DBS - First Southeast Asian-headquartered bank to offer financing and hedging solutions for one of the world's largest compliance carbon markets
Singapore.24 Sep 2024
Bank’s emissions reduction business to provide corporates with stable, cost-effective access to the EU carbon market
Recent transactions include one of the first of its kind repos involving emission allowances for a commodities company
Solutions are the latest in DBS’ ongoing efforts to partner customers to accelerate decarbonisation in the real economy
Singapore, 24 Sep 2024 - DBS today announced a suite of financing and hedging solutions to help a growing cadre of companies better manage their climate obligations under the European Union Emissions Trading System (EU ETS). This makes DBS the first Southeast Asian-headquartered bank to offer solutions catering to one of the largest and most mature compliance carbon markets in the world, which recently extended its coverage to include shipping companies outside of the EU.
Structured by DBS’ emissions reduction business – a unit within the bank’s Global Financial Markets group – this suite of solutions enables stable and cost-effective access to emission allowances used in the EU ETS, also known as EU Allowances (EUAs). The unit offers capabilities in two priority areas:
Jacky Tai, Group Head of Trading and Structuring, Global Financial Markets, DBS, said: “As the pace of decarbonisation continues to accelerate, the trading of emission allowances and voluntary carbon credits will grow in importance. They form part of a toolkit of mechanisms to incentivise businesses to reduce their carbon footprints and adopt cleaner technologies.”
“As a purpose-driven bank, DBS is committed to enabling Asia’s transition towards a low-carbon economy. Our emissions reduction business taps the bank’s deep expertise in structuring advanced financial market solutions and applies this to carbon markets like the EU ETS. Our goal is to provide clients with practical solutions which they can leverage to navigate emerging risks and capture opportunities as part of a net-zero future.”
Overview of EU ETS
The EU ETS is the world’s first carbon emissions trading scheme and aims to incentivise the adoption of low-carbon technologies. It operates on a ‘cap and trade’ model where an annual limit is set for the amount of carbon emissions that can be emitted by energy-intensive industries. This cap reduces every year. Companies that fall within the scheme must have an allowance, or EUA, for every tonne of carbon they emit or face a fine. Companies can buy, trade or receive emission allowances.
In 2024, the system was extended to include shipping emissions from companies outside of the EU[1]. Under the scheme, large vessels sailing to and from ports in the union will need allowances to cover half their carbon emissions.
Estimates indicate that Asian shipowners are projected to spend over EUR 1 billion (SGD 1.44 billion) annually by 2026 on EUAs, with those in Singapore and China expected to pick up the bulk of the tab[2].
These obligations place significant working capital requirements on companies – a challenge that is exacerbated by the price volatility of EUA. In the past two years, EUA prices have fluctuated between EUR 50 and 98 (SGD 72 and 141) per tonne.
Against this backdrop, DBS’ emissions reduction business set out to deliver solutions to help companies better manage emerging risks associated with compliance carbon markets and meet their climate obligations. The unit has seen growing interest from companies looking to navigate the complexities of the EU ETS, and recently completed two transactions.
Working capital solution for EUA inventories
Trafigura, a market leader in the global commodities industry, received working capital financing from DBS by pledging EUA inventory as collateral in a repurchase agreement (repo)[3]. The EUA-collateralised repo is one of the first of its kind being traded under the Global Master Repurchase Agreement (GMRA) – the industry standard for securities repos.
This enabled Trafigura to unlock working capital from EUAs on its balance sheet. Structuring the repo under GMRA provided more flexibility in the tenor, as well as simpler and more transparent pricing.
Camille Treujou, Global Head of Trade Finance at Trafigura, said: “Innovative funding solutions are strategic in addressing the needs of a growing regulated carbon market. This facility enables us to further diversify our funding sources in order to support the development of our carbon trading desk in Europe.”
Managing financial risk associated with EUA inventories
DBS executed an over-the-counter purchase of EUAs for Ocean Network Express (ONE), the world’s sixth-largest container carrier. The EUAs offset the equivalent of two months’ worth of carbon emissions from container vessels operated by ONE. This enabled the container carrier to hedge against future price volatility by locking in the present market price of EUA.
A spokesperson for ONE said: “ONE remains committed to ongoing preparations for EU ETS compliance together with our partner, DBS, corresponding with the compliance process for surrendering EUAs.”
These transactions are the latest in DBS’ ongoing efforts to deliver innovative financing solutions to advance decarbonisation in the real economy. As the first Singapore bank, and among the first 100 globally, to become a signatory of the Net Zero Banking Alliance, DBS published the “Our Path to Net Zero – Supporting Asia’s Transition to a Low-carbon Economy” report in 2022. The report lays out the bank’s transition approach to achieving net zero financed emissions by 2050. To date, these commitments represent one of the more comprehensive sets of decarbonisation targets in the global banking industry.
About DBS
DBS is a leading financial services group in Asia with a presence in 19 markets. Headquartered and listed in Singapore, DBS is in the three key Asian axes of growth: Greater China, Southeast Asia and South Asia. The bank's "AA-" and "Aa1" credit ratings are among the highest in the world.
Recognised for its global leadership, DBS has been named “World’s Best Bank” by Global Finance, “World’s Best Bank” by Euromoney and “Global Bank of the Year” by The Banker. The bank is at the forefront of leveraging digital technology to shape the future of banking, having been named “World’s Best Digital Bank” by Euromoney and the world’s “Most Innovative in Digital Banking” by The Banker. In addition, DBS has been accorded the “Safest Bank in Asia“ award by Global Finance for 15 consecutive years from 2009 to 2023.
DBS provides a full range of services in consumer, SME and corporate banking. As a bank born and bred in Asia, DBS understands the intricacies of doing business in the region’s most dynamic markets.
DBS is committed to building lasting relationships with customers, as it banks the Asian way. Through the DBS Foundation, the bank creates impact beyond banking by supporting businesses for impact: enterprises with a double bottom-line of profit and social and/or environmental impact. DBS Foundation also gives back to society in various ways, including equipping underserved communities with future-ready skills and helping them to build food resilience.
With its extensive network of operations in Asia and emphasis on engaging and empowering its staff, DBS presents exciting career opportunities. For more information, please visit www.dbs.com.
Structured by DBS’ emissions reduction business – a unit within the bank’s Global Financial Markets group – this suite of solutions enables stable and cost-effective access to emission allowances used in the EU ETS, also known as EU Allowances (EUAs). The unit offers capabilities in two priority areas:
- Financing – working capital solutions for clients with EUA inventories
- Hedging – strategies to help companies manage financial risk associated with EUA inventories
Jacky Tai, Group Head of Trading and Structuring, Global Financial Markets, DBS, said: “As the pace of decarbonisation continues to accelerate, the trading of emission allowances and voluntary carbon credits will grow in importance. They form part of a toolkit of mechanisms to incentivise businesses to reduce their carbon footprints and adopt cleaner technologies.”
“As a purpose-driven bank, DBS is committed to enabling Asia’s transition towards a low-carbon economy. Our emissions reduction business taps the bank’s deep expertise in structuring advanced financial market solutions and applies this to carbon markets like the EU ETS. Our goal is to provide clients with practical solutions which they can leverage to navigate emerging risks and capture opportunities as part of a net-zero future.”
Overview of EU ETS
The EU ETS is the world’s first carbon emissions trading scheme and aims to incentivise the adoption of low-carbon technologies. It operates on a ‘cap and trade’ model where an annual limit is set for the amount of carbon emissions that can be emitted by energy-intensive industries. This cap reduces every year. Companies that fall within the scheme must have an allowance, or EUA, for every tonne of carbon they emit or face a fine. Companies can buy, trade or receive emission allowances.
In 2024, the system was extended to include shipping emissions from companies outside of the EU[1]. Under the scheme, large vessels sailing to and from ports in the union will need allowances to cover half their carbon emissions.
Estimates indicate that Asian shipowners are projected to spend over EUR 1 billion (SGD 1.44 billion) annually by 2026 on EUAs, with those in Singapore and China expected to pick up the bulk of the tab[2].
These obligations place significant working capital requirements on companies – a challenge that is exacerbated by the price volatility of EUA. In the past two years, EUA prices have fluctuated between EUR 50 and 98 (SGD 72 and 141) per tonne.
Against this backdrop, DBS’ emissions reduction business set out to deliver solutions to help companies better manage emerging risks associated with compliance carbon markets and meet their climate obligations. The unit has seen growing interest from companies looking to navigate the complexities of the EU ETS, and recently completed two transactions.
Working capital solution for EUA inventories
Trafigura, a market leader in the global commodities industry, received working capital financing from DBS by pledging EUA inventory as collateral in a repurchase agreement (repo)[3]. The EUA-collateralised repo is one of the first of its kind being traded under the Global Master Repurchase Agreement (GMRA) – the industry standard for securities repos.
This enabled Trafigura to unlock working capital from EUAs on its balance sheet. Structuring the repo under GMRA provided more flexibility in the tenor, as well as simpler and more transparent pricing.
Camille Treujou, Global Head of Trade Finance at Trafigura, said: “Innovative funding solutions are strategic in addressing the needs of a growing regulated carbon market. This facility enables us to further diversify our funding sources in order to support the development of our carbon trading desk in Europe.”
Managing financial risk associated with EUA inventories
DBS executed an over-the-counter purchase of EUAs for Ocean Network Express (ONE), the world’s sixth-largest container carrier. The EUAs offset the equivalent of two months’ worth of carbon emissions from container vessels operated by ONE. This enabled the container carrier to hedge against future price volatility by locking in the present market price of EUA.
A spokesperson for ONE said: “ONE remains committed to ongoing preparations for EU ETS compliance together with our partner, DBS, corresponding with the compliance process for surrendering EUAs.”
These transactions are the latest in DBS’ ongoing efforts to deliver innovative financing solutions to advance decarbonisation in the real economy. As the first Singapore bank, and among the first 100 globally, to become a signatory of the Net Zero Banking Alliance, DBS published the “Our Path to Net Zero – Supporting Asia’s Transition to a Low-carbon Economy” report in 2022. The report lays out the bank’s transition approach to achieving net zero financed emissions by 2050. To date, these commitments represent one of the more comprehensive sets of decarbonisation targets in the global banking industry.
[1] From this year, shipowners sailing to and from the EU will have to surrender allowances equivalent to 40% of their liability, 75% in 2025 and 100% in 2026. In addition, they will not be entitled to receive EUAs under the scheme.
[2] EU’s volatile emissions-trading scheme will soon cost Asian shipowners big money, The Business Times
[3] A repo is a form of short-term borrowing that involves one party selling a security to another for cash, with the seller agreeing upfront to repurchase the same security from the buyer in the future at a higher price. In so doing, the seller is effectively borrowing cash from the buyer using the security as collateral, with the repurchase being a repayment of the loan and the higher price reflecting the interest rate.
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About DBS
DBS is a leading financial services group in Asia with a presence in 19 markets. Headquartered and listed in Singapore, DBS is in the three key Asian axes of growth: Greater China, Southeast Asia and South Asia. The bank's "AA-" and "Aa1" credit ratings are among the highest in the world.
Recognised for its global leadership, DBS has been named “World’s Best Bank” by Global Finance, “World’s Best Bank” by Euromoney and “Global Bank of the Year” by The Banker. The bank is at the forefront of leveraging digital technology to shape the future of banking, having been named “World’s Best Digital Bank” by Euromoney and the world’s “Most Innovative in Digital Banking” by The Banker. In addition, DBS has been accorded the “Safest Bank in Asia“ award by Global Finance for 15 consecutive years from 2009 to 2023.
DBS provides a full range of services in consumer, SME and corporate banking. As a bank born and bred in Asia, DBS understands the intricacies of doing business in the region’s most dynamic markets.
DBS is committed to building lasting relationships with customers, as it banks the Asian way. Through the DBS Foundation, the bank creates impact beyond banking by supporting businesses for impact: enterprises with a double bottom-line of profit and social and/or environmental impact. DBS Foundation also gives back to society in various ways, including equipping underserved communities with future-ready skills and helping them to build food resilience.
With its extensive network of operations in Asia and emphasis on engaging and empowering its staff, DBS presents exciting career opportunities. For more information, please visit www.dbs.com.
