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  • International Organization of Securities Commissions Publishes Consultation and Discussion Paper on Carbon Markets

    The International Organization of Securities Commissions has published a consultation on Compliance Carbon Markets and a separate discussion paper on voluntary carbon markets. Compliance Carbon Markets involve the issuance of carbon allowances by regional, national or state bodies. Companies are obligated to participate in the schemes to "pay" for their emissions. These markets are governed by regulations set at regional, state and international levels. The U.K., EU, Switzerland and California, for example, each have national Emissions Trading Schemes (as do some other countries or states). VCMs, on the other hand, involve participants who wish to offset their carbon emissions by buying carbon credits issued in relation to climate change mitigation or greenhouse gas reduction projects. VCMs are largely unregulated and, unlike Compliance Carbon Markets, are not mandatory. Instead, independent certification bodies usually check projects underlying credits for carbon reduction projects. Those credits can then be traded, either over-the-counter (which accounts for the majority of trades) or on exchanges.

    IOSCO's consultation on Compliance Carbon Markets sets out 12 recommendations on the functioning of primary and secondary Compliance Carbon Markets. Primary Compliance Carbon Markets involve the initial allocation of carbon allowances, while secondary markets involve the further trading of those allowances. IOSCO's recommendations are directed at the authorities who oversee these markets and include proposals such as increasing the predictability and transparency of their primary market decisions, setting more frequent auctions of allowances and defining the legal nature of allowances in their jurisdiction.
    The discussion paper on Voluntary Carbon Markets identifies potential vulnerabilities in VCMs, such as carbon credit quality, double counting or carbon credits and transparency and accuracy of emissions reduction calculations. The discussion paper then sets out a series of considerations for regulators and market participants to ensure that VCMs function well and can scale up. These include ensuring that VCMs allow for open, broad market participation, that the market operates with integrity and that market participants have sufficient liquidity and price discovery to execute trades on a timely basis. We discussed some of the difficulties facing VCMs, and potential solutions, in our client note published earlier this year.
    Responses to both the consultation and the discussion paper should be submitted by February 10, 2023.
    The consultation and discussion paper were launched during COP27, the latest UN conference on climate change. At the same time, IOSCO announced its expectation that the International Sustainability Standards Board's upcoming sustainability disclosures and assurance standards should be ready to be used by corporates by the time of their end-2024 accounts. It also expressed its view that Governments and regulators should take more decisive action to help build well-functioning sustainable finance markets.
    On November 7, 2022,  IOSCO also published a Good Sustainable Finance Practices Call for Action, addressed to voluntary standard setters and industry associations who promote good ESG practices among asset managers and ESG rating and data providers. The Call for Action proposes good practices that standard setters should encourage, including, in the case of asset managers, setting clear expectations regarding product level disclosures and, in the case of ESG rating and data providers, adopting written policies and procedures to ensure the quality of ESG ratings and data products. The proposed practices are voluntary and not intended to conflict with national regulatory frameworks.
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