Voluntary carbon markets (VCMs) – where to from here?
King & Wood Mallesons Richard Mazzochi, Head of Banking & Finance at King & Wood Mallesons Hong Kong and Claire Potter, Registered Foreign Lawyer (England and Wales) is delighted to have worked with the Global Financial Markets Association (GFMA) and other leading industry bodies in responding to the International Organization of Securities Commissions’ (IOSCO) consultation report (Consultation Report) on VCMs.
The Consultation Report follows IOSCO’s November 2022 discussion paper, which advanced a global discussion about what sound and effective VCMs should look like and what role financial regulators may play in promoting market integrity in VCMs.
The Consultation Report proposes good practices that promote well-functioning VCMs.
When launching the Consultation Report, the IOSCO Chairman, Jean Paul Servais, commented that: “VCMs are a key priority of the COP28 Presidency as a result of the potential role they could play within the international climate policy framework, particularly for emerging markets. But they can only work with financial integrity. And that is what we are trying to instil”. As regards IOSCO’s proposed set of good practices, Rostin Behnam, IOSCO Vice-Chairman, commented that: “[t]he proposed Good Practices aim to provide a strong foundation on which VCMs may continue to grow by supporting sound market structures, well-reasoned transparency objectives, and common-sense market conduct practices”.
The GFMA represents the common interests of the world’s leading financial and capital market participants to provide a collective voice on matters that support global capital markets. The Association for Financial Markets in Europe (AFME) located in London, Brussels, and Frankfurt; the Asia Securities Industry & Financial Markets Association (ASIFMA) in Hong Kong; and the Securities Industry and Financial Markets Association (SIFMA) in New York and Washington are, respectively, the European, Asian, and North American members of the GFMA.
The GFMA response to the Consultation Report was submitted on 1 March 2024. A copy of the GFMA response to the Consultation Report can be found here.
The key themes in the GFMA’s response to the Consultation Report include:
- financial market best practice: support for applying appropriate financial market best practices to VCMs;
- supporting market integrity: welcoming regulatory good practices to support and protect market integrity within VCMs whilst recognising that issues pertaining to environmental integrity are best left to private VCC initiatives (such as the Integrity Council for Voluntary Carbon Markets) and overseen by an environmental regulator or authority with the requisite experience and enforcement powers;
- clarification of regulatory status: encourage financial regulators to clarify the status of carbon credits within their respective jurisdictions, and for carbon credits to be treated the same way as similarly classified financial products where possible;
- market integrity versus environmental integrity: adopting the standards of private led carbon credit initiatives to drive robust environmental validation and verification practices within VCMs;
- striving for global harmonisation: aspire to harmonise VCMs at global level in the mid to long term;
- critical role of ‘risk takers’: recognising that ‘risk takers’ (such as banks and other financial institutions) have a critical role in scaling up VCMs; and
- vibrant secondary markets essential: promoting secondary market trading and standardisation of products and processes within VCMs to promote liquidity, transparency and price discovery. IOSCO’s guidance as regards secondary VCMs should follow existing financial markets best practice and regulation where relevant.
King & Wood Mallesons is delighted to have held the pen for GFMA in drafting their response to the Consultation Report, and thanks GFMA members from across Europe, the United States and Asia for their invaluable input.
Following publication of the paper on upscaling APAC carbon markets co-authored by ASIFMA and KWM and published on 26 October 2023, King & Wood Mallesons continues to work with ASIFMA to promote the development of robust and liquid carbon markets across the Asia Pacific region and support global decarbonisation efforts.
Richard Mazzochi of King & Wood Mallesons commented: “VCMs can only be effective if they operate with financial integrity. The Consultation Report together with the paper on upscaling APAC carbon markets co-authored by ASIFMA and King & Wood Mallesons, will help to drive the development of robust and well-functioning VCMs across APAC”.
Any reference to “Hong Kong” in this article shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.
