The International Organization of Securities Commissions on 14 November released a report on promoting the financial integrity and orderly functioning of the voluntary carbon markets (VCMs).
The report, which was three years in the making, outlines 21 “good practices” aimed at ensuring the financial integrity of VCMs. Global policymakers view the voluntary use of carbon credits as a valuable tool for incentivizing the reduction of harmful emissions, but the lack of standardization in how credits are generated has undermined confidence in the markets for these credits.
IOSCO acknowledged the challenges created by environmental integrity concerns but noted that private industry initiatives are addressing this issue. As an organization of financial market regulators, IOSCO has focused instead on recommendations designed to help carbon credit markets operate transparently, fairly, and efficiently and protect against fraud and market manipulation.
“Financial and market integrity is an essential component to the sound functioning of carbon markets," said Rodrigo Buenaventura, chair of IOSCO’s Sustainable Finance Task Force and chairman of Spain's National Securities Market Commission (CNMV). "Today’s good practices seek to be both practical and effective in fostering transparency, trust and integrity in voluntary carbon markets.”
IOSCO also announced a partnership with the World Bank to help jurisdictions looking to establish and enhance carbon markets in their countries. The two organizations published a policy note that outlines high-level elements for promoting financial integrity in carbon markets generally.
“We look forward to working with IOSCO to support countries in implementing the guidelines in the policy note published today, which will help ensure carbon markets function with financial integrity, under sound regulation and supervision, and with built-in safeguards against fraud," said Jean Pesme, World Bank director, finance.
FIA recommendations adopted
Notably for the cleared derivatives markets, IOSCO’s final report includes recommendations put forward by industry groups during the consultation phase of the process.
In particular, FIA is encouraged to see IOSCO adopt several recommendations put forward in its March 2024 response to IOSCO's request for feedback. For example:
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Regulatory approach and scope – the final report recommends that regulators and other authorities consider using existing frameworks to regulate and oversee VCMs, including IOSCO’s Principles for the Regulation and Supervision of Commodity Derivatives Markets.
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Standardization – the final report recommends that relevant regulators and other authorities could consider engaging with private sector entities to standardize a taxonomy of carbon credit attributes, strengthen verification methodologies, and streamline verification processes. Those entities could include carbon crediting programs, spot market trading platforms, derivatives exchanges, carbon credit rating agencies, private sector initiatives, and other market participants and stakeholders.
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Soundness and accuracy of registries - relevant regulators and other authorities could consider appropriate requirements around registries, as custodians of carbon credits, to ensure they are accurate, complete, and current in order to serve as reliable sources of information regarding the attributes, issuance, ownership, transfer, and retirement and/or cancellation of carbon credits.
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Access to VCMs - regulators and other relevant authorities could consider requirements or policies to foster open and fair access to secondary market trading on VCMs for interested market participants.
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Derivatives standards - regulators and other relevant authorities could consider ways to ensure that contract specifications for carbon credit derivatives include sufficient details on the standards by which the underlying credits were certified, the applicable delivery requirements, and procedures for market participants.
