Singapore Largest Bank DBS Launches Financing & Hedging Solutions for European Union EU Allowances (EUAs) to Manage Climate Obligations in Compliance Carbon Markets under European Union Emissions Trading System (EU ETS)
25th September 2024 | Hong Kong
Singapore largest bank DBS ($84 billion market value) has launched financing & hedging solutions for European Union EU Allowances (EUAs) to manage climate obligations in compliance carbon markets under European Union Emissions Trading System (EU ETS). DBS (24/9/24): “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: 1) Financing – working capital solutions for clients with EUA inventories, 2) Hedging – strategies to help companies manage financial risk associated with EUA inventories.” More info below:
“ Singapore Largest Bank DBS Launches Financing & Hedging Solutions for European Union EU Allowances (EUAs) to Manage Climate Obligations in Compliance Carbon Markets under European Union Emissions Trading System (EU ETS) “
Jacky Tai, Group Head of Trading and Structuring, Global Financial Markets, DBS: “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.”
Camille Treujou, Global Head of Trade Finance at Trafigura: “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.”
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. 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. 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). 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.
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. 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.
Singapore Largest Bank DBS Launches Financing & Hedging Solutions for European Union EU Allowances (EUAs) to Manage Climate Obligations in Compliance Carbon Markets under European Union Emissions Trading System (EU ETS)
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