ISDA Responds to Carbon Market and Sustainability Disclosure Proposals
The International Swaps and Derivatives Association (ISDA) submitted its response to the International Organization of Securities Commission (IOSCO) consultation on compliance and voluntary carbon markets and to the Financial Conduct Authority (FCA) consultation on sustainability disclosure requirements (SDR) and investment labels. It also published a white paper on the EU Corporate Sustainability Due Diligence Directive.
Below are the key highlights of the recent updates:
- ISDA, together with the Institute of International Finance (IIF), submitted its response to the IOSCO consultation on compliance and voluntary carbon markets. Both ISDA and IIF welcome the holistic approach of IOSCO to fostering the development of sound and well-functioning compliance and voluntary carbon markets. They strongly believe carbon markets are a critical component of the global response to climate change and the transition to net zero. The response sets out specific suggestions for IOSCO and its members with the aim to focus on enhancing market integrity, to leverage the work of key voluntary carbon markets governance bodies to support greater standardization and strengthen supply and demand-side integrity, to clarify the legal and regulatory treatment of carbon credits, and to monitor the development and linkages between compliance and voluntary carbon markets.
- Another consultation response from ISDA involves the FCA consultation on sustainability disclosures. In its response, ISDA expresses support for the FCA approach to not develop rules that specifically relate to derivatives and instead monitor developments and implement guidance to increase transparency on the use of derivatives in sustainable investment products. ISDA discusses the need for regulatory clarity on the treatment of derivatives from an EU sustainability perspective and thus, welcomes the proportionate approach of FCA to the use of derivatives in sustainable investing. ISDA recommends FCA to pursue a principles-based approach that sets out sustainability disclosure requirements and investment labels, given the importance for firms of international coherence and interoperability of rules. The response also outlines the contributory role of derivatives in sustainable finance, including new products such as sustainability-linked derivatives.
- The third recent update is the publication of a whitepaper by ISDA, jointly with the Association for Financial Markets in Europe and the Futures Industry Association and the European Payment Institutions Federation. The paper highlights the importance of ensuring that the proposed European Union Corporate Sustainability Due Diligence Directive (CSDDD) takes a proportionate, risk-based, and workable approach and provides a clear, practical and legally certain framework. The paper highlights the serious challenges faced by financial institutions if the obligations are applied beyond their upstream supply chain to their relationships with corporate clients or trading counterparties in their downstream value chain. The paper argues that the inclusion of downstream financial services, such as trading, derivatives, custody, clearing and payments, in the scope of the value chain is unlikely to actively cause or contribute to human rights abuses or environmental harm. The paper, thus, proposes that any inclusion of downstream business relationships should be focused on the provision of financing where the inclusion of the services within the legislation is expected to have the greatest impact on safeguarding human rights and the environment.
Keywords: International, Banking, Securities, Carbon Markets, Climate Change Risk, ESG, Carbon Credit, Derivatives, Sustainable Finance, Disclosures, CSDDD, Corporate Sustainability Due Diligence, IOSCO, FCA, ISDA
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