• This event highlights limits of CFTC authority in voluntary carbon markets
• It exposes likely CFTC focus to be enforcement against greenwashing and additional standards development
• Patomak can help companies navigate compliance and enforcement risk in emerging voluntary carbon markets and increased climate-focused regulation

The Commodity Futures Trading Commission (CFTC) recently hosted the first-ever “Voluntary Carbon Markets Convening” (Convening), where the scope of the Commission’s likely focus in this market came into greater focus.

The Convening brought together 30 market participants and stakeholders to consider the future of a market that exceeded $1 billion in annual transactions during 2021.[1] Directly following the Convening, the CFTC unanimously voted to release a Request for Information (RFI) seeking public comment on climate-related financial risk.

The Convening and discussion of VCMs highlighted the limitations of the CFTC’s authority to take a more expansive role in spot VCMs but exposed areas where the CFTC is most likely to focus its attention: enforcement actions against “greenwashing,” working with other domestic and international regulators to craft guidelines and using its oversight of derivatives markets to promote integrity in the spot market. The RFI indicates that the CFTC is also considering how to use its authority to create a registration framework for this market, which one commissioner flagged as exceeding the CFTC’s authority.

The Convening and subsequent RFI send a strong signal that this issue will grow in prominence under Chair Behnam and remain a priority at the Commission.

The CFTC and Climate Change

Chair Behnam has made climate change a key priority during his tenure at the CFTC. In 2019, as sponsor of the Market Risk Advisory Committee, Behnam established the Climate-Related Market Risk Subcommittee.[2] In 2020, he oversaw the drafting of a report entitled Managing Climate Risk in the U.S. Financial System, which outlined several findings and recommendations for regulators to take.[3] As one of his first acts as Chair, in March 2021, Behnam created the Climate Risk Unit (CRU) to better understand “the role of derivatives in pricing and mitigating climate-related risk” and facilitate a market-based transition to a “net zero carbon” economy.[4] Currently, the CRU is interfacing with market participants and exchanges to identify and address climate risk in the futures markets, including VCMs, developing a relevant and reliable database of climate-related financial data,[5] and exploring opportunities for public-private partnerships to finance climate change solutions.[6] In his opening remarks, Chair Behnam acknowledged that VCMs are tightly intertwined with the CFTC’s regulated exchanges, with a handful of carbon offset derivative contracts already trading on platforms that the CFTC oversees.[7]

Convening Overview

Chair Behnam stated several reasons for the Convening, including to better understand VCMs, to demonstrate the United States’ commitment to supporting those markets, and to signal an openness to international cooperation. Taking place a year after the formation of two independent governance bodies, the Voluntary Carbon Market Integrity Initiative (VCMI) and the Integrity Council for the Voluntary Carbon Market (ICVCM), the Convening is another step toward the CFTC’s defining what type of role it will play in VCMs as well as the broader climate change discussion.

In a rare occurrence, the Chairs of the House and Senate agriculture committees—Senator Debbie Stabenow (D-MI) and Representative David Scott (D-GA)—delivered opening remarks at the meeting, where they highlighted the benefits of carbon offsets in the agricultural sector. Their involvement underscores the political pressure, from Democrats in particular, for the CFTC to focus on climate issues. Those statements were followed by four panels discussing different elements of VCMs, including standards and quality initiatives, regulatory updates, market dynamics, and recommendations for the Commission.

Panelists noted difficulties around assessing the quality of carbon offsets and the absence of governing bodies. Panelists also offered several recommendations for the CFTC, including to promote standardization of VCMs through guidelines and international frameworks.

These discussions revealed the relative immaturity of VCMs and suggested the potential for more focused attention from regulators.

Looking Ahead

The CFTC’s authority to combat fraud and manipulation in spot markets is one tool it could use. Indeed, Commissioner Christy Goldsmith Romero noted in a recent speech that the CFTC could focus on bringing enforcement actions against companies engaged in “greenwashing”[8] to bring more trust and transparency to VCMs.[9]

While the CFTC has yet to bring a case in these markets, its counterpart in the securities markets—the Securities and Exchange Commission (SEC)—has recently brought enforcement actions against companies engaged in greenwashing.[10] Coordination between the two agencies on this topic will likely become increasingly important. The SEC has proposed a rule that would require registered public companies to disclose their carbon emissions, including any carbon offsets.[11]  If finalized as is, the rule would increase the legal liability around the disclosure of carbon credits.

Another potential area of focus, recommended by several panelists, would be for the CFTC to promote standardization.  The commission could do this by creating voluntary guidelines on its own or by working with international counterparts through standard-setting bodies like the International Organization of Securities Commissions (IOSCO).  The CFTC also indicates in the RFI that it is considering whether it can go a step further and asks stakeholders to comment on the possibility of creating a registration framework for market participants within VCMs. In a concurring statement, CFTC Commissioner Summer Mersinger argued that any potential registration framework would exceed the CFTC’s authority.[12]

Finally, the CFTC can continue to use its authority over exchanges and clearinghouses that list carbon offset derivatives contracts. In the past year, the CME Group and Intercontinental Exchange (ICE) have added voluntary carbon credit (VCC) futures contracts to their array of offerings.[13] The International Swaps and Derivatives Association (ISDA) recommended in a paper that the CFTC use these authorities to require exchanges and clearinghouses that list VCC futures contract to provide more detail in their rulebooks “on how and to what standards exchanges and affiliated clearing houses vet the standard setters or registries.”[14]

How Patomak Can Help

The CFTC’s Convening and RFI strongly indicate that the CFTC under Chair Behnam’s leadership will march toward more engagement—through enforcement and policy proposals—on climate matters.  The RFI touches on several topics, including data, scenario analysis and stress-testing, risk management, disclosure, product innovation, VCMs, digital asset markets, financially vulnerable communities, public-private partnerships, and capacity and coordination with other groups. Comments on the RFI are due August 8, 2022. [15]

For any entity engaged or seeking to engage in the nascent VCMs, having a strong compliance program is critical to helping ensure engagement is with sound and trustworthy counterparties, including marketplaces, vendors, and carbon credit sellers. From due diligence to vendor risk-management policies, Patomak has deep experience in developing and improving holistic compliance programs, as well as on CFTC, SEC, and related regulatory and policy issues. If you would like to learn more about how Patomak can help, reach out to Ted Serafini, Jamila Piracci, or your regular Patomak contact.

[1] The EM Insights Team, Voluntary Carbon Markets Top $1 Billion in 2021 with Newly Reported Trades, Ecosystem Marketplace (Nov. 10, 2021), https://www.ecosystemmarketplace.com/articles/voluntary-carbon-markets-top-1-billion-in-2021-with-newly-reported-trades-special-ecosystem-marketplace-cop26-bulletin/.

[2] Press Release Number 7963-19, Commodity Futures Trading Commission, CFTC Commissioner Behnam Announces the Establishment of the Market Risk Advisory Committee’s Climate-Related Market Risk Subcommittee and Seeks Nominations for Membership (July 10, 2019), https://www.cftc.gov/PressRoom/PressReleases/7963-19.

[3] Press Release Number 8234-20, Commodity Futures Trading Commission, CFTC’s Climate-Related Market Risk Subcommittee Releases Report (Sep. 9, 2020), https://www.cftc.gov/PressRoom/PressReleases/8234-20.

[4] Press Release Number 8368-21, Commodity Futures Trading Commission, CFTC Acting Chairman Behnam Establishes New Climate Risk Unit (Mar. 17, 2021), https://www.cftc.gov/PressRoom/PressReleases/8368-21.

[5] Id.

[6] Rostin Behnam, Chairman, Commodity Futures Trading Comm’n, Opening Statement at the CFTC Voluntary Carbon Markets Convening, Washington, DC (June 2, 2022), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement060222.

[7] Id.

[8] Greenwashing is the practice where firms falsely state that their products or company are beneficial to the environment or when firms falsely claim that they abide by other environmental principles when they do not. National Law Review, SEC Proposes Regulations to Address “Greenwashing” By Investment Funds, (June 13, 2022), available at https://www.natlawreview.com/article/sec-proposes-regulations-to-address-greenwashing-investment-funds.

[9] Keynote Address of Commissioner Christy Goldsmith Romero at the Chicago Bar Association’s Futures & Derivatives Law Seminar, Chicago (June 15, 2022), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/oparomero1.

[10]David Adams and Karina Bashir, SEC Begins “Greenwashing” Enforcement: A Sign of Increasing Risk to Come? Clifford Chance (May 27, 2022), available at https://www.cliffordchance.com/insights/resources/blogs/business-and-human-rights-insights/2022/05/SEC-begins-greenwashing-enforcement-a-sign-of-increasing-risk-to-come.html.

[11] John B. Lyman and Isabel Q. Carey, SEC Climate Rule Would Require Public Disclosures of Carbon Emissions, Marten Law (Mar. 31, 2022), available at https://www.martenlaw.com/news-and-insights/sec-climate-rule-would-require-public-disclosures-of-carbon-emissions.

[12] Public Statement, Summer K. Mersinger, Concurring Statement of Commissioner Summer K. Mersinger Regarding Request for Information on Climate-Related Financial Risk (June 2, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement060222.

[13] Voluntary Carbon Markets: Analysis of Regulatory Oversight in the US, International Swaps and Derivatives Association (June 2022), available at https://www.isda.org/a/93WgE/Voluntary-Carbon-Markets-Analysis-of-Regulatory-Oversight-in-the-US.pdf.

[14] Id.

[15] Request for Information on Climate-Related Risk, 87 Fed. Reg. 34856 (June 8, 2022), available at https://www.federalregister.gov/documents/2022/06/08/2022-12302/request-for-information-on-climate-related-financial-risk.