Christy Goldsmith Romero, CFTC Commissioner, outlined the CFTC’s proposals in a speech at ISDA’s ESG Forum on Promoting Market Resilience. The Commissioner repeatedly called climate change a ‘daunting’ challenge and one that poses “significant financial risk.” The Commissioner sees the CFTC “as a critical player in the story of climate change.”

According to the Commissioner, it is “critical for the CFTC to understand the actual role that derivatives markets are playing to promote climate risk resilience” and in order to do so is proposing the creation of a new environmental/climate-related product category for the derivatives market. The net for this category is cast relatively widely encompassing: renewable energy or fuel products, ESG index products, compliance and voluntary carbon credits, weather, battery metals, and any other sustainable climate-related product. It is envisioned that the creation of this new category would enable market players to “monitor how derivatives markets are promoting resilience to climate risk” and it would also enable the Commission to publish reports and statistics on the market.

The Commissioner is proposing utilising the CFTC’s existing authority to oversee climate-related products utilising a similar approach taken for digital assets, which might include:

• Educating consumers;
• Asserting legal authority;
• Gathering market intelligence;
• Robust enforcement; and
• Coordination with other regulators.

Climate-related products

Better public understanding of climate-related products is particularly important, because the knowledge deficit in this area “could make the public and market participants vulnerable to wild assertion, bold headlines, and hyperbole.” A better understanding of carbon credits and markets is also essential, in the Commissioner’s view, because of the critical role that they potentially could play in emissions reduction.

A Heightened Review framework for self-certified climate-related products would “ensure market integrity and deter fraud, manipulation and abuse” according to the Commissioner. Here again carbon credit markets would be brought directly within its scope targeting specific concerns around their complexity, reliability and lack of transparency.

The primary thrust of the Commissioner’s proposals throughout is replicating the CFTC’s approach to digital assets. There might be some concern from stakeholders around this, given the disastrous events in crypto in 2022. It will be interesting to observe to what extent the Commissioner’s ambitions for the CFTC are realised.