The International Organization of Securities Commissions (IOSCO) has launched a consultation to promote the integrity and orderly functioning of the Voluntary Carbon Markets (VCMs).

The 90-day public consultation outlines a set of 21 good practices that it believes will promote the integrity and orderly functioning of VCMs.

VCMs are markets where entities buy carbon credits for voluntary use (e.g., to offset carbon emissions and support a claim about their climate performance, or otherwise finance mitigation activities with traceable results) rather than to comply with an obligation. These carbon credits are most often issued in relation to climate change mitigation activities or projects. The projects are designed to mitigate climate change through either emission reduction, for example, by investing in renewable energy or preventing deforestation, or through carbon removal and sequestration, such as planting trees or technology-based carbon capture mechanisms.

“VCMs are a key priority of the COP28 Presidency as a result of the potential role they could play within the international climate policy framework.”

Jean-Paul Servais, IOSCO Chairman and Chairman of the Belgium Financial Services and Markets Authority

Announcing the publication of the consultation at COP28 in Dubai on December 3, 2023 , Rodrigo Buenaventura, Chair of the IOSCO Sustainable Finance Taskforce (STF) and Chairman of the Spain CNMV, said that VCMs have become significantly more important in recent years and that IOSCO recognizes that in order to continue to succeed, they need to be able to demonstrate both environmental and financial integrity.

“I believe IOSCO and its international market expertise will be key in promoting financial integrity and build the trust these markets need to scale,” he said.

21 good practices

IOSCO said that it had drawn on existing good practices and principles for well-functioning markets, such as IOSCO’s Objectives and Principles of Securities Regulation (including the derivatives markets) when developing its good practices for VCMs. They also build on key considerations included in the discussion paper published in November 2022 as well as IOSCO members’ knowledge and oversight of financial markets.

The good practices standards cover regulatory frameworks, primary market issuance, secondary market trading, and disclosure of use of carbon credits:

• The the first four standards deal with regulatory frameworks: regulatory approach; regulatory treatment; domestic and international cooperation; and participants’ skill and competence.
• Standards 5-9 cover primary markets: standardization; transparency; disclosure; soundness and accuracy of registries; and due diligence.
• There are eleven secondary markets standards (standards 10-20) covering: market functioning and transparency; governance and risk management; and market abuse.
• Standard 21 deals with disclosure around the use of carbon credits.

The STF Carbon Markets working group that developed the good practices was co-chaired by Verena Ross, chair of ESMA and Rostin Behnam, chair of CFTC.

Ross said as the regulators looked into VCMs, they recognized that in addition to environmental integrity vulnerabilities there were financial integrity problems with the carbon markets.

“These markets also lacked some characteristics of fair, efficient and transparent markets that protect investors – characteristics [that] are at the heart of the IOSCO community and core of every well-functioning securities market,” she said.

Jean-Paul Servais, IOSCO Chairman and Chairman of the Belgium Financial Services and Markets Authority welcomed the publication of the document, noting that: “VCMs are a key priority of the COP28 Presidency as a result of the potential role they could play within the international climate policy framework, particularly for emerging markets. But they can only work with financial integrity. And that is what we are trying to instil.”

The consultation closes on March 3, 2023. IOSCO calls on stakeholders to provide their respective insight and expertise in response to the questions included in the consultation via a link on their website.