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Guest Column

Published on: Nov. 8, 2021, 2:46 p.m.
Bonds of sustainability
  • Carbon trading is a novel way of addressing the climate issue and it is turning heads in modern times; Image courtesy: Pixabay

By Manish Dabkara. The author is CMD & CEO, EKI Energy Services Ltd

Carbon trading is a trading system which is market-based and aims to reduce greenhouse gases, especially excess carbon dioxide, from the environment. It is a positive approach to limit emissions by creating a market that limits allowances for emissions and encourages companies and organisations to meet carbon emission reduction targets.

Compliance forms of the market are of two types:

Cap & Trade

Carbon Tax

Under ‘cap and trade’, governments or inter-governmental bodies hand out ‘carbon permits’. The 'cap' is the name given to the limit imposed on any company on the amount of GHGs that company or factory is emitting and the 'trade' is the financial aspect, on which market is built involving buying and selling of allowances that let the company emit only a certain amount of GHGs. The government sets the caps on the industries or across industries and sets penalties for the violations to ensure compliance of the policy

World is market driven and 'cap and trade' allows the market to find the cheapest way to cut emissions. Cap and trade is always regarded as the main contributor to the slashing of increasing levels of GHGs from the atmosphere. Carbon emissions are believed to decrease globally if cap and trade is much more discretely planned, and is implemented worldwide with precision.

A carbon tax sets a price on carbon by defining a tax rate on greenhouse gas emissions. It is different from an ETS and cap and trade in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is.

The choice of the instrument will depend on national and economic circumstances. There are also more indirect ways of more accurately pricing carbon, through fuel taxes, the removal of fossil fuel subsidies, and regulations that may incorporate a “social cost of carbon.” Greenhouse gas emissions can also be priced through payments for emission reductions. Private companies or organisations can purchase emission reductions to compensate for their own emissions (offsets) or to support mitigation activities through results-based finance.

 The projects that count as ‘emissions avoidance, range from building hydro-electric dams to capturing methane from industrial livestock facilities. The carbon ‘savings/emission avoidance’ are calculated according to how much less greenhouse gas is presumed to be entering the atmosphere than would have been the case in the absence of the project. The World Bank officials, accounting firms, financial analysts, brokers and carbon consultants are involved in devising these projects.

The usual criticism that carbon trading faces is whether it is proper to put a price on climate change? Can we ever put money out of the way though, the world is run on money and the most powerful people in the world are too affluent and far off for a voice of an activist to reach them. By pricing the carbon one can talk to the affluent in the language they understand. It is a novel way of addressing the climate issue and it is turning heads in modern times.

Environmental, social, and governance (ESG) bonds are becoming increasingly important to fixed income asset managers, throughout the world and for global equity research where these factors are more firm. In 2016, the United Nations-supported Principles for Responsible Investment (PRI) unveiled the ESG Credit Ratings Statement.   Over 160 investors with over $30 trillion in assets under management and 23 CRAs have signed the statement as of October 2020.

ESG represents a more environment and stakeholder-centric approach to doing business, it manages to take care of the concerns of the environment as well as the concerns of stakeholders. ESG is environmentally effective, and promises sustainability. Companies that adhere to ESG standards agree to conduct themselves ethically in the areas of environment and sustainability. Covid-19 has certainly forced human consciousness to think on sustainable grounds. That's the reason ESG bonds are spreading through the world like wildfire, breaking all records in 2021. 

ESG criteria are an increasingly popular way for investors to evaluate companies in which they might want to invest. Many mutual funds, brokerage firms, and robo-advisors now offer products that employ ESG criteria. ESG criteria can also help investors avoid companies that might pose a greater financial risk due to their environmental or other practices.

The growing relevance of ESG (in corporate boardrooms) in India is now evident in the profit earning plans of Indian business circles with Indian companies raising the amount of almost $5 billion by ESG bonds in 2021 so far, which is higher than the amount raised ever before in history. These are certainly the steps on the road towards sustainability and clean and green living. The bonds which serve humanity and the environment and we have to be most proud of are certainly ESG bonds as it is based on standards that are for the common good of humans.

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