Thursday, March 09, 2023

Goldsmith Romero outlines how the CFTC should approach climate financial risk

By Rodney F. Tonkovic, J.D.

In a keynote address at the ISDA's 2023 ESG Forum, CFTC Commissioner Christy Goldsmith Romero talked about her priority to promote market resilience to climate risk. Romero shared her thoughts on how to best promote climate risk resilience, and she took the opportunity to announce five new proposals to promote market integrity and resilience; the proposals would also implement recommendations by the Financial Stability Oversight Council. The remarks, delivered on March 7, 2023, were titled "A Thoughtful Approach to the Daunting Challenge of Climate Financial Risk."

A daunting challenge. Goldsmith Romero began by outlining the challenges posed by climate change. Initially, she said, the players were world leaders, scientists, and environmentalists, but not participants in the financial world or its regulators. The industry was slow to accept the idea that there was financial risk from climate change, but this is now well-established, and participants in the financial markets are now major players in the climate change story.

Promoting market resilience. When she was confirmed as a Commissioner in March 2022, Goldsmith Romero stated that one of her highest priorities would be to identify and mitigate risks that could threaten market integrity and resilience. After many discussions on climate matters, Goldsmith Romero announced in September 2022 her "priority to promote market resilience to climate-related risk, and to see the CFTC as a critical player in the story of climate change."

It is critical, Goldsmith Romero said, for the CFTC to understand the role that derivatives markets play to promote climate risk resilience. She also called for a whole-government approach to the matter to engage with the issue and to better leverage experience, expertise, and resources across the agencies.

Five proposals. Goldsmith Romero announced five proposals for action by the Commission:
  • Proposal 1: The Commission should enhance its understanding of the use of derivatives markets to manage climate-related financial risk by creating a new category that identifies Environmental/Climate-Related products that are trading in derivatives markets. Goldsmith Romero noted that the Commission currently lacks a method for determining what is an environmental/climate-related product and that creating such a category would help it to understand and monitor how derivatives markets are promoting resilience to climate risk.
  • Proposal 2: The Commission should follow a similar oversight and approach to Environmental/Climate-Related products as those adopted for digital assets. There is "no reason to reinvent the wheel," Goldsmith Romero said, and the CFTC should use essentially the same approach for ESG products as it does for digital assets.
  • Proposal 3: The Commission should conduct consumer education of Environmental/Climate-Related products. A greater public understanding of environmental/climate-related products, plus standard definitions of, for example, "green" or "sustainable," would help inoculate the public against wild assertions and hyperbole. There is also a need for greater understanding about carbon credits, Goldsmith Romero said.
  • Proposal 4: The Commission should develop a “Heightened Review” framework for any self-certified environmental/climate-related products (including those relating to carbon credits), just as it did with derivatives on digital assets. As it did with digital assets, Goldsmith Romero said that the CFTC should provide guidance on the steps that an exchange should take before self-certifying that products comply with the Commodity Exchange Act. The Heightened Review could also include steps more targeted at concerns in the carbon credit markets.
  • Proposal 5: The Commission should increase market intelligence to monitor and surveil markets to promote integrity and resilience to climate risk. Increased market intelligence would also help ensure that derivatives markets are providing appropriate price discovery, Goldsmith Romero said.
Finally, Goldsmith Romero observed that she had previously proposed that the Commission increase its law enforcement resources to combat greenwashing and other forms of fraud. Here, she emphasized that: "As a 20 year federal law enforcement official, I take the position that greenwashing is one type of fraud." To that end, she said, the Commission should develop a specialized group of expert enforcement staff.