Mitigating climate change is increasingly becoming the focus of companies and businesses. And, data, as they say, is the new oil. What then is a better way than to take advantage of both secular trends in one go?
The Singapore Exchange (SGX) plans to launch new derivative contracts using carbon data from the upcoming carbon exchange, Climate Impact X (CIX), just like how it had done so with shipping and freight data from the Baltic Exchange.
SGX currently provides a range of shipping derivative contracts based on the Capesize, Panamax, Supramax and Handysize timecharters. It also provides derivative contracts based on individual voyage routes that shipowners, chartering and trading companies, as well as users in the key dry bulk markets of iron ore and thermal coal, use.
Likewise, with CIX, SGX plans to launch futures contracts derived from the carbon exchange’s price index, says Lee Beng Hong, the bourse operator’s head of fixed income, currencies and commodities (FICC). “To some extent, CIX is like the Baltic Exchange. They are platforms that produce data that can be used for futures products,” he tells The Edge Singapore in an interview.
The carbon exchange will be jointly established by SGX, DBS Bank, Standard Chartered and Temasek Holdings. It is expected to be launched by the end-2021. Contributions from CIX will be recognised under SGX’s FICC business.
Lee is hopeful that the new carbon futures contracts could be launched as soon as next year. This would require CIX aligning all its ducks in a row, including regulatory approval and network. “So, for CIX, I think once the price index is ready, [among other things], there will be a discussion between SGX and them on what is the right time to launch carbon futures contracts,” he says.
Sufficient traction in the underlying market is also an important element. Otherwise, a carbon futures market would be for naught.
Fortunately, Lee believes there is a surging demand from investors. He says the demand to offset their scope three emissions, which refers to emissions from assets not owned or controlled by the reporting entity, is set to increase over time.
“I think we would have the right level of adoption by the next calendar year. So, it won’t be a classic five years later [in setting up the carbon futures market],” he says.
Analysts are positive on SGX’s recent efforts to grow its multi-asset platform. Jefferies says various mergers & acquisitions, partnerships and in-house products have led SGX to capture opportunities emerging from secular trends, such as ESG and passive investments as well as growing demand for electronification in FICC markets.
The brokerage believes the bourse operator offers a unique investment proposition combining stability from solid core businesses, exciting growth engines and a host of emerging opportunities. “SGX occupies an investment sweet spot,” Jefferies analyst Krishna Guha writes in a June 11 report. He has kept his “buy” rating for the stock with a price target of $11.30.
CGS-CIMB Research says SGX is on the cusp of connecting the dots in its multi-year journey to build a comprehensive one-stop-centre of investing solutions. “We think that these initiatives are a step in the right direction in raising customer stickiness,” CGS-CIMB anaSGX to exploit carbon data as the new oil lyst Andrea Choong writes in a June 12 report. She has also reiterated her “add” call for the stock with an unchanged target price of $11.61.
Meanwhile, Phillip Securities says SGX’s FICC’s business is one of its growth engines as it provides opportunities from cross-selling and new client acquisitions to an enlarged trading network. “SGX remains committed to expanding its suite of products through strategic partnerships and new product development for newly-acquired businesses with the aim of serving clients end to end,” Phillip Securities’ senior analyst Terence Chua writes in a June 16 note. He has kept his “accumulate” recommendation for the stock with a higher target price of $11.25 from $11.01 previously.