The Biden administration’s recent actions represent a 180 degree turn by the USA on carbon. However, the juggernaut that is Environmental, Social and Corporate Governance (ESG) has been traveling sometime and has built quite a head of speed already. The shift in US politics will simply give more impetus to something that is already occurring and rapidly – at least in the western world. Further regulatory and political pressure will just force the ESG trend according to Bruce Tozer of Gen10. He sees finance sector initiatives like climate disclosure having a powerful impact on commodities. “Big questions are being asked of the sector,” he said. “At the same time, the EU ETS is having a strong and sustained resurgence as it moves into the post 2020 post Kyoto era,” he says. “Carbon prices have spiked right up despite the lockdown and lower economic activity.”
Bruce also points to a lack of global standards around carbon as a bit of an issue for commodity firms. Most carbon markets are regional with different rules, instruments and so on as well as different prices. “Lack of consistent Carbon standards is a major issue. The Taskforce for Scaling Voluntary Carbon Markets, spearheaded by Mark Carney and Bill Winters, CEO of Standard Chartered, is looking at how to standardize and scale carbon markets, so it is easier to trade them,” he told me. “The Taskforce published an initial consultation paper in November last year, followed on January 29th by the release of an ambitious action plan to drive the creation of a common set of standards and a carbon pricing mechanism, ideally to be implemented in time for COP 26 to be held in Glasgow in December. Anyone trading commodities will be facing issues as to how to deal with the carbon footprint and price of carbon,” he said. “How will carbon be dealt with? Will it be embedded in the contract as a carbon neutral cargo, for example?” he asked.
His points are well taken. The future of commodity markets and traders will inevitably now include climate risks and the price of carbon. Already margins can be thin and keeping costs along the supply chain down is a key criteria to maintaining profitability. In the future, Bruce sees there being a lot more data involved in decisions and analysis that includes the climate and carbon aspects of how a product is produced, transported and delivered. The problem is that right now there isn’t a single global price for carbon and with all the different schemes, markets and allowances, often with no real forward curve, it adds up to a picture fraught with risk and complexity, he told me.
Gen10 has been working on this area for some time, Bruce told me. Gen10 sees this as another physical and price risk and “we are already embedding traceability throughout our software and we will be baking in the carbon side of things as well. In fact, we have already done just that on the biomass side of things,” he pointed out. “It will become another parameter in trading commodities with lots of data behind it. All commodity companies are going to have to understand the carbon complex and figure out how to build it into their processes for efficiency.” Meanwhile, he says, “G10 continues to build and incorporate its decarbonisation expertise into its core product offering, with the objective of making it an integral and seamless part of CTRM systems and apps for companies to be easily able to manage their internal and external carbon related data sources and link efficiently and effectively with emerging carbon market infrastructure and product platforms. The carbon price could be the biggest risk of all or at least as big as other risks in commodities.”
