On February 10, 2023, Commodity Futures Trading Commission (“CFTC”) Commissioner Christy Goldsmith Romero delivered the keynote address at the FIA & SIFMA Asset Management Derivatives Forum, focusing on the CFTC’s role in addressing cyber and climate risks (the “Keynote Address”). She opened her remarks by emphasizing the multifaceted climate risks affecting derivatives markets and market participants and highlighting the CFTC’s imperative to monitor such risks and promote climate resilience.

Most significantly, Commissioner Romero called for the CFTC to increase enforcement resources and expertise to combat greenwashing and other forms of related fraud, particularly in the voluntary carbon markets. As discussed below, these remarks serve as a clear warning to market participants that the CFTC’s interest in environmental issues is likely to evolve from exploratory information requests and industry gatherings to more concrete investigations of alleged misconduct and ultimately to enforcement actions.

Commissioner Romero’s Remarks Addressing Climate Risks

During the Keynote Address, Commissioner Romero made the case that severe climate events are increasing, and related climate financial risk can impact financial stability and pose systemic risk. She argued that it is important for the CFTC to monitor the risks related to markets as they transition to a lower-carbon economy. Commissioner Romero cited surveys indicating that nearly all asset managers and asset owners currently report or plan to report on climate-related information. However, she went on to highlight concerns about the integrity of data and information related to identified carbon reduction and sustainability.

Commissioner Romero highlighted the CFTC’s leadership role in the area of climate risk, noting that the CFTC has (i) authority over “the 200+ environmental or sustainability derivatives products that trade on CFTC-registered exchanges, along with environmental-related swaps” and (ii) “anti-fraud authority over the spot market.” Commissioner Romero then presented three specific proposals to encourage resilience to climate risk, urging the CFTC to:  

(1) promote market integrity by increasing enforcement resources and expertise to combat greenwashing and other forms of fraud; 

(2) promote market resilience to climate-related risk by monitoring climate-related financial risk to commodities and derivatives markets; and 

(3) work with exchanges and market participants to ensure the integrity of derivatives markets and promote responsible innovation in climate/sustainability products.

Most significant among these ideas is the proposal to increase enforcement resources and expertise to combat greenwashing and other forms of fraud in derivatives and spot markets under CFTC jurisdiction. After acknowledging that no consistent definition of greenwashing exists, Commissioner Romero proposed a definition to assist market participants in recognizing if it is present: 

“In the narrowest sense, greenwashing is limited to an issuer (a public company) making false claims about the environmental qualities of their products. But products traded in the derivatives markets or the voluntary carbon credit markets that only purport to reduce or remove GHG emissions, with no emissions reduction (or less than one ton of reduction) could also be greenwashing.”

Commissioner Romero advised funds purportedly involved in green or sustainable investing to take steps to ensure the accuracy of their disclosures, and then noted that voluntary carbon markets carry particular concerns of greenwashing, fraud, and manipulation. The Commissioner supported this claim by referencing a 2013 Interpol report, which highlighted the significant risk of exploitation by criminals due to the large amount of money, the immaturity of regulations, and lack of oversight and transparency. The Commissioner likewise cited a letter from the Environmental Defense Fund, which raised fraud concerns in voluntary carbon markets, including fraud or misleading claims with respect to the environmental benefits of purchased carbon credits, and fraudulent misrepresentation of measurements to claim more carbon credits from a project than were actually generated. 

Finally, Commissioner Romero noted IOSCO’s concerns about greenwashing, fraud and manipulation in voluntary carbon markets, including: “The risk of fraudulent selling of carbon credits that do not exist or do not belong to the seller; different methodologies to quantify the carbon avoided or reduced poses risks for greenwashing; conflicts of interests between traders and investors could lead to traders manipulating carbon credit prices by issuing buy/sell recommendations to their customers, while doing the opposite with their own credits; and the risk of unclear and misleading communications around the use of carbon credits by buyers could result in greenwashing.”

Commissioner Romero concluded this portion of the Keynote Address by highlighting the degree to which greenwashing and other fraud can undermine climate resilience by distorting market pricing, damaging a company’s reputation, and compromising market integrity. She advised that market participants can take steps to protect themselves against greenwashing by asking for, and validating, information to backup ESG claims. Commissioner Romero again reemphasized that the CFTC has an important enforcement role to play in combating this type of fraud in the environmental markets.

Trending Environmental Market Focus at the CFTC

In the past year, the CFTC clearly has made environmental issues and the voluntary carbon markets a growing priority at the agency. For example, the CFTC held its first-ever Voluntary Carbon Markets Convening on June 2nd, 2022, the purpose of which was to discuss issues related to the supply and demand for high quality carbon offsets, including the CFTC’s potential role in these markets and the need for product standardization and reliable data to ensure the integrity of greenhouse gas emissions avoidance and reduction claims. 

During his opening statement at this Convening, Chairman Rostin Behnam reported that the CFTC’s Climate Risk Unit (CRU) was conducting a regulatory assessment of what CFTC registrants, registered entities, and other market participants can do to better anticipate and alleviate climate-related risk. Chairman Behnam also highlighted the rapid expansion of voluntary carbon markets, and emphasized CFTC’s duty to promote the ongoing integrity of CFTC-regulated exchanges, identify and take action against any fraudulent or other abusive practices in the underlying markets, and promote responsible innovation and fair competition. The Chairman’s remarks reflect the CFTC’s objective as a market regulator to ensure that voluntary carbon markets within its jurisdiction are subject to adequate supervision and to establish the necessary guardrails and guidance for market participants. 

Subsequently, on June 2nd, 2022, the CFTC released a Request for Information (RFI) on Climate-Related Financial Risk. This RFI sought feedback on climate-related financial risk as it may pertain to CFTC-regulated markets and market participants, including responses to questions specific to voluntary carbon markets and greenwashing. For example, the RFI solicited information on “whether there are aspects of the voluntary carbon markets that are susceptible to fraud and manipulation and/or merit enhanced CFTC oversight.” 

Takeaways

Overall, Commissioner Romero’s remarks serve as a clear warning to the markets that the CFTC’s interest in environmental issues will move from exploratory information requests and broad industry hearings to more concrete investigations of alleged misconduct and ultimately to enforcement actions. While the likely focus of such potential actions is not yet clear, the direction toward enforcement investigations seems inevitable. Accordingly, actors in the voluntary carbon markets and those trading and utilizing other environmental products should consider this growing CFTC regulatory risk and carefully assess their current practices, policies, and procedures related to environmental market activities to solidify related compliance efforts and mitigate this developing CFTC risk. 

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