Comment Text:
Data
Question 1. What types of data would help the Commission evaluate the climate-related financial risk exposures of registered entities, registrants, and other participants in the derivative markets that the Commission oversees? Are there data sources that registered entities, registrants, and/or other market participants currently use to understand and/or assess climate-related financial risk? What steps should the Commission consider in order to have better access to consistent and reliable data to assess climate-related financial risks?
Response: The most useful data types to enable the Commission to evaluate the climate-related financial risks specifically associated with the purchase and use (for offsetting) of poor quality carbon credits would be comprehensive carbon credit disclosures, along the lines of those proposed by the SEC in its proposed amendment to Title 17, Chapter II of the Code of Federal Regulations (17 CFR 229.1506) from early 2022.
Question 2. Would it help the Commission, registered entities, registrants, market participants and/or the public to understand and/or to manage climate-related financial risk if Commission reporting requirements included information about climate-related aspects of listed derivatives products, reported transactions, and/or open positions? Are there data standards or definitions that the Commission should consider incorporating into any such reporting?
Response: Yes it would help all stakeholders if the above information were included among reporting requirements. As well as helping to guard against climate-related financial risk, this type of disclosure would help to bring the general public on board with the transition to net zero by bringing transparency and hence trust to the market activities associated with it.
Question 3. What steps should the Commission consider to better inform the public of its efforts to assess and address climate- related financial risks? What information could the Commission publish that would be useful in this regard? What steps should the Commission consider to make climate-related data more available to registrants, registered entities, other market participants, and/or the public (as appropriate and subject to any applicable data confidentiality requirements) in order to help understand and/or manage climate-related financial risk?
Response: In order to better inform the public of its efforts to assess and address climate- related financial risks it would be extremely useful for the Commission to publish all data in a clear, accessible, comprehensive and machine readable format, as well as to provide meta-data growing out the key trends, commonalities and divergences between approaches taken by different market segments and participants.
Scenario Analysis and Stress Testing
Question 4. Are there any climate forecasts, scenarios, or other data tools that would be useful to the Commission, registered entities, and/or registrants to better understand the exposure of any registered entities or registrants to climate-related financial risk and how those risks translate to economic and financial impacts?
Response: On the general topic of assessing transition risk for the macroeconomy, the Commission may find value in reviewing the work of the Inevitable Policy Response, a research programme from the UN Principles for Responsible Investment (UNPRI).
On the more specific question of climate-related financial risks specifically associated with the purchase and use (for offsetting) of poor quality carbon credits, the Commission would be welcome to review Sylvera’s in-depth carbon credit ratings data, which currently covers a significant proportion of all credits in the voluntary carbon markets.
Question Risk Management
8. How might registered entities and/or registrants need to adapt their risk management frameworks—including, but not limited to, margin models, scenario analysis, stress-testing, collateral haircuts, portfolio management strategies, counterparty and third-party service provider risk assessments, and/or enterprise risk management programs—to address climate-related financial risk?
Response: An additional way in which registered entities and/or registrants need to adapt their risk management frameworks is to develop risk-weighted carbon credit portfolios, for registered entities and the entities they are financially exposed to (as creditors and/or debtors). This will enable them to measure and hence manage their level of exposure to greenwashing claims and associated financial and litigative risk.
Disclosure
Question 14. A goal of climate-related financial disclosure is to offer meaningful information about climate-related financial risks, and to foster increased transparency into those risks. In connection with any assessment of whether updated requirements are needed, what specific disclosures, building on the Task Force on Climate-Related Financial Disclosures' (“TCFD”) four core elements of governance, strategy, risk management, and metrics and targets,[32] would be most helpful for the Commission to consider?
Response: As noted in the response to question 1 above, the most useful public disclosure for the Commission to require, in order for stakeholders to evaluate the climate-related financial risks specifically associated with the purchase and use (for offsetting) of poor quality carbon credits, would be comprehensive carbon credit disclosures, along the lines of those proposed by the SEC in its proposed amendment to Title 17, Chapter II of the Code of Federal Regulations (17 CFR 229.1506) from early 2022.
Product Innovation
Question 19. Are there customer protections or other guardrails that the Commission could consider to promote market integrity in climate-related derivatives products?
Response: In response to the climate-related financial risks specifically associated with the purchase and use (for offsetting) of poor quality carbon credits, the Commission could consider setting minimum quality standards or expectations for carbon credits. In addition, or perhaps as an alternative, the Commission could also consider requesting information regarding the due diligence undertaken by any suitably qualified third parties in order to determine credit quality.
Question 20. Are there any potential innovations in climate-risk-related technology that could shape derivatives product innovation or are otherwise likely to impact the derivatives markets overseen by the Commission?
Response: A broader innovation within the carbon markets, which the Commission may already be familiar with, has been the emergence of the carbon credit ratings sector. The older provider of this data, Sylvera, was founded in March 2020. The carbon credit ratings data, or constituent parts thereof, could be useful input for the construction or pricing of derivative products relating to carbon.
Voluntary Carbon Markets
Question 22. Are there ways in which the Commission could enhance the integrity of voluntary carbon markets and foster transparency, fairness, and liquidity in those markets?
Response: Yes. We would strongly advocate disclosure requirements for emissions, use of credits, future climate commitments and plans to achieve them. Regarding the use of credits, as noted above, the recent proposals from the SEC, specifically their draft amendment to Title 17, Chapter II of the Code of Federal Regulations (17 CFR 229.1506), would be a good starting point. Carbon credit buyers should be required to disclose: Number of credits retired; Credit ID and certification standard; Vintage; Host country; Whether a corresponding adjustment has been applied; Price paid, Date of credit(s) purchase.
To further aid this assessment of risk, credits buyers should also disclose the due diligence they have performed on the credits purchased. This could include both internal processes or verification, authentication, or subsequent monitoring / assessment by a reliable third party, for example carbon credit ratings agencies. This could also include information from independent initiatives such as IC-VCM, including whether a credit meets their Core Carbon Principles. However, this should be with the understanding that this is a binary judgement, and more nuanced quality assessments help further mitigate risk.
A third area the Commission might consider would be the establishment of guardrails for the emerging areas of market data which are of growing importance, such as carbon credit ratings. Minimum standards for technical rigour in this field would help to ensure their rigour and dependability as the market continues to scale.
Question 23. Are there aspects of the voluntary carbon markets that are susceptible to fraud and manipulation and/or merit enhanced Commission oversight?
Response: One of the most concerning ways in which the voluntary carbon markets are susceptible to fraud is regarding greenwashing, i.e. market participants overclaiming on the environmental integrity of their climate action, including carbon credits. This has a material impact on the atmosphere, public trust in corporate efforts to reduce emissions, and on financial risk, because greenwashing accusations can materially affect share prices, revenues and litigative liabilities.
Public-Private Partnerships/Engagement
Question 29. Are there experts with whom it would be useful for Commission staff to collaborate to identify climate forecasts, scenarios, and other tools necessary to better understand the exposure of registered entities and registrants to climate-related financial risks and how those risks translate into economic and financial impacts?
Response: We would be happy to provide access to our technical experts in order to discuss the issues around carbon credit quality, as highlighted in response to question 4.
