On June 2, 2022, the Commodity Futures Trading Commission
(“CFTC”) convened for the first time market
participants to discuss the state and the challenges of the U.S.
voluntary carbon credit (“VCC”) markets and, at the end
of the meeting, published a Request for Information
(“RFI”) on Climate-Related Financial Risk. This convening
was an important step in CFTC’s broader initiative to
conceptualize its jurisdictional reach over environmental, social
and governance (“ESG”) commodity markets generally.

From the outset, CFTC leadership and participants recognized
that the CFTC has only a limited enforcement jurisdiction over ESG
commodities and specifically carbon credits, allowing the CFTC to
prosecute for fraud and manipulation. Even though ESG commodities
are generally considered “commodities” under the
Commodity Exchange Act of 1936 (“CEA”), CFTC’s
exclusive (or regulatory) jurisdiction is triggered only when
derivatives or “commodity interests” are involved, which
are swaps, options and futures. Given that most of the VCC markets,
as well as ESG commodity markets, are spot or forward markets,
CFTC’s regulatory reach is limited, as it is not a general
consumer protection agency.

Nevertheless, the CFTC chose to hold the convening to address
the increasing use of sustainability-linked derivatives
(“SLDs”) both in the OTC and regulated exchange markets
that are being used by market participants to mitigate climate
risks, as well as secure financing of ESG projects.

At the conclusion of the VCC convening, the CFTC published the
RFI, seeking “public comment on climate-related financial risk
to better inform its understanding and oversight of climate-related
financial risk as pertinent to the derivatives markets and
underlying commodities markets.” Information obtained from the
RFI will assist further work of CFTC’s Climate Risk Unit, as well in formulating
CFTC’s future policies addressing climate risks and the
developing spot and derivative markets in ESG commodities.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.