The CFTC is starting to push the Climate Change train forward - establishes new "Climate Risk Unit" that may impact you
One of the emerging areas that we have been working on here at DCM is the confluence of the emerging carbon products and existing risk and compliance operations. In many cases, the activities driving towards carbon offests and carbon reduction are being headed by groups outside the historic market facing risk and compliance controls. But now the SEC - with its ESG reporting requirements - and the CFTC - with tradeable CORSIA compliant futures - arre becoming active players in overseeing corporate carbon objectives and the activities related to them.
This brings us to the press release that came out almost a month ago from Chairman Behnam of the CFTC establishing the new Climate Risk Unit. The release is here and the most challenging information is:
"As the U.S. joins governing bodies around the world in recognizing the need to reduce carbon emissions, the derivatives markets regulated by the CFTC will play a vital role in supporting and developing new products and solutions that address climate and sustainability challenges. In support of these efforts, it is widely recognized that globally consistent standards, taxonomies, and practices will be critical as the industry and policymakers partner and guide their economies through the transition. "
Taken at face value, this would imply that the CFTC Is going to be an actor in working to develop and implement global taxonomies for climate derivatives and possibly other things - this would imply the possibility of a globally imposed taxonomy for carbon related blockchains and derivatives (possibly including carbon reduction validation requirements?).
If this is the case, then adopting and implement, for example, a Scope 3 carbon blockchain for your supply chain at this time might be something that requires a complete data model and entity/attribute rebuild based on global imposed taxonomies. The upside would be that the oversight of such systems woould be much simpler to implement - similar to the difference in implementing trade surveillance for European natural gas trading versus US natural gas trading.
In addition, market participants must recognize that the CFTC considers physical activity underlying the market activity that sets a tradeable future on US market as to be within their jurisdiction as regards manipulation of prices. I can speculate that the CFTC would look very harshly at a firm that falsified data, either interntionally or by failure to meet standards, that causes a significant misstatement of carbon reduction accomplished versus the amount stated in a certificate delivered through an exchange futures physical settlement. The SEC might similarly look harshly at a firm that had to restate prior year ESG reporting because the carbon reduction reported was not the carbon reduction achieved.
DCM takes this as a very positive, though potentially complicating, step. Much of our recent focus has been on helping firms strategize for how they will encompass the billions, in some cases, of dollars spect on a reportable, and tradeable, product within their existing control frameowrk. Firms that fail to accomplish this could find themselves in a very similar regulatory situation as the natural gas firms found themselves in the mid 1990s when natural gas price indicies all of a sudden were subject to regulatory scrutiny. For those in the banking industry, the similar impacts on idnividuals in the LIBOR investigation might resonate - especially, the lack of regulator appreciation for the "that is just how I was taught the industry works" argument as criminal charges were filed. The individuals who ended up in jail in both cases might advise getting the control structures in place early as an advisable course of business.