November 14, 2024/IOSCO

IOSCO marks COP29 by releasing its Final Report on promoting the financial integrity and orderly functioning of the Voluntary Carbon Markets (VCMs).

IOSCO’s work on carbon markets spans three years, during which it has published recommendations for Compliance Carbon Markets (CCMs), with a particular focus on Emissions Trading Schemes (ETSs).

Today’s Final Report on Voluntary Carbon Markets outlines a comprehensive set of 21 Good Practices aimed at ensuring financial integrity in VCMs, which could be applicable across all carbon credit markets.

In addition, IOSCO and the World Bank have today published a policy note outlining high-level elements for promoting financial integrity in carbon markets generally, using the occasion to announce a new partnership in 2025. Building on IOSCO’s Good Practices and today’s joint publication, IOSCO and the World Bank will work hand in hand to assist those jurisdictions looking to establish and enhance carbon markets in their countries.

Presenting the Final Report at COP29, Jean-Paul Servais, Chair of the IOSCO Board and Chairman of the Belgian Financial Services and Markets Authority (FSMA) said: “Today’s report is the result of meaningful engagement with a diverse range of stakeholders, from regulators to market participants and beyond. Their insights have been invaluable in shaping our work on voluntary carbon markets over the past three years with a view to promote financial integrity in voluntary carbon markets.”

Chair Servais further emphasized the importance of a collaborative approach when it comes to bringing financial integrity to carbon markets. “Our partnership with the World Bank will empower jurisdictions worldwide in their efforts to establish robust, transparent, and effective carbon markets”, he said.

“Growing Voluntary Carbon Markets could contribute much more to financing investments in mitigating climate change,” said Jean Pesme, World Bank Director, Finance. “We look forward to working with IOSCO to support countries in implementing the guidelines in the policy note published today, which will help ensure carbon markets function with financial integrity, under sound regulation and supervision, and with built-in safeguards against fraud.”

IOSCO’s 21 Good Practices will support sound market structures and enhance financial integrity in VCMs, facilitating orderly and transparent trading of carbon credits.

IOSCO’s 21 Good Practices have three overarching objectives:

1. To support the establishment of sound market structures and appropriate architecture for custody, trading, and settlement.
2. To promote transparency to foster information symmetry and ensure orderly and fair trading; and
3. To advocate for adequate market conduct and behaviour – to prevent fraud, market abuse, insider dealing and scams.

Rodrigo Buenaventura, Chair of IOSCO’s Sustainable Finance Task Force (STF) and Chairman of the Spain CNMV, said: “Financial and market integrity is an essential component to the sound functioning of carbon markets. Today’s Good Practices seek to be both practical and effective in fostering transparency, trust and integrity in voluntary carbon markets”.

The 21 Good Practices address five key principles of traditional financial market regulation, offering guidance for jurisdictions and market participants in developing and operating voluntary carbon markets:

1. Clear and effective regulatory frameworks that provide legal certainty and proportional oversight;
2. Enhanced transparency in carbon credit creation, trading and use;
3. Strong governance standards, risk management frameworks, and policies to address conflicts of interest within the carbon credit ecosystem;
4. Comprehensive market surveillance to detect and prevent fraud, abuse, and disruptive behaviours, and;
5. Open, fair, and accessible trading for all participants, and standardization to boost market liquidity.

Verena Ross, co-Chair of IOSCO’s STF Carbon Markets Workstream and Chair of the European Securities and Markets Authority (ESMA), said: “Establishing financial integrity and transparency within voluntary carbon markets is crucial for their credibility and impact. Our Good Practices build on the experience of securities markets regulators with the aim to empower market participants to engage confidently in this important sector in the future”.

Rostin Behnam, IOSCO Vice-Chairman and co-Chair of the STF Carbon Markets Workstream, and Chairman of the U.S. Commodity Futures Trading Commission (U.S. CFTC), said: “We developed the Good Practices in this report to create a roadmap for regulatory alignment, financial market integrity, and transparency. If taken onboard by regulators, relevant authorities, and market participants, these Good Practices can help to further enhance the utility of voluntary carbon markets while reflecting foundational characteristics of well-established and sound financial markets.”