ESG emerging issues

SEC and CFTC considerations regarding carbon credits and ESG disclosures


Thomas Lord

United States Publication November 2, 2021


Although the Biden Administration has faced difficulties finding legislative success for its climate change initiatives, the Administration remains committed to its plan to achieve "net-zero emissions no later than 2050." A key element of this plan is forcing carbon-emitting companies to "bear the full cost of the carbon pollution they are emitting."

Many companies whose business strategies require offsets of carbon emissions, as well as internal carbon footprint reductions, are now reallocating funds and developing infrastructure to support trading carbon credit contracts in order to achieve on-paper net-zero emissions. Companies, however, should be mindful of how such actions can trigger questions from the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).


While much attention has been focused on what the SEC's forthcoming ESG rule proposal may include, companies should not overlook how their current or prior statements regarding net-zero goals might be scrutinized. 

Companies should assess whether their investments in carbon reductions or carbon offsets should be incorporated into their public financial reporting. If companies "silo" their ESG activities, there can be a risk that the ESG reporting will not receive sufficient attention and scrutiny when the company is preparing its public financial reporting or other types of public statements. This could lead to potential problems, including the following:

  • Lack of rigor in internal controls underlying ESG data collection and reporting
  • Gaps between ESG-related public statements and the underlying data regarding progress towards achieving publicly stated goals
  • Not properly considering the impact of significant carbon reduction investments and carbon offset expenditures in public financial reporting
  • Failing to incorporate carbon offset and carbon credit purchasing activities within existing reported derivatives and risk management controls programs
  • Overlooking whether there is a need to update or correct prior ESG-related public statements based on changed circumstances, including the existence of new data, rules or regulations
  • Not carefully assessing whether potential future cost impacts observable from publicly available forward market prices for carbon offsets and carbon capture investments should be incorporated into public financial reporting

Firms should also consider that multiple organizations, such as the International Standards Organization with the proposed 14068 standard for sustainability, are calling for greater accountability and controls for monitoring the achievement of stated corporate sustainability and net-zero carbon targets. As the standards develop, they may create potential risks associated with prior public statements of corporate sustainability and carbon reduction initiatives as well as mandate greater conformity in controls and reporting systems. 

Although the foregoing considerations implicate accounting and other specialized skills, the development of strategies and the documentation of discretionary conclusions—and the basis for these conclusions—should be grounded on sound securities law advice given the potential liabilities under existing and potential legislation and regulations. Moreover, many companies might benefit from having candid evaluations and deliberations regarding their ESG processes and controls in the context of seeking legal advice within the scope of the attorney-client privilege. 


CFTC jurisdiction and regulations apply to both carbon credit futures transactions and the markets underlying the pricing of carbon credits traded on US exchanges. We have observed that market participants are not always aware of the wide spectrum of legal exposure generated by the physical transaction marketplaces underlying the futures markets that the CFTC oversees. Nor are market participants always attuned to the specific risks associated with CFTC oversight of these physical markets.

Companies that are trading carbon futures contracts such as GEO and N-GEO or that are performing bi-lateral carbon offset transactions through the registries underlying the US exchange-based carbon futures should consider that:

  • All exchange-based trading activity is subject to CFTC regulations and US exchange rules. This is an aggressive regulatory regime with specialized rules that apply to all participants
  • While bilateral carbon offset transactions through the registries that also supply the US futures contracts with their credits may be exempt from most CFTC and exchange rules (as opposed to the futures contracts themselves), firms need to recognize that the CFTC may claim jurisdiction over the transactions relying on those registries for purposes of fraud and market manipulation cases
  • Similarly, the US-based location of the registries supplying the underlying credits for the GEO and N-GEO futures markets may be considered as an additional factor for a "minimum contacts" analysis for assertion of jurisdiction over the parties to transactions within the registry
  • Finally, carbon offset transactions have the potential to be structured in a manner that requires reporting under some jurisdictions' derivatives or swap regulatory regimes. Because of this, the groups executing these transactions should be properly trained to recognize such risks and manage transaction reporting appropriately

Just as with the SEC considerations, it will be important to ensure that carbon offset transaction activities do not become "siloed." Otherwise, appropriate controls—both risk and compliance—may fail to be implemented to provide adequate oversight of these transactions or to prevent inadvertent violations of regulatory requirements or exposure to US jurisdiction for non-US entities.

The registries underlying US carbon futures are some of the largest in the world and function as the legal foundation for multiple voluntary carbon transactions. This means that a wide variety of transactions that might otherwise not fall under US jurisdiction now present a legal risk to the companies interested in joining this fast-developing contracting zone without exposure to US jurisdiction and regulation. 

What we can do

Norton Rose Fulbright stands on the cutting edge of identifying the legal risk associated with the fast-developing carbon markets. We have a wealth of regulatory and investigatory experience to help US and non-US firms create and revise policies, procedures and process to address SEC and CFTC requirements and expectations. Our risk advisory team can audit data and process controls to confirm that they are functioning properly and effectively. Working together, our legal and risk advisory teams can help those clients who make disclosures, or are planning to make disclosures, create strategies and programs for internal controls and reporting to cover any forward-looking statements, and validate milestones and progress towards stated goals to protect against potential liability. Finally, for companies that have already made disclosures, we can develop strategies to analyze prior disclosures, revise prior disclosures if necessary, develop appropriate controls for restating prior ESG reporting errors and substantiate necessary restatements to protect against potential liability.

We stand ready to perform in-depth reviews of transactions and business structures to identify and mitigate associated risk factors. For companies interested in how best to create corporate structures to make questions of jurisdiction readily determinable, Norton Rose Fulbright has both the experience and knowledge to craft the basis for strategies and controls for your ESG carbon market activities.

Project Manager - Regulatory Compliance Thomas Lord, based in our Washington, DC office, contributed to the preparation of this content. Thomas provides assistance to lawyers practicing in Regulatory Compliance.


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