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VCM players urge greater transparency as US CFTC issues climate risk RFI

03 June 2022 Keiron Greenhalgh

Voluntary carbon markets (VCM) need greater transparency as they scale up, participants told the US Commodity Futures Trading Commission (CFTC) 2 June, the same day the agency issued a request for comment on climate-related financial risk related to commodity derivatives and their underlying markets.

Transparency is the number one requirement for environmental markets, said Mark Kenber, co-executive director for external affairs at the Voluntary Carbon Markets Integrity Initiative (VCMI), which wants to establish sustainability guidelines for buyers, at the commission's "convening" on VCM.

VCMI is scheduled to release a Claims Code of Practice on 7 June. This document aims to address how companies can use carbon offsets to make climate claims.

There needs to be transparency at all levels, said Kenber, adding that if there was one thing he would recommend the CFTC does then it would be to focus on transparency so that everyone has confidence in the markets.

The who, the how, the what, and the when evident in more established environmental markets such as renewable energy credits (RECs) are not obvious as yet in the VCM space, added Mike Kierstead, head of environmental products, Intercontinental Exchange (ICE).

But all the pieces are there for carbon markets, and "we're at the point where we're working out how all the pieces fit," said Linda French, global head of ESG policy and regulation, sustainability and global government relations at investment bank JPMorgan Chase. There's a gap between standardized contracts and what the bank or other buyers need, she added.

JPMorgan Chase is a buyer of offsets, but its first priority in achieving carbon targets is energy efficiency, followed by buying renewable energy, and then it may buy offsets, said French. The bank also advises customers about carbon offset purchases. JPMorgan Chase expects to start trading carbon offsets later this year, she said.

Exponential growth

The bank won't be the only new entrant. As CFTC Chair Rostin Behnam noted in his opening remarks at the hearing, VCM are "growing exponentially." In 2021, VCM exceeded $1 billion in value for the first time, but Behnam said some forecast carbon markets could stimulate more than $1 trillion of capital investment by 2050, citing an International Emissions Trading Association study.

Such figures attract scrutiny from regulators and lawmakers. Addressing the meeting was US Senator Debbie Stabenow, Democrat-Michigan, chairwoman of the Senate Committee on Agriculture, Nutrition, and Forestry, who said participants must have confidence in the markets.

Meeting those integrity needs is key, fellow panelists said, a fact already recognized by existing market participants. The creation of the VCMI and the Integrity Council for the Voluntary Carbon Market, which aims to set criteria for high-quality carbon offset projects, is testament to that.

This is ever more important as the markets evolve. What had been a cash or spot market is now evolving into a cash and forwards market, including futures contracts on exchanges such as CME and ICE, Stephen Donofrio, director of VCM intermediary Ecosystem Marketplace, said.

May saw the top three trading days so far for CME's VCM futures, noted CME Group Managing Director of Energy and Environmental Products Pete Keavey. Since those products launched in 2021, he added, the price environment has been relatively stable.

The CFTC regulates exchange-traded derivatives, which are often futures and options traditionally used as risk management tools.

Speaking at Politico's second annual sustainability summit, Fast-Tracking a Sustainable Future, Behnam said 18 May carbon offsets themselves are not derivatives, but many of the products available in VCM are commodities by law.

The world is past the point of wondering whether derivatives are affected by carbon markets, he added on 2 June.

Climate risk RFI

After the 2 June meeting ended, the CFTC issued a request for information (RFI) on climate-related financial risk "to better inform its understanding and oversight of climate-related financial risk as pertinent to the derivatives markets and underlying commodities markets."

Behnam said in a statement accompanying the call that "the RFI will seek responses on questions specific to data, scenario analysis and stress testing, risk management, disclosure, product innovation, voluntary carbon markets, digital assets, greenwashing, financially vulnerable communities, and public-private partnerships and engagement."

He added that the agency's focus was on ensuring that American farmers, ranchers, manufacturers, commercial end-users, and investors were equipped to manage risks from increasingly severe and frequent weather events as well as the transition to a net-zero, low-carbon economy.

Guidance, policy statements, regulation, or other actions could follow the RFI, the agency said.

The urgency for regulators to recognize the systemic impacts that carbon emissions are having on financial markets is growing, and CFTC action on trade reporting, clearing, and market monitoring should be expected, S&P Global Commodity Insights Executive Director Peter Gardett told Net-Zero Business Daily 3 June.

"Chairman Behnam is right to note that the impact of carbon pricing is already part of futures markets," Gardett said. "Corporates and financial firms see the carbon offset market as a vital tool in managing the price risk stemming from the energy transition's impacts, and they need orderly, transparent markets with the kind of clear regulatory guidance the CFTC has provided in so many other areas."

The request for public comment comes more than a year after the CFTC set up a climate risk unit to discuss new and emerging market risks related to climate change and how such risks are being addressed or could be addressed.

VCM participants told the convening they were behind the CFTC having a larger role in the markets.

JPMorgan Chase's French called on the CFTC to play a leading international role, arguing VCMs need consistency and coordination.

BP Vice President Low Carbon Strategy, Regulatory Affairs and Partnerships Jeff Swartz said standardization, integrity, and coordination were required, although he cautioned against extra regulation. He called on the CFTC to coordinate closely with its counterparts around the globe.

Swartz said the CFTC should encourage best practices, and encourage harmonization, but avoid hampering liquidity.


However, one CFTC commissioner has concerns about a growing role for the agency in tackling climate risk, including VCM. Commissioner Summer Mersinger said in a statement after the RFI was issued that she "was struck by the lack of concern or interest in legacy agriculture contracts and futures markets."

"With respect to what is asked in the RFI, information is only useful if it can further our efforts to achieve our mission, which is why I find it concerning that we are requesting information that we cannot use and not asking questions on well-functioning markets where climate risk is already hedged," Mersinger said, adding: "I can only conclude that the RFI reflects either inadvertent 'mission creep' at best, or a power grab to expand the CFTC's authority at worst."

Posted 03 June 2022 by Keiron Greenhalgh, Senior Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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