ISDA Publishes Verified Carbon Credit Definitions, Issue Other Updates
The International Swaps and Derivatives Association (ISDA) published standard definitions for the trading of verified carbon credits and submitted its response to the European Supervisory Authorities’ (ESAs) call for evidence on greenwashing. Additionally, ISDA and the Association for Financial Markets in Europe (AFME) published its response to a discussion paper on the Prudential Regulatory Authority’s (PRA) future approach to policy.
Below are the key highlights of the recent updates:
- ISDA published standardized documentation for the trading of Verified Carbon Credits (VCCs), as part of a broad effort to support the transition to a green economy by developing robust legal and risk management standards for markets related to environmental, social and governance (ESG) activities. The 2022 ISDA Verified Carbon Credit Transactions Definitions and related template confirmations for spot, forward and options contracts have been developed with the flexibility to support trading of carbon credits across carbon standards and registries. The new standards will be available digitally on ISDA’s MyLibrary electronic documentation platform, enabling ISDA to seamlessly revise and update these documents as market practices evolve. In addition to the voluntary carbon market, ISDA is working to bring greater standardization to the sustainability-linked derivatives (SLD) market. These products embed a sustainability-linked cashflow in a derivatives structure and use key performance indicators (KPIs) to monitor compliance with ESG targets, with incentives to encourage parties to meet their sustainability objectives.
- Additionally, in its response to call for evidence on greenwashing, ISDA highlights that the current regulatory framework provides for an inconsistent treatment of derivatives and an unclear representation of the role of derivatives in sustainability, exposing them to unwarranted claims of greenwashing. ISDA reiterates its call for specific environmental, social and governance (ESG) classification guidelines to be issued for derivatives and structured products in order to allow financial institutions to implement their ESG obligations without undue regulatory risks, which could otherwise expose firms selling these products to a significant risk of litigation and reputational damage. ISDA further points to the lack of clarity around regulations and methodologies as one major cause of greenwashing. ISDA also elaborates on the structure of sustainability-linked derivatives (SLDs), including ISDA’s related work to encourage adequate disclosure of how SLDs help attain sustainability objectives.
- Finally, ISDA and AFME, in its response to PRA’s future approach to policy, highlight their support for PRA as an independent regulator and endorse the PRA’s statement that its position as an operationally independent regulator is an important safeguard for the UK financial system. With recent market instability, it is ever more important to maintain stability and predictability of the UK’s regulatory regime, underpinned by the independence of the PRA, which is key to ensuring investor confidence to facilitate market stability, future investment and growth. The associations support the continuation of structured policy developments, built on ongoing dialogue and consultation between policymakers and the industry that delivers the clarity, certainty and predictability that international businesses and investors seek.
Related Links
- Press Release on Trading of Verified Carbon Credits
- Legal Framework for Carbon Trading
- Press Release on ISDA Response on Greenwashing
- ISDA Response to Call on Greenwashing (PDF)
- Response to PRA’s Future Approach to Policy
Keywords: International, Banking, Securities, ESG, Carbon Credit, Climate Change Risk, Transition Risk, Greenwashing, Reputational Risk, Disclosures, PRA, AFME, ESAs, ISDA
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