets. By locking into these commitments, current decision makers will be held accountable for their actions,” said Mogesh during the panel titled “A just transition: Advancing inclusivity in finance”.

He also proposed for the government to set up a child and youth climate change committee.

Another group that must be included in the just transition is small and medium[-sized] enterprises (SMEs), many of which currently have insufficient awareness about sustainability. 

“It’s not the lack of funding. It is there. Banks have come together and we want to support the journey for the transition,” said Shahril Azuar Jimin, chief sustainability officer of Maybank Group.

“Many (SMEs) are still recovering from the effects of Covid, and some are still citing the often-used phrase that ‘to go green, you cannot be in the red’,” he said.

This is worrying because the SMEs will suffer when new regulations like the European Union’s Carbon Border Adjustment Mechanism are introduced, Shahril added.

On the other hand, to prevent greenwashing, there needs to be comparable data and increasingly, standards to understand social and environmental impact of companies’ policies. More sophisticated methodologies are being introduced to enable the latter, said Helena Fung, head of sustainable finance and investment for Asia-Pacific at the London Stock Exchange Group.

“Having clear standards will be critical to understand the impact of what companies are doing and measuring what they do, versus what they say they do.”