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Is Carbon Trading the Next Big Thing?

The U.S. carbon credit trading business could take off if the Senate passes the Waxman-Markey climate change bill. Current environmental market players such as Citi, the CME, the Chicago Climate Exchange and BlueNext are preparing to capitalize on the expected surge.

The fledgling U.S. carbon credit market, currently a $100 million-plus business, is poised to skyrocket if The American Clean Energy and Security Act of 2009, which recently was passed by the House, makes it through the Senate. The bill would limit, or “cap,” the amount of carbon emissions that companies can produce each year.

Under the bill, sponsored by Representatives Henry Waxman (D-CA) and Edward Markey (D-MA), firms that produce more greenhouse gases than they’re allowed would be able to buy credits from companies that have produced fewer emissions than they’re allotted, creating a large market for carbon credits. President Obama has estimated that more than a half-trillion dollars’ worth of carbon credits will be auctioned in the first seven years after the bill is enacted.

The United States was the first country to introduce a cap-and-trade scheme. The 1990 Clean Air Act Amendments established an emissions trading system to reduce emissions of sulfur dioxide (SO2) from fossil fuel-burning power plants. According to Randy Warsager, director of green products at CME Group, the SO2 market was challenged last year by an unfavorable court decision, but it has been rebuilding slowly.

A voluntary market currently exists for carbon credit trading, primarily through regional initiatives such as the Regional Greenhouse Gas Initiative (RGGI), which covers Maine, New Hampshire, Vermont, Connecticut, New York, New Jersey, Delaware, Massachusetts, Maryland and Rhode Island. In the RGGI’s latest auction in June, 30.8 million allowances were sold for $3.23 each, which raised more than $104 million for the 10 Northeastern states to invest in energy-efficiency and renewable energy programs. (Each allowance represents a ton of carbon that electric plants can release.)

Profiting From the Environment

Citi is among the investment banks that have been moving forward in the environmental products space. Garth Edward, the firm’s director of environmental markets, began trading environmental products with the introduction of the EPA’s NOx Budget Trading Program, a cap-and-trade program that the EPA created in 2003 to reduce emissions of nitrogen oxides (NOx) from power plants and other large combustion sources. For the past few years Citi has focused primarily on CO2 trading, which has been driven by the European Union’s emissions trading system. “This is where the bulk of liquidity is, most of the capital flow that drives emission reduction projects around the world,” Edward notes.

Growth in market activity and the capital deployed in environmental products has been strong, primarily because of cap-and-trade legislation, according to Edward. “Where you have a step forward in legislation such as the EU emissions trading system, the voluntary agreements in Japan and the Waxman-Markey legislation, that’s the kind of process that starts creating compliance requirements on end users and incentivizes service and technology providers to provide solutions,” he says.

Despite the projected growth in environmental markets, Credit Suisse recently cut back its New York-based carbon trading team; Carbon Finance, a newsletter dedicated to the global markets in greenhouse gas emissions, reported that half the team will depart early next year as part of a de-emphasizing of the business. According to the Carbon Finance report, going forward Credit Suisse will focus on environmental trading on behalf of its clients, which are mostly European. (Credit Suisse did not respond to Carbon Finance’s nor to Wall Street & Technology’s requests for an interview.)

Meanwhile the primary U.S. exchanges involved in carbon trading are the Chicago Climate Exchange (CCX) and the Chicago Mercantile Exchange (CME). The CCX trades allowance and offset contracts that each represent 100 metric tons of CO2 equivalent. The Chicago Climate Futures Exchange, a subsidiary of the CCX, trades RGGI futures and options contracts. The CCFE reported record trading volume for June 2009 — it traded 133,175 contracts versus its previous record of 132,319 in April.

The CME — along with partners Evolution Markets, Morgan Stanley, Credit Suisse, Goldman Sachs, J.P. Morgan, Merrill Lynch, Tudor Investment, Constellation Energy, Vitol, RNK Capital, ICAP and TFS Energy — has applied for CFTC approval for a Green Exchange, on which it will trade all the environmental products it already trades on its commodities exchange. (For more on the CME’s carbon credit trading efforts, see “CME Revs Up for Surge in Carbon Credit Trading“.)

Europe’s BlueNext, an environmental exchange that’s 60 percent owned by NYSE Euronext, plans to open an office in New York “very shortly,” according to Keiron Allen, the exchange’s marketing and communications director. It plans to start trading contracts within the RGGI market by the end of the year, Allen reports, adding that the exchange intends to compete with the U.S. environmental exchanges. “It will be a race to see who gains critical mass first,” he says.

The European Experience

In Europe, cap-and-trade rules similar to those outlined in the Waxman-Markey bill have been in effect since 2005; carbon credits are traded on the European Climate Exchange (ECX), BlueNext, Nord Pool (the Nordic Power Exchange) and the European Energy Exchange (EEX).

BlueNext trades European Union Allowances, the carbon emission allowances used in the European Union Emissions Trading Scheme, and Certified Emission Reductions, which are carbon credits issued under the rules of the Kyoto Protocol, which is part of the United Nations Framework Convention on Climate Change, an international environmental treaty with the goal of reducing greenhouse gas concentrations in the atmosphere. BlueNext trades an average of 5 million tons’ worth of carbon emissions a day. Its 100 members (buyers and sellers on the exchange) are carbon-emitting companies, financial firms with their own trading desks and carbon credit aggregators that act as brokers.

BlueNext’s model is different than most other carbon exchanges, Allen says, because it uses a delivery-versus-payment system rather than a clearing system. “In a delivery-versus-payment system, there’s zero counterparty risk,” he contends. “If you sell contracts, you’ve got to put them into your account on the exchange first. And if you want to buy something, you have to put money in your exchange account first. Each party knows the other’s got the right amount of money or contracts.” Allen adds that in BlueNext, trades are physically settled within 10 or 15 minutes, versus the more typical T+1, T+2 or T+3 for commodities settlement.

The European carbon market has been growing quickly; the U.S. market still is in its infancy. Trading activity in the European Emissions Trading Scheme grew by 54 percent in the first quarter of 2009 compared to Q4 2008, reaching $28 billion, according to Carbon Finance. This represented 84 percent of the world’s carbon market in terms of value and 78 percent of its volume. Carbon trading in the U.S., on the other hand, made up only 3.7 percent of the trading volume and 1 percent of the value of the global carbon market. According to CME’s Warsager, though, “We’re hoping to build some market share [in the U.S.] as we move forward with the Green Exchange.”

The CME isn’t the only institution hoping to capitalize on carbon credit trading in the U.S. But what are the barriers to entry to this new market? At Evolution Markets, a White Plains, N.Y.-based voice brokerage for environment and energy products, the trading floor is as noisy and chaotic as any commodities trading room. According to firm spokesman Evan A. Ard, the technology required for carbon credit trading is no different from the technology required to trade other commodities.

Jubin Pejman, VP, Americas, for Trayport, whose energy commodities trading and order matching software is used by 13,000 traders and many investment banks and utilities in Europe and the U.S., agrees that carbon futures trade like any other type of futures contract. “You have hedge funds speculating, you have industrials buying them, you have brokers,” he says. “At any futures exchange around the world, it’s the same type of breakup. From a technology standpoint, there’s a matching engine, there’s risk management, there’s margin management, there are counterparties, there’s clearing. BlueNext, for example, looks very much like other futures exchanges.”

BlueNext’s Allen, however, points out one big difference between carbon emissions contracts and other commodities: “If you’ve got a spot market for oil or grain, you physically deliver that oil or grain to the buyer,” he explains. “You don’t roll up in a giant truck and deliver 15,000 tons of carbon dioxide.”

Regional carbon futures contracts in the U.S. tend to be processed manually or through voice trading. “Europe is about 10 years ahead of the curve as far as technology for energy emissions trading,” Trayport’s Pejman says. He explains that large European financial firms have their own carbon trading platforms; smaller entities turn to third-party solutions such as Trayport’s platform.

But, Citi’s Edward says, in terms of technology and compliance, carbon trading should not be difficult for many U.S. firms because emissions trading in the U.S. has been around for more than a decade. The same IT processes, management systems, accounting systems, and even risk management and hedging systems will work under the new carbon credit trading scheme, he points out. “We’re not introducing something that’s conceptually dramatically new and untried in the U.S.,” Edward notes.

BlueNext’s Allen says the exchange will publish a how-to book by the fourth quarter to help small and medium-size firms get involved in carbon trading. (Hearing this, Trayport’s Pejman jokes that the book will be made out of Styrofoam.)

The Future of U.S. Carbon Trading

Even as firms build out their carbon credit trading capabilities, the market is expected to reach significant levels fairly quickly. President Obama has predicted that about $646 billion worth of carbon credits will be auctioned in the first seven years of the mandatory cap-and-trade system in the U.S.; others have suggested the number could be two or three times that. To the novice onlooker, this would suggest a healthy rate of carbon credit market growth.

But Citi’s Edward demurs. “The actual volume of allowances issued is not necessarily what drives liquidity and price,” he says. “It is the ambition of the target that drives activity.”

According to Edward, the U.S. experience may mirror the EU’s emissions trading system, which, he says, is similar in size in terms of covered installations and required emission reductions. “The EU turns over close to a half-billion dollars’ worth of allowance transactions a day, so that may be a reasonable expectation for the U.S.,” Edward comments.

The Waxman-Markey bill currently would take effect in 2012; the Senate may postpone this start time to 2013. Still, “We’d expect trading to take place far in advance of that first compliance year,” Edward says. “That’s the normal case with environmental trading systems — companies that dispatch power generation or refineries need to hedge in advance their emissions exposure; they need to lock in the margins around running their plant, and that requires them to buy the allowances in advance.” If the first compliance year is 2013, Edward says, he would expect early trading to begin in 2010.

Trayport’s Pejman notes that once the legislation is passed, there will be a race to the market. “Whoever is already in production will have a tremendous advantage over those that are scrambling to get ready,” he asserts.

But what if the Senate doesn’t pass this bill? “That would change everybody’s plans,” BlueNext’s Allen concedes. “I like the Woody Allen joke: ‘How do you make God laugh? Write down your plans.’ “

Source: Wallstreet & Technology, 19.07.2009 By Penny Crosman

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Carbon Trading Market Creating Opportunities

Continued growth in the global carbon trading market and the anticipated adoption of a U.S. climate control bill is creating plenty of new opportunities for investment banks, nascent exchanges, technology vendors and asset servicing agents in the trading and post-trade arenas.

The carbon emissions market, which grew 75 percent to reach $116 billion in 2008 from the prior year, could expand to $2 trillion by 2020 should more markets adopt a version of Europe’s “cap and trade” model for reducing greenhouse gas emissions, according to research firm Celent.

Based on the 1997 Kyoto Protocol, an international treaty, the European Emissions Trading Scheme allows for members of the European Union to create tradable European Emissions Allowances (EUAs) and Certified Emission Reduction Credits (CERs)–otherwise known as offsets. Other countries such as Australia, New Zealand, Canada and Japan are also pursuing their own versions of carbon cap and trade models as is the United States.

“The potential for carbon trading is great, as is the opportunity cost of ignoring the market,” said Stephen Bruel, research director for TowerGroup. Even more lucrative than trading will be advisory services to help energy firms comply with divergent regulations to reduce carbon emissions, he believes. Harmonization between regulatory regimes to create a unified global market, while ideal, is a long way off.

“It is costly for global firms to comply with the patchwork emission schemes and investment banks can help carbon emitter clients navigate this minefield with offset strategies,” said Bruel, citing BNP Paribas, Goldman Sachs and Credit Suisse as examples of firms with specialized carbon risk desks. Hedge funds, he predicted, will also want to capitalize on the arbitrage opportunities between regulatory regimes and will use algorithms to take advantage of the correlations between the price of coal or weather patterns and the price of carbon.

Although much of the trading activity and innovation in the carbon emissions market remains in Europe, where the European Climate Exchange and Bluenext are the largest exchanges, the potential passage of U.S. legislation later this year or in 2010 could easily make the U.S. the largest regulated carbon market.

Under the proposed American Clean Energy and Security Act, the ceiling on greenhouse gas emissions would be divided into billions of permits, each conferring the right to emit one metric ton of carbon dioxide. Fewer permits would be issued to utilities, manufacturers and refiners each year until emissions are 83 percent by 2050 over 2005 levels.

It is unclear what effect the legislation, if passed, would have on several voluntary regional and state projects which have already cropped up, creating emission offset contracts traded over-the-counter, largely through interdealer brokers and web-based mechanisms.

“Trading volumes will continue to expand in the over-the-counter market but U.S. legislation will likely favor exchange-traded contracts and several more exchanges could emerge,” said Jubin Pejman, vice president in the Americas for Trayport, an electronic trading software firm purchased by interdealer broker GFI last year. Exchange-traded contracts are typically standardized and cleared through a centralized facility, which reduces counterparty risk–a key mantra of the new Obama administration for the over-the-counter market.

Three fledgling U.S. emissions exchanges–the Chicago Climate Exchange, its sister company Chicago Climate Futures Exchange and rival Green Exchange, stand to benefit the most from any federal mandate. The CCX, launched in 2003 as a voluntary market with binding targets, offers participants a way to buy and sell “carbon financial instruments” (CFIs) that represent a certain level of emissions reductions; the CCX overtook the over-the-counter market for the first time last year.

The rival Green Exchange created in December 2007, by a consortium of trading firms and the New York Mercantile Exchange (Nymex), is awaiting approval from the Commodity Futures Trading Commission as a designated contract market. Its contracts are already listed for trading and clearing on Nymex.

Pejman said that Trayport’s GlobalVision Broker Trading System, a screen-based network, is scaleable enough for broker dealers to expand their message traffic on bid and offers in the over-the-counter market for carbon emission allowances and credits in the U.S.The firm’s GlobalVision Trading Gateway, which enables traders to trade on multiple liquidity pools through a single user interface, will also link to the Green Exchange, should the market win CFTC approval.

Software vendors with cross-asset capabilities are also finding fertile territory in adding functionality for carbon emission contracts. SunGard has enhanced its GL Clearvision middle office and GL Ubix back-office products–inherited through the 2008 acquisition of GL Trade–for trades executed on Bluenext, a Paris-headquartered exchange majority-owned by NYSE Euronext.

Mark Stugart, product manager of commodities for Calypso Technology, a trading and risk management softwar firm, said that his firm will upgrade its platform to incorporate trade capture, pricing and P&L calculations for EUAs and CERs on the ECX and BlueNext by year end.

Last month, Bank of New York Mellon launched a centralized custody and trade settlement platform called GEM to give customers a single view of their entire carbon portfolio–for regulated and voluntary markets–and perform all transactions including trading, cancellation and retirement of contracts in one place.

Original Article

Source:Securities Industry News, 22.06.2009 by Chris Kentouris

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Worldbank: State and Trends of the Carbon Market 2009


Filed under: Asia, Australia, Energy & Environment, Exchanges, Korea, News, Trading Technology, , , , , , , , , , , , , , ,

Markit And The Carbon Disclosure Project To Launch Climate Change Investment Indices

Markit, a financial information services company, and the Carbon Disclosure Project (CDP), the leading independent global climate change reporting platform, today announced their intention to launch a family of investment indices reflecting the financial performance of companies with strong carbon management strategies.

By combining CDP’s benchmark climate change data and Markit’s index expertise, the two companies aim to create a family of high quality equity indices that will help investors gain exposure to companies that actively manage their impact on the environment.

The stock selection and weighting will be based on CDP’s annual corporate Carbon Disclosure Leadership Index (CDLI) data. CDP gathers data from companies globally through an annual information request on behalf of 475 institutional investors. The individual corporate reports are scored by professional services firm PricewaterhouseCoopers LLP based on the quality of information disclosed. This provides a deep insight into companies’ greenhouse gas emissions and climate change management strategies.

Markit and CDP plan to launch an index for the UK and Europe, in addition to a US index and a global index. Markit intends to license the indices to exchange-traded fund (ETF) and structured product providers.

Niall Cameron, Executive Vice President of Commodities, Indices, Equities and Risk Management at Markit, said: “The creation of this family of climate change indices underscores Markit’s commitment to the environmental markets.

“The quality, transparency and independence of the data underpinning these indices are of vital importance to their success and that is why we have chosen to work with CDP, a leading provider of emissions data, on this project.”

Paul Dickinson, CEO of CDP, said: “Climate change is a material issue for increasing numbers of companies and there are significant commercial opportunities for those with a strong carbon management strategy to benefit from the transition to a low carbon economy. This is why we are working with Markit to produce investment indices based on the Carbon Disclosure Leadership Index.”

Source:MondoVisione, 18.06.2009

Filed under: Data Management, Data Vendor, Energy & Environment, News, Risk Management, , , , , , , , , ,

CCX Chicago Climate Exchange signs agreement to collaborate on establishing Emissions Trading in Korea

Chicago Climate Exchange, Inc. (CCX®) signed a memorandum of understanding today in Washington, DC with Korea Power Exchange (KPX), Korea Exchange (KRX) and Korea Energy Management Corporation (KEMCO) to collaborate in preparing for the establishment of emissions trading in Korea.

Parties to the agreement will explore avenues of cooperation in the establishment of Korean emissions trading and matters relating to the infrastructure for emission trading, both of which could play an important role in promoting “low carbon green growth” in Korea.

“Emissions trading is a proven tool for using market-based mechanisms to address environmental challenges and we look forward to working with KEMCO, KRX and KPX, as well as the Ministry of Knowledge Economy and other Ministries in Korea, as Korea moves forward with its important ‘low carbon’ growth goals,” said Dr. Richard L. Sandor, Chairman of CCX and Executive Chairman of Climate Exchange plc.

By creatively integrating public concerns about environmental protection and his experience in financial innovation and business development, Dr. Sandor founded CCX in December 2003 and launched the European Climate Exchange (ECX) in April 2005. CCX also operates the Chicago Climate Futures Exchange (CCFE), which handles NOX, SOX and other criteria pollutant contracts based on the U.S. Clean Air Act.

“CCX is the preeminent and most influential organization in carbon trading. This MOU not only represents a historic collaboration of the parties, but represents a crucial initiative between the United States and Korea,” said KPX CEO Il-Hwan Oh.

“CCX has many international connections we want to be part of. CCX has provided a market solution, with many products as everybody knows, and is facilitating the preparation for carbon trading, fostering green growth,” said KRX CEO Jung-Hwan Lee.

“We are confident the MOU will be part of developing infrastructure in Korea for emissions trading,” said KEMCO CEO Tae-Yong Lee.

Source: MondoVisone, 15.06.2009

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Worldbank: State and Trends of the Carbon Market 2009

Over the past year, the global economy has cooled significantly, a far cry from the boom just a year ago in various countries and across markets. At the same time, the scientific community communicated the heightened urgency of taking action on climate change. Policymakers at national, regional and international levels have put forward proposals to respond to the climate challenge.

The most concrete of these is the adopted EU Climate & Energy package (20% below 1990 levels by 2020), which guarantees a level of carbon market continuity beyond 2012. The EU package, along with proposals from the U.S. and Australia, tries to address the key issues of ambition, flexibility, scope and competitiveness. Taken together, the proposals tabled by the major industrialized countries do not match the aggregate level of Annex I ambition called for by the Intergovernmental Panel on Climate Change, or IPCC (25-40% reductions below 1990). Setting targets in line with the science will send the right market signal to stimulate greater cooperation with developing countries to scale up mitigation.

Download: Trends of the Carbon Market May 2009 Worldbank

Overall Market Grows
The overall carbon market continued to grow in 2008, reaching a total value transacted of about US$126 billion (€86 billion) at the end of the year, double its 2007 value (Table 1). ApproximatelyUS$92 billion (€63 billion) of this overall value is accounted for by transactions of allowances and derivatives under the EU Emissions Trading Scheme (EU ETS) for compliance, risk management, arbitrage, raising cash and profit-taking purposes. The second largest segment of the carbon market was the secondary market for Certified Emission Reductions (sCERs), which is a financial market
with spot, futures and options transactions in excess of US$26 billion, or €18 billion, representing a five-fold increase in both value and volume over 2007. These trades do not directly give rise to emission reductions unlike transactions in the primary market.

See also: Investment in Clean Energy Exceeded Fossil Fuel Investment in 2008

Source: Worldbank, 26.05.2009

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What is carbon capture and storage?

Executives and public policy makers should familiarize themselves with the technologies involved in carbon capture and storage (CCS) as they work toward reducing carbon dioxide levels in the atmosphere.

Climate change has businesses, governments, and nonprofits examining how to stabilize atmospheric greenhouse gases while still maintaining economic growth. In plotting the course to a low-carbon economy, they will weigh a number of methods for addressing the various risks and opportunities. Carbon capture and storage (CCS)—or more accurately, the sequestration of carbon dioxide—is an important topic in the emerging field of climate change. It represents one possible approach for stabilizing atmospheric greenhouse gases—although there are many economic, technical, and legal barriers to its implementation. As background for informed discussion, we offer this interactive depiction of the technologies involved in CCS.

For full article and interactive description of McKinsey click here

Source: McKinsey January 2009

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Financing Energy Efficency: Lessons from China, Brazil, India and Beyond

The World Bank has recently published a book that might be interesting to fellow CleanTechies. Financing Energy Efficiency: Lessons from Brazil, China, India and beyond says that aforementioned countries will more than double their energy use and greenhouse gas emissions within a single generation if they fail to implement successful energy efficiency efforts. Given the increasing energy demand from these three developing nations at a time of skyrocketing worldwide energy prices and greenhouse gas emissions, there should be a general interest to reduce energy consumption in these countries.

Alarming figures
China, India and Brazil are three of the world’s top 10 energy consumers. Together these countries are expected to represent 40% of the world’s population and be responsible for well over 50% of all energy demand by developing countries. By 2030, they are expected to account for 42% of growth in energy demand worldwide.

Bob Taylor, a World Bank energy economist, explains his and the other authors’ approach in writing this book: “We dissected the energy efficiency terrain through this study to find out why it’s so hard to get the right incentives in place so that more investment can happen. What we found is enormous untapped potential – especially in Brazil, China and India – but plenty of good solutions that can work as long as the financing and investment environment is in place and there’s plenty of commitment from policy makers.”

Need for action
According to the authors, energy efficiency is critical in these countries “for reasons of energy supply security, economic competitiveness, improvement in livelihoods, and environmental sustainability.” While they see gradual improvement in the three countries, “when you think about the sort of energy demand of even one of these countries in the next decade, the need for action and much faster progress is very clear,” says Taylor.

The authors conclude that implementing energy efficiency projects could – to a certain extent – be cheaper than providing new supplies. However, the development and financing of energy efficiency projects would be impeded by weak economic institutions in these developing and transitional economies. The authors analyze these difficulties, suggest a 3-part model for planning and financing energy efficiency retrofits and present thirteen case studies to illustrate the issues and principles involved.

Source: CleanTechies, 02.12.2008

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Tianjin Climate Exchange (TCX) And Hong Kong Exchanges And Clearing Limited (HKEx) Begin Discussions On Possible Collaboration

Chicago Climate Exchange (CCX), which is owned by Climate Exchange plc (LSE: CLE.L), announced today that the Tianjin Climate Exchange (TCX), a CCX joint venture partner, and Hong Kong Exchanges and Clearing Limited (HKEx) have entered into discussions on possible avenues for cooperation in environmental emissions markets. Details of the collaboration will be explored in the coming months.

Source: HKEx, 23.12.2008

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HKEx Signs Corporate Social Responsibility and Carbon Reduction Charters

Hong Kong Exchanges and Clearing Limited (HKEx) has signed two Hong Kong-based charters by which HKEx is committed to be a responsible corporate citizen.

By signing Community Business’s Hong Kong Corporate Social Responsibility (CSR) Charter, HKEx is committed to providing leadership on CSR, integrating CSR into its organisational strategy and operations, and engaging and communicating with its stakeholders on its CSR strategies and policies in a manner relevant and appropriate to its business. By signing the Hong Kong Environmental Protection Department’s Carbon Reduction Charter, HKEx pledged to support the reduction of greenhouse gas emissions.

Signing the charters demonstrates HKEx’s commitment to the sustainable development of the workplace, marketplace, community and environment, and to promoting the development of socially responsible practices in its marketplace and community.

Source: HKEx, 19.12.2008
Notes:
The Hong Kong Corporate Social Responsibility Charter is available at:

http://www.communitybusiness.org.hk/CSR_Charter/forms/CSR_Charter.pdf

The Carbon Reduction Charter is available at:
http://www.epd.gov.hk/epd/english/climate_change/ca_charter.html

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