Scaling solutions: the role of carbon markets in accelerating the net zero transition

The world needs transformational change to fight climate change. And it needs it now.

In 2022, we witnessed flooding in Pakistan, wildfires in Europe, droughts in California and a total of 29 major weather disasters each causing damage of over $1 billion. Clearly, climate change is here, happening and having an impact on us all – the good news, then, is that we are finally seeing broad-based efforts to address this global crisis, not just debate it.

Despite geopolitical tensions, climate change topped the Bali G20 agenda, forged new dialogue between China and the United States, and has sparked a range of new policy initiatives across the globe, including the US’s Inflation Reduction Act and the European Union’s “Fit for 55” package.

At COP 27 we saw a landmark agreement on loss and damage funding, which put the crucial issue of climate accountability front and centre, resulting in stakeholders around the world having to take a hard look at the environmental impacts of their activities and work out how to address them.

Nowhere is the journey towards addressing climate change more important than in the corporate sector. While recent progress has been encouraging, with 3,152 companies in the MSCI ACWI Index already having made net zero pledges in 2022, compared with 2,891 in 2021, MSCI research shows 54% of companies in the MSCI ACWI Index have no net zero target at all and 64% of listed companies have no decarbonisation target at all.

As investors put ESG considerations at the forefront of their decision-making, disclosure standards are tightening, so bolstering corporate accountability. Today’s companies will however have to move faster to decarbonise and be more explicit about the progress they are making if they are to meet societal and investor demands.

For many, decarbonisation will be a long journey, requiring time to make the wholesale changes required, including adopting new technologies, improving their environmental management capabilities, and fully measuring the range of emissions across their operations and supply chains.

Carbon credits can offer a solution as companies move towards decarbonisation.

On voluntary carbon markets, for example, corporates can purchase carbon credits generated by projects that avoid or remove greenhouse gas (GHG) emissions - to neutralise or compensate for their emissions. By creating a viable carbon market, carbon credits in turn, help drive investment into carbon offset projects, such as in forestry, renewable energy and greenhouse gas capture activities.

Carbon markets have grown rapidly in recent years. Pioneered in Europe since 2005 and now used globally, auctions of carbon credits on carbon markets in the world’s major markets have raised an estimated $141.2 billion between 2017 and 2021, and voluntary markets alone are forecast to raise an estimated $100 billion per year by 2050.

But some obstacles have stood in the way of wider adoption, particularly in Asia. Since the introduction of voluntary carbon credits, a myriad of standards have emerged under various schemes, meaning credits can vary significantly in terms of their governance, scope & eligibility and methodologies.

That means buyers often have difficulty navigating different standards, finding price transparency or defining high-quality carbon credits. For sellers, this limits access to finance and raises the cost of verification for small project developers. Such obstacles, and a lack of trusted marketplaces, may impede the flow of capital from those making carbon neutral or net zero commitments into the hands of those with the ability to reduce or remove carbon.

To meet these challenges and connect capital with climate-related products and opportunities in Hong Kong, Mainland China and globally, HKEX was proud to launch Core Climate, an easy-access, one-stop voluntary international carbon marketplace that includes trading and settlement functions, on 28 October 2022.

Carbon credits on the platform are transparent, coming from internationally-certified carbon projects and are issued under international standards, such as Verified Carbon Standard under VERRA. Participants can purchase, sell, settle, store and retire voluntary carbon credits on the platform.

We won’t reach global net zero without China

With its proximity to China, the world’s largest greenhouse gas emitter, we hope that Core Climate will become an important international hub for facilitating international investors’ access to one of the world’s largest carbon markets, as well as connecting Mainland China companies and investors with high-quality carbon projects around the world.

And China’s commitment to reach carbon neutrality by 2060, as well as the Hong Kong government’s pledge to do so by 2050, means we anticipate considerable demand and opportunities for green finance in the region.

Core Climate is the latest step we have taken in our role as a market operator to develop an ecosystem of sustainable and green investment products to help fund companies on their low carbon transitions.

Additionally, as a regulator we continue to advocate and set standards for ESG disclosure and governance, where ESG practices and reporting are fully integrated into daily business operations.

Finally, as a listed company ourselves, we look to lead by example, for example though our commitment to the Glasgow Financial Alliance for Net Zero, which involves making a net zero pledge and developing and implementing business plans as part of our strategy, for a low-carbon future.

We believe that successfully addressing climate change will be dependent on what we do now, not tomorrow.

As society looks to leaders to drive and define the speed of climate-action, we are proud to serve as a change agent, innovator and advocate - we are committed to progressing our markets and the communities they support.

With our latest carbon initiative, we are confident that we are creating the channels needed to scale-up the solutions we all need to accelerate the net zero transition. Please join us as we strive to create a prosperous future for all.