Bursa said that it will be launching the VCM exchange later this year, enabling participants to buy and sell voluntary carbon credits. 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. VCM also rewards green asset owners and this will incentivise innovation in clean technologies. While the VCM is a lauded move by Bursa, we maintain our fundamental SELL rating on the stock (TP: RM5.65) given recent lacklustre ADV numbers.

NEWSBREAK

In a press release yesterday, Bursa said that it will be launching the Voluntary Carbon Market (VCM) exchange later this year. We highlight the following salient points:

1) A VCM exchange enables companies to purchase voluntary carbon credits from climate-friendly projects and solutions. To achieve a lower carbon footprint over time, corporates can use these carbon credit products to voluntarily offset their existing climate impact alongside other internal carbon reduction initiatives.

2) 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.

3) There will be distinct product categories for carbon credits derived from nature based solutions and technologies that reduce or remove carbon emissions. The VCM exchange will aggregate carbon credits that share similar traits and fundamentals, with vintages 2016 onwards. Additionally, the Exchange will also label products to differentiate between carbon credits sourced in Malaysia and globally.

4) Bursa will adopt the Verified Carbon Standard or better known as “Verra”. Verra is a widely recognised standard in the voluntary carbon market, accounting for nearly 70% of voluntary carbon credit issuances globally. 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. Bursa signed an MOU with Verra in May 2022, which focuses on capacity building.

5) Bursa has open its registration to interested project developers (to supply carbon credits for the auction) and corporates (who would like to participate in the auction and purchase carbon credits).

HLIB’s VIEW

Rational for a VCM. The aim of the VCM is to put a price on carbon emissions through a market mechanism. Actual monetary value will be put on (i) the cost of carbon emission; and (ii) low-carbon energy opportunities such as clean technology, carbon capture, green mobility and others. Effectively (though in a more mandatory sense rather than voluntary), the costs that the public pays – through crops damage, property damage from flooding and sea level rise, heat waves, drought, etc. – will be shifted back to those who are responsible for the carbon emissions. A carbon price is a clear economic signal to polluters to decide whether to discontinue polluting and reduce emissions or continue polluting and pay for it.

Why would one voluntarily participate in the VCM? Although the VCM is voluntary, we believe that companies who choose to participate and purchase carbon offset will be able to demonstrate to stakeholders their commitment towards reducing their carbon footprint. The system will drive corporates to internalize this cost in to 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.

Lauded move, but fundamentally still a SELL. During its recent investor’s briefing, management shared that they do not expect significant contribution from the VCM in the near term but definitely sees potential over the longer term. While the impending launch of the VCM is a lauded move by Bursa in aiding Malaysia’s journey to becoming carbon neutral country by 2050, we maintain our fundamental SELL rating on the stock given the lacklustre ADV numbers witnessed since last month. Our RM5.65 TP is based on 20x PE (5Y mean) tagged to FY22 EPS.

Source: Hong Leong Investment Bank Research - 16 Aug 2022