Securities watchdog IOSCO offers guidelines for oversight of voluntary carbon markets

The International Organization of Securities Commissions or IOSCO has published a report with guidelines for global voluntary carbon markets, covering regulatory oversight, primary and secondary trading activities, and the use of carbon credits for decarbonization claims.

The report underscores growing involvement by a variety of oversight bodies from traditional financial markets and commodities trading in the carbon space as carbon markets evolve around the world.

While the extent of regulation, and self-regulation, needed for carbon markets has been widely debated, the amount of oversight has increased due to the growing importance of carbon markets, interest from new investors and the evolution of carbon credits as a tradeable instrument.

IOSCO said the recommendations are aimed at developing market structures and ensuring integrity in VCMs, in line with existing frameworks in other major financial markets to boost investor confidence.

The report is targeted at regulators and authorities with carbon credit markets in their jurisdictions, trading platforms facilitating listing and trading of carbon products, and other entities involved in the trading of these credits.

"The Good Practices address transparency, liquidity, and price discovery, as well as potential fraud or greenwashing, based on IOSCO's objectives of investor protection, fair, efficient, and transparent markets, and reducing systemic risk," the report said.

IOSCO said the recommended practices have been drawn from its existing market guidelines such as Principles for Securities Regulation, Principles for the Regulation and Supervision of Commodities Derivatives Markets (Commodity Derivatives Principles) and Principles for Price Reporting Agencies.

Good practices

On the regulatory side, IOSCO said authorities could consider ways to provide clarity around the legal and regulatory treatment of carbon credits, and things like issuance, trading, and retirement of carbon credits.

IOSCO said there is a need to improve the understanding of the benefits and risks of trading in VCMs, and how existing regulatory frameworks may, or may not, apply.

It said authorities could consider engaging with carbon crediting programs, spot market trading platforms, derivatives exchanges, carbon credit rating agencies, and stakeholders "to standardize a taxonomy of carbon credit attributes, strengthen verification methodologies, and streamline verification processes."

On transparency, besides comprehensive disclosures on project development, verification and accounting of emissions reductions and removals, and MRV or monitoring, reporting, and verification, IOSCO said "transparency of contracts and pricing in the primary market could also be encouraged."

As is the case for Price Reporting Agencies or for custodians in asset management, there may be a need for "registries to have effective oversight mechanisms, which could include regular audits and/or reviews by independent third parties," it suggested.

Market oversight

With respect to secondary trading of carbon credits, IOSCO said the broader market would benefit if there was proper disclosure of "relevant data regarding trading, including, but not limited to, pre- and post-trade price transparency, trading volume, bid-ask spreads, and deliveries of carbon credits."

These disclosures, including for platforms that deal in carbon market derivatives, should broadly be aligned with existing requirements in other financial markets, it said.

The report said respondents to its consultation were of the view that carbon registries should remain separated from trading and pricing and disclose information relating to their core functions of recordkeeping and validation.

IOSCO suggested there should be mechanisms in place to deal with market manipulation, fraud and price distortion, including practices such as false or misleading statements regarding the attributes of carbon credits.

One challenge associated with any use of carbon credits is the appropriate disclosure of that use, including the retirement of those credits, and dealing with greenwashing, the report said.

IOSCO said regulators could consider "encouraging or requiring disclosures regarding an entity's use of carbon credits to achieve any net GHG emission targets."

IOSCO is an association of regulators in financial securities and derivatives markets, including commodities trading, from around the world including the US, Europe and Asia.