Bursa's VCM exchange puts a price on carbon emissions

KUALA LUMPUR: Bursa Malaysia Bhd's voluntary carbon market (VCM) exchange, which it will launch by the end of the year, will help to put a monetary value on company initiatives to reduce their carbon footprint.

Hong Leong Investment Bank (HLIB) Research, in a report, noted the benefits of such an initiative, which will reward green asset owners and incentivise innovation in clean technologies.

"The VCM allows a price to be put on both carbon emissions and low-carbon opportunities.

"While participation in the VCM will be voluntary, companies that choose to do so can demonstrate their commitment to reducing their carbon footprint – failure to do so may lead to reputational woes and higher cost of capital," the research firm said.

According to HLIB, the system will drive corporates to internalise this cost in their business operations.

"Failure for companies to transition to low carbon practices (or failure to demonstrate their commitment) will not only damage their reputation (which in turn impact revenue), it can also make it more difficult for them to access capital (raising cost of capital) as debt financiers are increasingly looking at sustainability criteria when providing capital.

"On the other end, VCM rewards green asset owners and this will incentivise innovation in low carbon technologies. Through VCM, investors will also be able to start using the price signals from the exchange to price in carbon emission cost to businesses," it added.

In its press statement yesterday, Bursa Malaysia said the VCM exchange will enable companies to purchase voluntary carbon credits from climate-friendly project and solutions, which can be used to voluntarily offset their existing climate impact alongside other internal carbon reduction initiatives.

Bursa intends to offer standardised carbon credit products for trading via a rules-based VCM exchange.

The clearing price from the auction (which will be the VCM’s inaugural transaction) will establish a baseline demand for carbon credits in Malaysia, which will provide a reference point for secondary trading for market participants.

In addition, it will help provide clear price signals to support the development of domestic carbon credit projects.

The stock exchange operator said it would adopt the verified carbon standard or "Verra", which is a widely recognised standard in the voluntary carbon market.

"Using Verra standards, carbon credit projects will be subjected to robust assessment that ensures environmental claims are appropriately measured and independently verified, thus preventing greenwashing claims," said HLIB.

While Bursa Malaysia said in a recent investors' briefing that it does not expect significant contribution from the VCM in the near term, it sees potential over the longer term.

HLIB currently has a "sell" call on Bursa Malaysia given the the lacklustre average daily traded value over the last month.

It maintained its target price at RM5.65 based on 20 times price-earnings (five-year mean) tagged to FY22 earnings per share.