Better Markets filed a comment letter in response to the Commodity Futures Trading Commission’s Request for Information (RFI) on climate-related financial risk.
Why It Matters. Climate change is a scientific consensus, and it is widely understood that urgent action is needed to avoid serious consequences for the environment and the economy. Climate change poses special risks to the financial markets, including those for commodities, like agricultural products, and their derivatives. The CFTC must therefore join with other federal agencies in a whole-of-government response to facilitate a transition to a lower carbon economy and to mitigate the worst effects of climate change.
What We Said. The CFTC has requested public input on a wide variety of topics touching on climate-related risk; this input might help shape a future agency agenda for rulemakings or other actions. Better Markets recommended action on three fronts. First, the CFTC should revisit its regulation on position limits for speculators in the commodity derivatives markets. The agency should investigate the need for controls on excessive speculation in derivatives markets for commodities, like lithium, that are expected to play a central role transitioning the economy to cleaner energy; these commodities should not be used as a virtual casino by Wall Street or other speculators. At the same time, the CFTC should review its current position limits on derivatives in agricultural, energy, and other basic commodities to ensure that speculators do not take advantage of increased volatility driven by climate change. These commodity derivatives ultimately impact the prices paid by average Americans at the grocery store and for fuel.
Second, the CFTC must ensure that the infrastructure and players in the commodity derivatives markets are prepared to weather the impacts of climate change and will help reveal climate-related risks growing within those markets. This means tightening rules on risk management, including incorporation of climate-based scenario analysis, and even disaster recovery. The CFTC should also push for more reporting of emissions related to the commodities underlying many derivatives.
Third, the CFTC has jurisdiction to combat fraud and manipulation in commodities markets, and it should use that power to investigate problems behind voluntary carbon credits or offsets. While these carbon credits can, in theory, be a powerful tool to combat climate change—and are growing in popularity with large corporations—widespread anecdotal evidence suggests that many such credits do not function as advertised. The CFTC can be at the forefront of ensuring that these markets maintain better integrity.
Bottom Line. Climate change is an issue of ever-greater importance and urgency, and financial markets will get no free pass from its consequences. It is imperative, then, that the CFTC move quickly to help address the causes and consequences of climate change. Its RFI is strong encouragement that it will do so, but time is of the essence.
Read our full Comment Letter here or click the button below.