Climate Risk Scorecard
Significant Progress
Some Progress
No Progress
Not Applicable
Commodity Futures Trading Commission
Significant Progress
Reasoning
In addition to the public comments noted in the 2022 Scorecard, Chair Rostin Behnam, who commissioned the CFTC’s 2021 climate risk report, and Commissioner Christy Goldsmith Romero have publicly spoken about the systemic nature of climate risks:Â
Chair Behnam remarks at the Commodity Markets Council regarding the CFTC’s role in voluntary carbon credit markets (January 2023)Â
Commissioner Romero speech regarding CFTC’s role in promoting market resilience to climate risk (February 2023)Â
Commissioner Romero remarks on steps CFTC could take to manage climate risk (March 2023)Â
Chair Behnam testimony in front of the Senate Agriculture Committee Hearing regarding CFTC’s role in ensuring financial markets are resilient to climate risk (March 2023)Â
Commissioner Romero remarks at Ceres Global on voluntary carbon markets (March 2023)Â
Chair Behnam remarks at a Bipartisan Policy Center fireside chat regarding CFTC’s role in improving carbon credit quality (April 2023)Â
Commissioner Romero statement on proposed risk management program regulations (June 2023)Â
Next Steps
Continue to publicly acknowledge the systemic nature of climate-related financial risk in agency speeches and publications. Â
*These recommendations, all within the CFTC’s mandate and authority, are designed to address climate-related financial risks and promote the integrity and resilience of the U.S. derivatives markets through sound regulation. Â
Methodology
We assessed the extent to which the agency has publicly affirmed the systemic nature of the climate crisis individually in official agency communications (outside of the FSOC report).Â
Significant Progress
Reasoning
The CFTC created the Climate Risk Unit (CRU) in 2021 to focus on the role of derivatives in understanding, pricing, and addressing climate-related risk and transitioning to a low-carbon economy, appointing Abigail Knauff as deputy in 2022. This group is comprised of staff from across the CFTC’s operating divisions and offices. According to the FSOC report, the main focus of the Climate Risk Unit is to “accelerate CFTC engagement in industry-led and market-driven processes in the climate and wider ESG spaces to ensure that new products and markets facilitate hedging, price discovery, and capital allocation (page 35).”  Â
Two other CFTC advisory committees are also looking at climate as part of their mandate. The CFTC federal advisory committee, the Energy and Environmental Markets Advisory Committee (EEMAC), has hosted public meetings and met in September 2021 to discuss how the derivatives markets can facilitate the transition to a low-carbon economy, including the status of carbon reduction through cap-and-trade and other carbon trading market mechanisms.Â
The CFTC’s Climate-Related Market Risk Subcommittee of its Market Risk Advisory Committee (MRAC), which has a broad mandate to provide analysis and recommendations regarding the existing and emerging risks, has engaged on climate-related risks on the financial markets. Climate-related risk and voluntary carbon markets have been topics of discussion during multiple MRAC meetings, including in September 2022 and March 2023. Â
In April 2023, Commissioner Romero announced that Yevgeny Shrago will serve as her senior counsel and climate policy advisor. In June 2023, the CFTC announced the establishment of the Environmental Fraud Task Force to combat environmental fraud and misconduct in derivatives and relevant spot markets (such as voluntary carbon credit markets), relating to purported efforts to address climate change and other environmental risks. The task force – which is comprised of attorneys and investigators across different offices within the Enforcement Division – will examine fraud respect to the purported environmental benefits of purchased carbon credits, as well as registrants’ material misrepresentations regarding ESG products or strategies. Â
Next Steps
Continue work with the CFRC, CFRAC, and interagency climate risk working groups, and initiate work with FLEC to assess the resiliency of financially vulnerable communities.Â
Continue internal staff education and training on climate-related financial risks, ensuring sufficient enforcement and compliance capacity and knowledge.Â
*These recommendations, all within the CFTC’s mandate and authority, are designed to address climate-related financial risks and promote the integrity and resilience of the U.S. derivatives markets through sound regulation. Â
Methodology
We assessed the extent to which the agency has expanded and established sustainable, well-resourced capacity “to define, identify, measure, monitor, assess, and report on climate-related financial risks and their effects on financial stability.” (FSOC 1.3).Â
This includes investments in staffing, appointing senior staff, forming internal working groups and/or committees, staff training, investments in technological and analytical capabilities, and financial resources provided to staff working on these issues.Â
Some Progress
Reasoning
As noted above, the CFTC created the Climate Risk Unit to accelerate CFTC engagement in support of industry-led and market-driven processes in the climate space to ensure that new products and markets fairly facilitate hedging, price discovery, market transparency, and capital allocation. However, we are not aware of any updates or activity related to the work of this group, and there is no designated webpage for updates on the CRU’s work. Similarly, the MRAC Climate-Related Market Risk Subcommittee does not have a designated webpage and has not published research or data since its 2020 report outside of the discussions held during MRAC meetings. The MRAC webpage lists the subcommittee’s membership as under review. Additionally, in March 2023, the chair stated that the CFTC would wait for congressional authority before pursuing climate risk initiatives directly. Â
Next Steps
Establish a webpage to provide information on completed and ongoing climate risk-related activities, including the status of proposed rulemakings, current relevant supervisory guidance, what staff are assigned to the CRU and Climate-Related Market Risk Subcommittee, what those groups are working on, disclose budgets and resources, and other recommendations in this section.Â
*These recommendations, all within the CFTC’s mandate and authority, are designed to address climate-related financial risks and promote the integrity and resilience of the U.S. derivatives markets through sound regulation. Â
Methodology
We assessed the extent to which the agencies have made information and data available to the public.Â
“[I]nclude descriptions of their activities related to climate-related financial risks in their annual reports and consider incorporating climate-related financial risks in relevant risk reports that they publish, as appropriate ... [and] within the context of each member’s mandate and authority.” (FSOC 1.4).Â
“[M]ake climate-related data for which they are the custodians freely available to the public, as appropriate and subject to any applicable data confidentiality requirements.” (FSOC 1.5).Â
No Progress
Reasoning
Ceres is not aware of any progress in this category. Â
The CFTC has the authority to address fraud and misinformation in the derivatives markets and underlying commodities markets as it relates to climate-related risk and carbon markets. The CFTC publishes an annual report on its consumer education activities, and regularly issues Customer Advisories alerting populations that may be more susceptible to scams or inexperienced investors – including seniors, Millennials, online daters, and agricultural customers – of fraud in a specific industry or instance – including market volatility related to Covid-19, virtual currency, and natural disasters. Â
Further, the CFTC is a member of FLEC, and has already indicated its intent to work with FLEC member agencies on other financial education materials. The agency has acknowledged the importance of combating fraud and giving people the tools to identify fraudulent activity. Its Office of Customer Education and Outreach (OCEO) works with internal and external stakeholders to monitor and identify current and developing fraud trends, develop timely and effective educational materials, messages and outreach strategies, and alert the public to products, situations, or behaviors that could make them targets for crime. The OCEO should use its authority to research, evaluate, and provide education and outreach to financially vulnerable communities that may be at risk of scams under the guise of carbon trading, and engage with FLEC to implement appropriate safeguards as it has committed to for crypto assets. Â
Ceres encourages the CFTC to consider the impacts of its policies on financially vulnerable communities, who suffer disproportionate climate risk. The CFTC should keep the rights and needs of these communities, particularly Indigenous peoples, foremost in its work relating to carbon offset projects and the potential impacts of those projects on the communities in which they are based. Attention should be paid to what products might be developed that focus, whether geographically or in terms of particular vulnerabilities, on the risks to financially vulnerable communities. This may also help reduce or prevent greenwashing and other forms of carbon market fraud by ensuring that there is reliable, accurate, and consistent data regarding offset projects. Â
Next Steps
Actively and transparently engage in interagency coordination on assessing risk to financially vulnerable communities, provide updates, and publish findings, such as advances made with the FLEC Climate Resiliency Group.Â
Consider the policy implications of climate-related financial risk supervision and regulation on LMI and BIPOC communities.Â
Advocate for inclusion of provisions supporting Indigenous peoples in nature-based solutions to ensure these projects respect the rights of Indigenous peoples and do not cause harm to communities. Â
Issue a Customer Advisory informing the public to be on alert for frauds seeking to profit from voluntary carbon markets.Â
*These recommendations, all within the CFTC’s mandate and authority, are designed to address climate-related financial risks and promote the integrity and resilience of the U.S. derivatives markets through sound regulation. Â
Methodology
We assessed the extent to which the agency - consistent with its mandate and authorities and its membership in the Financial Literacy and Education Commission (FLEC) - has assessed and made progress on addressing climate risks to financially vulnerable communities. Â
“[C]oordinate the analyses of climate-related financial risks ... with their efforts to understand impacts on communities and households. FSOC members should, as applicable, integrate these analyses into the[ir annual] public reports.” (FSOC 1.6).Â
“[E]valuate climate-related impacts and the impacts of proposed policy solutions on financially vulnerable populations when assessing the impact of climate change on the economy and the financial system.” (FSOC 1.8). Â
“[FLEC members should] analyze and understand the impact of climate change on the financial well-being of financially vulnerable populations. FSOC members that are also FLEC members should actively participate in this analysis.” FLEC members include the Fed, OCC, FDIC, NCUA, SEC, CFTC, and FHFA. (FSOC 1.9). Â
Some Progress
Reasoning
In September 2020, a subcommittee of the Commodity Futures Trading Commission published a climate report that included recommendations for financial regulators to integrate climate risks into their oversight functions. The report argued for the need to move urgently and decisively to measure, understand, and address climate risks. While this report was released by a sub-committee of the CFTC, it was endorsed by the current Chair Behnam when he was a commissioner. Â
In June 2022, the CFTC held a Voluntary Carbon Markets Convening to discuss issues related to the supply and demand for high quality carbon offsets, including product standardization and the data necessary to support the integrity of carbon offsets’ greenhouse gas emissions avoidance and reduction claims. During the meeting, the CFTC unanimously voted to release a request for information to seek public comment on climate-related financial risk to better inform its understanding and oversight of climate-related financial risk as it relates to the derivatives markets and underlying commodities markets. Â
In July 2022, the CFTC attended the EU-US Joint Financial Regulatory Forum, where participants discussed implementation of new capital and financial reporting requirements for swap dealers. Climate-related risk and voluntary carbon markets have also been topics of discussion during multiple MRAC meetings, including in September 2022 and March 2023. Â
Next Steps
Emphasize the need for forward-looking analysis, as climate risk is shifting fundamental environmental parameters, rendering traditional risk-modeling techniques, which rely heavily on historical data, increasingly inadequate.Â
Conduct research into financial instruments that could be useful for and work with exchanges to ensure that they offer appropriate products and help the private sector mitigate its climate-related risks.Â
Review the extent to which financial market infrastructure is resilient against losses from physical risk.Â
Provide updates on the agency’s climate risk-related data collection and research, what additional data is needed, and its plan for collecting such data.Â
Provide easily searchable access to white papers, blogs, infographics, etc. that demonstrate data collection and research on climate-related financial risk and disclosure.Â
*These recommendations, all within the CFTC’s mandate and authority, are designed to address climate-related financial risks and promote the integrity and resilience of the U.S. derivatives markets through sound regulation. Â
Methodology
We assessed the extent to which the agencies have advanced research and data collection on climate risk. Â
“Identify[] the data needed to evaluate the climate-related financial risk exposures of regulated entities and financial markets.” (FSOC 2.1).  Â
“Perform[] an internal inventory of currently collected and procured data and its relevance for climate risk assessments." (FSOC 2.1).  Â
“Develop[] a plan for procuring necessary data through data collection, data sharing arrangements and information purchased from data providers or other sources.” (FSOC 2.1).  Â
“[F]acilitate the sharing of climate-related data across FSOC members and non-FSOC member agencies to assess climate-related financial risk, consistent with data confidentiality requirements.” (FSOC 2.2)   Â
“[D]evelop consistent data standards, definitions, and relevant metrics ... to facilitate common definitions of climate-related data terms, sharing of data, and analysis and aggregation of data.” (FSOC 2.5)Â
Not Applicable
Reasoning
Although this assessment category is not within the CFTC’s mandate as described in our methodology, the CFTC has the authority in some circumstances to conduct and require certain market participants to conduct stress tests and scenario analysis exercises. The CFTC has conducted these exercises in the past, and should consider conducting climate exercises to assess the impact of extreme but plausible scenarios on the market in order to monitor the potential effects of climate risk on the financial system as a whole.Â
Next Steps
Conduct stress tests to determine the potential price change or a potential change in a price input from climate impacts, with scenarios that include physical and transition risks, disorderly transition, concurrent and consecutive risks, impacts on multiple traditional risk categories, short- and long-term horizons, etc.Â
Expand its central counterparty stress testing to cover the operational continuity and organizational resilience of central counterparties, including organizational resilience of operations, contingency planning, and engineering resilience for facilities exposed to climate-related physical risks. Â
*These recommendations, all within the CFTC’s mandate and authority, are designed to address climate-related financial risks and promote the integrity and resilience of the U.S. derivatives markets through sound regulation. Â
Methodology
We assessed the extent to which the agencies have begun to assess, develop, and conduct climate scenario analyses at their supervised entities. Â
“[C]ollaborate with external experts to identify climate forecasts, scenarios, and other tools necessary to better understand the exposure of regulated entities to climate-related risks and how those risks translate into economic and financial impacts.” (FSOC 4.1).Â
“[U]se scenario analysis, where appropriate, as a tool for assessing climate-related financial risks, taking into account their supervisory and regulatory mandates and the size, complexity, and activities of regulated entities.” (FSOC 4.3).Â
“[C]onsider using common scenarios that build on existing work, including scenarios developed by NGFS and work at the FSB, as appropriate for the institutions and markets under consideration.” (FSOC 4.4).Â
Some Progress
Reasoning
On June 2, 2022, the CFTC held its first Voluntary Carbon Markets Convening, which included discussion of disclosures and transparency. That same day, the CFTC released a request for information (RFI) to seek public comment on climate-related financial risk as it relates to the derivatives markets and underlying commodities markets. The RFI posed multiple questions on disclosure requirements, such as necessary data and whether GHG emissions should be included. Â
Next Steps
Encourage and accelerate the development of trustworthy data sources and classification systems which can enable better climate-related financial risk management.Â
Ensure that climate-related financial risks faced by derivatives market participants and intermediaries are appropriately disclosed, and establish appropriate oversight of these risks.Â
Examine the extent to which climate impacts are addressed in disclosures required of swap dealers and other regulated entities, and consider guidance and rulemaking if disclosure improvements are needed.Â
*These recommendations, all within the CFTC’s mandate and authority, are designed to address climate-related financial risks and promote the integrity and resilience of the U.S. derivatives markets through sound regulation. Â
Methodology
We assessed the extent to which the agency has enhanced public reporting requirements for their regulated entities. The market is currently mispricing climate risk. The lack of consistent disclosure by entities supervised by U.S. financial regulators is an obstacle to market efficiency and to the accurate pricing of climate risk. Â
“[R]eview their existing public disclosure requirements and consider, as appropriate, updating them to promote the consistency, comparability, and decision-usefulness of information on climate-related risks and opportunities.” (FSOC 3.1).Â
“[C]onsider enhancing public reporting requirements for climate related risks in a manner that builds on the four core elements of the TCFD.” (FSOC 3.2).Â
“[C]onsider whether such disclosures should include disclosure of GHG emissions.” (FSOC 3.4).Â
“[R]eview banks’ public regulatory reporting requirements to assess whether enhancements are needed to provide market participants with information on institutions’ climate-related financial risks, taking into account a bank’s size, complexity, and activities.” (FSOC 3.7).Â
Some Progress
Reasoning
In 2020, the CFTC’s Climate-Related Market Risk Subcommittee published the first-ever climate report by a U.S. financial regulator, providing recommendations for the CFTC, Federal Reserve, the Securities and Exchange Commission, the Financial Stability Oversight Council, and other financial regulators to address climate-related financial risk. The subcommittee included 34 diverse representatives from industry, academia, and NGOs; the subcommittee voted unanimously 34-0 to adopt the report. Â
The CFTC’s request for information on climate-related financial risk indicated the information collected may be used to inform potential future actions including new guidance or policy statements. However, the CFTC has not taken any actions or summarized the comments received since the comment period closed in October 2022. Â
In June 2023, the CFTC issued an alert seeking whistleblower tips related to fraud and manipulation in voluntary carbon markets, noting that the agency’s Whistleblower Office will work with market participants that report information related to potential misconduct. Â
Next Steps
Recommend that FSOC oversee and coordinate risk management standards governing the operations related to the payment, clearing, and settlement activities of financial market utilities designated as systemically important to incorporate measures to monitor and manage physical climate risks. Â
Create a framework, in concert with the Integrity Council for the Voluntary Carbon Markets and other voluntary carbon market participants to ensure rigorous evaluation and meaningful certification of all carbon credits by outside, neutral, and expert third parties.Â
Exercise its authority to oversee derivatives with offsets as underlying, including investigating cases of project fraud or manipulation, in both derivatives trading and the underlying commodities.Â
Encourage and promote responsible innovation in derivative instruments to aid in addressing the financial risks of climate change.Â
Issue guidance to describe the physical and transition risks associated with climate-related financial risk and explain how those risks relate to traditional financial risks with which institutions are familiar.Â
Issue guidance on standardized carbon accounting to encourage futures exchanges to quantify the carbon emissions associated with a commodity contract, such as Scope 1, 2, and 3 emissions.Â
*These recommendations, all within the CFTC’s mandate and authority, are designed to address climate-related financial risks and promote the integrity and resilience of the U.S. derivatives markets through sound regulation. Â
Methodology
We assessed the extent to which the agencies have enhanced supervisory scrutiny of climate risk management at their supervised entities to ensure their resilience and the resilience of our financial system.                Â
“[C]larif[y] or enhanced risk management expectations ... [and] guidance.” (FSOC 4.8).Â
“[R]eview[] regulated entities’ efforts to address climate-related risks." (FSOC 4.6).
“[R]eview[] existing ... guidance ... to identify where clarifications and enhancements are needed.” (FSOC 4.7).Â
No Progress
Reasoning
Ceres is not aware of any progress in this category. Â
Next Steps
Expand risk management rules and related quarterly risk exposure reports to cover material climate-related risks.Â
Issue regulations for registrants and/or registered entities regarding the implementation of policies and procedures to measure, track, and account for physical and transition risk.Â
Issue regulations that will ensure products actually provide the benefits they claim and block products with insufficient verification, holding offset issuers accountable if promised carbon reductions do not or cannot occur, and rejecting derivatives of carbon offsets unless the agency can ensure the offsets upon which the derivatives are based are not fraudulent.Â
Impose capital and liquidity requirements for entities that deal in derivatives to incorporate climate risk into asset risk weights and require higher capital ratios if a firm is found to have insufficient capital or liquidity to absorb losses.Â
*These recommendations, all within the CFTC’s mandate and authority, are designed to address climate-related financial risks and promote the integrity and resilience of the U.S. derivatives markets through sound regulation. Â
Methodology
We assessed the extent to which the agencies have incorporated climate risk management expectations into their regulatory requirements for supervised entities to ensure their resilience and the resilience of our financial system.
“[C]larif[y] or enhanced risk management ... requirements.” (FSOC 4.8).Â
“[R]eview[] existing regulations ... and regulatory reporting to identify where clarifications and enhancements are needed.” (FSOC 4.7).Â
Significant Progress
Reasoning
In September 2020, a subcommittee of the Commodity Futures Trading Commission published the first-ever climate report by a U.S. financial regulator, affirming climate change as a systemic risk: “Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.”  Â
Current CFTC Chair Rostin Behnam, who commissioned the climate report, has publicly spoken out about the systemic nature of climate change risks on a number of occasions while serving as acting chair, including:Â
Ceres webinar, Managing Climate Risk in the U.S. Financial System (September 2020)Â
Ceres 2021 conference session on Regulating Climate Change as a Systemic Financial Risk
Remarks before the Market Risk Advisory Committee in which he highlighted “the overarching impact of climate change on our financial markets” (February 2021)Â
In addition, CFTC Commissioner Dan Berkovitz has also addressed this issue while delivering a keynote address, Climate Change and Decentralized Finance: New Challenges for the CFTC, in which he stated: “The dangers to our financial markets from climate change are clear and present.”Â
Methodology
Recognizing that climate change poses a financial stability risk is a critical first step for all financial regulators and will send an important message to all financial market stakeholders. Such statements are particularly important, given the complex nature of climate risks and continuing ambiguities about the extent to which the issue falls under specific agency mandates.Â
We assessed the extent to which the agency has publicly affirmed the systemic nature of the climate crisis individually in official agency communications outside of the FSOC report.Â
Significant Progress
Reasoning
In September 2020, a subcommittee of the Commodity Futures Trading Commission published the first-ever climate report by a U.S. financial regulator recommending sweeping steps that financial regulators should take to integrate climate change risks into their oversight functions. The report argued for the need to move urgently and decisively to measure, understand, and address climate risks. While this report was released by a sub-committee of the CFTC it was endorsed by the current Chair Behnam when he was commissioner. Commissioner Behnam initiated this effort to examine climate-related impacts on the financial system in June 2019 when the MRAC convened to examine climate change-related financial risks.Â
Methodology
Producing quality research and data is critical to assessing and addressing climate-related financial risks. As stated in the FSOC report, “Analyzing climate-related financial risks begins with measuring and assessing risks from climate impacts. To do this, data is needed that captures the drivers of physical and transition risks that could impact households, businesses, the economy, and the financial sector (page 48).” We incorporated this new category in the 2022 Scorecard to respond to these critical data gaps.Â
We assessed the extent to which the agency has advanced work to make progress on FSOC Recommendation 2.1:Â Â
“Identif[y] the data needed to evaluate the climate-related financial risk exposures of regulated entities and financial markets within the context of each FSOC member’s mandate and authorities; Â
Perfor[m] an internal inventory of currently collected and procured data and its relevance for climate risk assessments; and Â
Develo[p] a plan for procuring necessary data through data collection, data sharing arrangements and information purchased from data providers or other sources.”Â
No Progress
Reasoning
Although it is a member of the Financial Literacy and Education Commission (FLEC), Ceres is not aware of specific actions the CFTC has demonstrated on FSOC Recommendations 1.8 and 1.9.Â
Methodology
The FSOC report highlights the imperative to assess climate risks on “financially vulnerable communities,” given that “climate change disproportionately affects financially vulnerable populations potentially including lower-income communities, communities of color, Native American communities, and other disadvantaged or underserved communities.” This troubling reality is further compounded by the fact that vulnerable communities are “less likely to have the resources to protect and guard against damage to their properties or adequately deal with loss of income from an adverse climate or weather event (page 22).” While the significance of this issue is emphasized, it is qualified by an important warning against measures or actions that may unintentionally worsen existing inequalities.Â
We assessed the extent to which each agency, consistent with its mandate, authorities, and its membership in the Financial Literacy and Education Commission (FLEC), has advanced work to make progress on FSOC Recommendations 1.8 and 1.9: Â
“members, consistent with their mandates and authorities, evaluate climate-related impacts and the impacts of proposed policy solutions on financially vulnerable populations when assessing the impact of climate change on the economy and the financial system.” (FSOC 1.8)Â
“Treasury Department engage other members of the Financial Literacy and Education Commission (FLEC) to analyze and understand the impact of climate change on the financial well-being of financially vulnerable populations. FSOC members that are also FLEC members should actively participate in this analysis.” (FSOC 1.9). Â
FLEC members include the Office of the Comptroller of the Currency, Federal Reserve, the Federal Deposit Insurance Corporation, National Credit Union Administration, Securities and Exchange Commission, Commodity Futures Trading Commission. Â
Significant Progress
Reasoning
In March 2021, the CFTC created the Climate Risk Unit to focus on the role of derivatives in understanding, pricing, and addressing climate-related risk and transitioning to a low-carbon economy. This group is comprised of staff from across the CFTC’s operating divisions and offices. According to the FSOC report, the main focus of the Climate Risk Unit is to “accelerate CFTC engagement in industry-led and market-driven processes in the climate and wider ESG spaces to ensure that new products and markets facilitate hedging, price discovery, and capital allocation (page 35).” Since the announcement of the Climate Risk Unit, we are not aware of any updates or activity related to the work of this group. Â
Two other CFTC advisory committees are also looking at climate as part of their mandate:Â
The CFTC has engaged on climate-related financial risk issues through its Climate-Related Market Risk Subcommittee of its Market Risk Advisory Committee (MRAC).Â
A public meeting of MRAC was held in February 2021 where Chairman Behnam stated: “I gave the Climate Subcommittee a broad mandate: provide an analysis and recommendations regarding the existing and emerging risks and impacts of climate change on the financial markets. The Climate Report has exceeded all expectations in tackling the challenges of how to safeguard the financial system in the face of the uniquely complex risks presented by climate change and how to facilitate the transition to a low-carbon, climate resilient economy.”Â
The CFTC federal advisory committee, the Energy and Environmental Markets Advisory Committee (EEMAC), has also hosted public meetings and met in September 2021 to discuss how the derivatives markets can facilitate the transition to a low-carbon economy, including the status of carbon reduction through cap-and-trade and other carbon trading market mechanisms.Â
Methodology
It is urgent that agencies establish sustainable, well-resourced capacity at the political and technical levels to address climate risk to meet the scale of the challenge and deliver on the administration and FSOC commitments.
We assessed the extent to which the agency has appointed dedicated staff to address climate risk to execute the agency’s climate commitments and FSOC recommendations. We assess, for example, the role, authority, and human and financial resources provided to staff dedicated to work on climate risk.Â
Some Progress
Reasoning
On June 2, the CFTC held the first ever Voluntary Carbon Convening. According to the CFTC, “the purpose of the meeting is to discuss issues related to the supply and demand for high quality carbon offsets, including product standardization and the data necessary to support the integrity of carbon offsets’ greenhouse gas emissions avoidance and reduction claims.” During the meeting, the CFTC unanimously voted to release a request for information (RFI) to seek public comment on climate-related financial risk to better inform its understanding and oversight of climate-related financial risk as it relates to the derivatives markets and underlying commodities markets. Â
Methodology
The market is currently mispricing climate risk. The lack of consistent disclosure by entities supervised by U.S. financial regulators is an obstacle to market efficiency and to the accurate pricing of climate risk. In response, the FSOC recommended that members:Â
“review their existing public disclosure requirements and consider, as appropriate, updating them to promote the consistency, comparability, and decision-usefulness of information on climate-related risks and opportunities, consistent with their mandates and authorities.” (FSOC 3.1) Â
“consider enhancing public reporting requirements for climate related risks in a manner that builds on the four core elements of the Task Force on Climate-Related Financial Disclosure (TCFD)” (FSOC 3.2)Â
“consider whether such disclosures should include disclosure of GHG emissions” (FSOC 3.4)Â
Following on FSOC Recommendations 3.1, 3.2, 3.3, and 3.4, we assessed the extent to which the agency has enhanced public reporting requirements, consistent with its statutory mandates.Â
No Progress
Reasoning
Ceres is not aware of any progress in this category.Â
Methodology
Supervision and regulation of climate risk is urgently needed to ensure the resilience of supervised entities and our financial system. Â
Following FSOC Recommendations, we assessed the extent to which the agency has “clarified or enhanced risk management expectations, guidance and requirements (FSOC 4.8).” We will also consider if agencies have:Â
“reviewed regulated entities’ efforts to address climate-related risks (FSOC 4.6)Â
“reviewed existing regulations, guidance and regulatory reporting to identify where clarifications and enhancements are needed” (FSOC 4.7)Â
The Commodity Futures Trading Commission (CFTC) regulates commodity futures, commodity options, and swaps trading markets. The CFTC’s mission is to promote the integrity, resilience, and vibrancy of the U.S. derivatives market through sound regulation. It investigates and prosecutes commodities fraud, including foreign currency schemes, energy manipulation, and hedge fund fraud. Firms and individuals that deal with futures, swaps, and options must register with the CFTC, including commodity pool operators and advisors, futures commission merchants, introducing brokers, and swap dealers.Â
Commodities are economic goods that are interchangeable with other goods of the same type, regardless of who produced them. Commodity prices are generally determined by supply and demand, and can be impacted by economic shocks, natural disasters, and investor preferences. Most commodities are raw materials, basic resources, agricultural, or mining products, but also include carbon offsets and carbon credits. Investors and traders can buy and sell commodities directly in the cash market or via derivatives such as futures and options. Commodity futures contracts are legal agreements to buy or sell commodities at a predetermined price and delivery date.Â
Transactions relying on registries underlying the exchange-based carbon futures may be regulated by the CFTC. Carbon credits are currently traded in on voluntary markets that are not currently subject to the regulations that govern derivatives and securities markets. Because the CFTC is tasked with preventing fraud and manipulation in derivatives markets, it has the authority to review carbon markets and ensure high quality carbon offsets with a focus on integrity, infrastructure, and credibility. Â
The CFTC’s regulations also require swap dealers to maintain an effective risk management program that covers various risks. It requires swap dealers to “establish, document, maintain and enforce” a system of risk management policies and procedures to monitor and manage market, credit, liquidity, and “any other applicable risks,” which could include material climate-related risks. Â
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