The CFTC’s Energy and Environmental Markets Advisory Committee (EEMAC), sponsored by Commissioner Dan Berkovitz, examined environmental, social, and governance (ESG) initiatives at its October meeting, with a focus on the promotion of diversity, equity, and inclusion (DEI) in the energy and environmental markets. The agenda also included a discussion of exchange-listed ESG derivatives, as well as an update from CFTC staff on the energy derivatives markets between Q1 and Q3 2020. The meeting was held by videoconference in accordance with the agency’s COVID-19 social distancing protocols.
Some preliminary observations about ESG. In his opening remarks, Commissioner Berkovitz noted that the focus of the meeting would be on the "social" component of ESG, even though the "environmental" component has traditionally dominated ESG discussions at the Commission.
Berkovitz noted that the events of the past summer, spurred by the killing of George Floyd, had drawn attention to the importance of "social" factors in the workplace as well as in society at large. He stated that within firms, there has been a growing commitment to promoting diversity and incorporating a sustainable, inclusive ethos into the fabric of the company.
The commissioner also observed that efforts to enhance diversity, equity, and inclusion can help a business succeed in different ways. He noted research that suggests a heterogeneous workforce is more innovative and performs better than a homogeneous one. Additionally, investors are increasingly taking social factors into account in their decisions about where to allocate their capital. Berkovitz also cited a working paper by Dr. Chris Brummer, which examines the lack of African Americans in senior leadership positions across U.S. financial regulatory agencies. That paper makes the argument for greater diversity when it comes to shaping financial regulatory policy.
Moving forward with a diversity, equity, and inclusion program. Paula Glover, the president and CEO of the American Association of Blacks in Energy led off the day’s first panel with a discussion of some of the nitty gritty issues an organization must consider when running a DEI program. She noted the first questions an organization must confront are "What are you doing now?" and "How is that going? She noted that while many companies are leaning in on DEI efforts in the aftermath of the summer’s events, there is no broad agreement with regard to how to measure progress among the association’s membership.
The next question to consider, according to Glover, is: Does the organization have the right policies in place? She noted four key steps an organization should consider on this score, which include the following:
- Work to include all employees, and work to make all employees feel fully valued.
- Focus on efforts to increase representation of diverse groups including hiring, promotion, as well senior leadership and board members.
- Commit to equitable spend with respect to diverse businesses, including suppliers and others.
- Encourage students to be in the industry via STEM programs, networking opportunities, scholarships, and early career development undertakings.
Steven Hamilton of ICE Futures U.S. declared that his exchange saw strong tailwinds for ESG integration. In short, Hamilton indicated that ICE has seen the convergence of evolving fiduciary duties, increasing regulatory obligations, and strong client demand in the ESG realm. Moreover, the COVID-19 crisis highlighted the need for risk management tools in light of corporate controversies and the performance of ESG factors during the height of the pandemic.
Margins performed adequately in a time of crisis. In the third panel of the day, Sayee Srinivasan and John Paul Rothenberg of the CFTC Division of Clearing and Risk’s (DCR) Risk Surveillance Branch (RSB) provided an update on the energy derivatives markets between Q1 and Q3 2020. This was an extremely volatile time in the markets as crude oil futures crashed, with the WTI May futures contract settling at negative $37.63 on April 20. Nonetheless, the CFTC RSB staff concluded that operative margin models performed adequately, and concluded the following:
- Margins did not start the crisis or cyclical lows.
- Margins rose commensurate with risk.
- Initial margin for major products performed adequately.