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CARBON CREDITS—AN EMERGING ASSET CLASS

Join our panelists as they discuss how carbon credits, as an asset class, can help corporations achieve their net-zero carbon targets, support the global climate agreement, and help protect the environment.

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Highly recommended for fund managers, general partners, asset allocators, and advisers interested in European fund structures opportunities.

WEBINAR TRANSCRIPT

Disclaimer: Please be advised that this recorded webinar has been edited from its original format, which may have included a product demo. To set up a live demo or to request more information, please complete the form to the right. Or if you are currently not on CSC Global, there is a link to the website in the description of this video. Thank you.

Per: Hello, everyone, and welcome to this very topical webinar. We have very three very interesting professionals that have been looking at this field for quite some time. And I think it's appropriate to say good morning to those of you who are in America, good day to us in Europe, and good evening to all our participants from Asia.

There's really been a global interest in this topic, and I think it's only going to grow. Only after the close of COP here, was it a week ago, the carbon offsetting prices rose 5% in the open market. So it is definitely a topic that a lot of corporates are looking at and associations and organizations. And I think contextualizing this asset, which it really is becoming, will be very interesting to hear from our speakers.

So today we have Debra Franzese from New York, we have Paul Whelan from Ireland, and we have Kevin, who's normally in Ireland but today he's calling in from Manchester I believe.

So with that, I'd like to kick off by introducing Kevin, who is going to start off. He's a director and shareholder at Quayside Fund Management. He is a qualified chartered accountant, and he's been working across the field in sort of fund accounting and administration depositary roles until founding Quayside Fund Management in 2014. He also runs a regulatory advisory business out of Dublin, which I know is very popular with the Central Bank, and somebody I treasure his insights on when it comes to funds and asset management.

So with that, Kevin, I hope I did you justice. I leave it over to you.

Kevin: Thank you, Per. So what I want to do is, as Per said, my background is in funds, and like a lot of people this has come on to me relatively recently. And so I want to start with what the heck is a carbon credit anyway. The thing you have to recognize, from a fund background, is this is not like stocks and shares, where you can watch a price tick up and down on a screen.

It starts with the Real Earth Summit back in 1992. That established the United Nations Framework Convention on Climate Change. Now there's 197 countries in the world have signed up to this. Well, have more than signed up. They've actually ratified the convention, and they're known as parties. So when Per referred to the COP26, that's I think the 26th conference of the parties, i.e., the meetings of the signatories to the Real Earth Summit Convention.

The next sort of branch of that was the Kyoto Protocol. That came into force in 2005. So, again, what it was designed to do was to operationalize the UNFCCC by committing industrialized and emerging countries, but not undeveloped countries, to limit greenhouse gases in accordance with agreed individual targets. And the idea here is to have a degree of equity. So if you're in one of the poorest countries on Earth, the industrialized countries, like sort of France and Germany and stuff like that, who had a coal-based industrial revolution 150, 200 years ago, are actually bearing your burden because you're not seen as being a massive drag on the system, and the cost of compliance for you would be crippling compared to them. So there is a degree of international equity there.

The Kyoto Protocol also established the concept of carbon trading between countries. And there's a couple ways that this happens. So it was the Kyoto Protocol that introduced carbon credit trading. Article 17 of that protocol allows countries with spare emissions units to trade them with other countries, the idea being here that it's the most economically efficient way to do that. The units, and it's a standard unit, one metric ton of carbon dioxide emissions, hence the name carbon credits.

Now not all credits are the same. The Kyoto Protocol actually designated three other types of tradable units. There's a thing called an RMU, a removal unit on the basis of land use change or reforestation, so carbon sinks.

There's ERUs, emission reduction unit, generated by a joint implementation project. So you can see the acronyms are starting to creep into this. So a joint implementation project under Article 6 of the protocol is where Country A sets up a reduction project in Country B, but that project counts towards Country A's target, not Country B's.

Then you have a thing called a CER, a certified emission reduction, generated from a clean development mechanism project under Article 12. A clean development mechanism is actually very like the joint implementation, but just one of the countries is a poor country. So, again, Country A sponsors something to happen in Country B, where it's cheaper and more efficient to do it, but the emissions claim from that accrue to the sponsoring country rather than the host country.

So the next big step was the Paris Agreement, which came into force in 2016, and that's the one we're all currently familiar with. The goal is to limit global warming to two degrees above pre-industrial level. We're a climate neutral world by 2050. That's in the Paris Agreement.

Again, this is all intergovernmental. So in Ireland, the government passed a law requiring the setting out of a carbon budget, with sectoral emissions ceilings. So there's a detailed national Climate Action Plan, published back in 2019 and currently up for revision.

There are four let's say subsidizing or initiative funds, the Project Ireland 2040 funds, the Climate Action Fund, Disruptive Technologies Innovation Fund, the Urban Regeneration and Development Fund, and the Rural Regeneration and Development Fund. Now they have a collective budget amounting to an estimated four billion through 2027.

And you can see the governmental approach is not just about say scrubbers in factory chimneys, because we don't have an awful lot of those. But it's to bring about a general change in behavior and utilization of assets in a way that is not disruptive and achieves the climate action goals. And that can be something as simple as insulating your house. And that's where you're seeing these urban regeneration or rural regeneration development funds coming into it.

There's taxation as well as subsidies. So we have a carbon tax in Ireland. The price of petrol just went up with the last budget purely because of a preannounced, well-known increase in the carbon tax. So the carbon tax is going to rise to €100 per ton over time, and it's going to go up by €10 a ton every year until it [finally 00:07:23] gets there.

Similarly you have an emissions cap. And the issue we had the first time we got into carbon credits, with the European Union's ETS scheme, was everybody issued just way too many credits, so they had no value. The cap was too high. What you're going to see here is a scheme where the cap tightens year on year. So it becomes more and more pressing for the targeted polluters.

So just a bit where we go, "Okay, that's lovely, Kevin. But how do you make money out of that?" Well, I don't know, but I'll tell you how I'm trying to make money out of that.

So, as I said, I got into the carbon credit game quite accidentally. We have a forestry fund, and it started off as a very simple and conventional fund. We have a client who does contracts growing of tropical hardwood teak in Ghana. So it's in sub-Saharan West Africa. And it turns out that tree growing is an activity that can generate carbon credits.

Now our canny plantation owner was very smart, and they have kept all the carbon credits for themselves for the contract growing stuff that we're doing. But we're putting a second stage fund designed with institutional investors, and the carbon credits are going into that. And it is actually a very big focus for investors, and it is actually a very nice money spinner for the plantation manager.

Now a lot of people would say, "You're growing trees. How in the name of God is that removing carbon from the atmosphere?" The answer is trees are made of carbon, so that's where it comes out.

Reforestation is deemed to be very important. It even has its own program under the UNFCCC, called REDD+, reducing emissions from deforestation and forest degradation in developing countries. So basically what this means is a humble forestry fund can grow its own carbon credits. So we're not buying them. We're not actively trading them, and we have something that will naturally sprout them, which is great.

Now, Per mentioned a rise in the price of the emissions after the COP26 closure. You need to be really careful with your carbon credits. So they're generally not exchange traded. There are some emissions and energy markets quoting them, but the majority of deals tend to be bilateral and off market. Remember, this started out as a government-to-government thing, so it's not like buying shares in Company X or Company Y or Company Z. These are not assets for long-term holdings. The price goes up and down. The idea is they're to be used. So you have a carbon credit, which is a right to pollute, or an offset. And they're bought by people who have pollution who need credits to extinguish against their statutorily levied carbon liabilities.

Now the other thing to be aware of is while carbon credits don't expire, they can become obsolete. So I mentioned earlier the EU ETS scheme. That's now in Phase 4. If you bought a Phase 3 credit, it has a very limited remaining useful life as that can only be offset against Phase 3 liabilities, which are in previous years at this stage. So there's a shrinking market there. So you want to make sure you've got the right types of credits.

The other thing is they're not created equally. I mean, yes, they're all one metric ton of carbon sequestration, but it's like a market for used cars. You know, you can have two cars of the same model and the same year, and they can have very different mechanical histories. One could be a nice, clean thing that you'll keep for the rest of your days. Another one may break your heart with breakdowns every week.

With carbon credits, you have a couple of issues. One is fraud, so people saying that they're creating credits when they're not, or the certifying authority being maybe a little bit lax on their checks, their verification and validation. So you may end up with something that proves to be worthless after you've paid over the money. So you need to be careful about what you're buying.

Certain purchasers or industries will have a restricted list of certifying authorities. So they're only going for the good registrars. You know, tempting and all as it is to set yourself up as a registrar, it shouldn't be that easy.

What sort of buyers are you looking for? Again, there's people who need to do it. But you can also find voluntary purchasers of carbon credits out of the good of their heart or for marketing reasons have decided to go carbon neutral early and they will voluntarily buy the credits and extinguish them. And again, bear in mind, that is the purpose of the carbon credit to be extinguished.

But you want to be careful. There is an awful lot of greenwashing out there. So you'll see sort of airlines, when you're making your reservations, saying, "Hey, make your flight carbon neutral for just two euros." You know, okay, it makes you feel good. But the question is, "What happens to that actual two euros?" And the answer in a lot of cases is maybe not a lot. It goes in sort of fees and commissions and stuff like that, and not an awful lot of trees get planted, not an awful lot of carbon gets sequestered.

Aviation in particular is a huge area of contention. It accounts for 3.8% of total emissions. Now it's trying to clean up its act through a variety of different initiatives. So technology has helped. The fuel burn has fallen by 24% over the last 15 years or so. But the offset of that is people like Ryanair and easyJet have gotten very popular. The number of passengers and the average distance they flew has increased. So one is kind of offsetting the other.

There is a carbon tax scheme on aviation inside the EU. But outside the EU, the EU doesn't enforce that, and it's not something that a regional power could do. So, in 2016, the International Civil Aviation Organization (ICAO) introduced a thing called CORSIA, so the Carbon Offsetting and Reduction Scheme for International Aviation. It's a global carbon reduction scheme. It's three phases. It's currently in its second phase. Sorry, it's currently in what is called the first phase, the actual first phase being called the pilot phase. And it's going to move in 2027 to a mandatory situation, where airlines are required to be carbon neutral from 2027.

So if you're a market trader, there is a whole pile of very incentivized buyers who are going to pile into an immature market. So the price of carbon credits is only going to go one way when that happens. You may want to be long carbon credits when that kicks in.

I mentioned that it's not just sort of offsets. Aviation is trying really hard to clean up its act, but you've got to look at where they are with the other alternatives. And it's sustainable fuel they're talking about. So electric flight suffers from battery weight and durability issues. So anyone who's got an electric car will be familiar with these. You know, weight is not your friend if you're an airplane. So they're making some progress. It's very limited so far, but there are electric planes out there. They take an age to recharge, and they're not going to be flying you from Cyprus to Reykjavik anytime soon.

Sustainable aviation fuel is the big one being bandied around at the moment, and you'll see people talking about green planes flying on this fuel. It is, in a number of cases, made from used cooking oil. So when McDonald's are finished trying their fries, it gets turned into jet fuel. It can be blended with jet fuel, only up to 50% mix though, because otherwise it doesn't burn the right way in the engines and it cost two to three times as much as Jet A-1. So that's not going to take over the world tomorrow.

The long-term goal that they're betting all the chips on is hydrogen. Now hydrogen and aviation have an unfortunate history, but it is seen now as being the long-term solution. A couple of problems with it. Energy density, Jet A-1 is way more dense with the power you're getting out of it. Handling and infrastructure, you know, hydrogen goes kaboom. You've got to be very careful how you do it. For aviation, it's proposed to use it in liquid form. It needs to be kept excessively chilled to do that, and quite frankly they don't have the infrastructure for it. But they're working on it.

So I think for 2027 carbon offset schemes are the only game in town. So CORSIA has a list of credible, recognized registrars that they can use. If you're not registered with one of those, your credits are worthless.

Now what I want to do is just on the whole fraud thing, just want to show you some pictures. So this here is one of your big problems with carbon. How do I know it's real? People are saying they're planting trees XYZ. This is from one of our forestry funds. It's a map of the Afram Headwaters Forest Reserve area in the Ashanti Region of Ghana. The compartments in blue there, they're not contiguous, are the ones that we look after.

So we go out there and we try to make sure that our plantation manager has planted the trees we've contracted with them for and they're looking after the ones that were planted in previous years. We're being aided hugely by satellite technology. You'll see how those green bits there line up pretty much with the map. And that shows that they have actually been planting where they said they were.

So there's an awful lot of very cheap or indeed, in some cases, free satellite technology available out there, which will help you to look at these sort of things. It can also show when things aren't great.

This is a competitor site. So the area outlined in blue is what's supposed to be fully planted. And if you look at the satellite picture on the right, you can see that while they have planted, a lot of the growth is brown rather than green, and in this context green is not a good color.

Why do you care about all of this if you're trading carbon credits? Well, if you're selling into CORSIA, there is a validation and verification procedure, and CORSIA uniquely requires that the carbon credits continue to be validated for 20 years after purchase. If my good friend in Ghana doesn't plant the trees, those carbon credits could potentially be canceled, and the airline finds itself in debit on its carbon liabilities. And they could come after you and say, "Hey, we bought this carbon credit off you. It has now disappeared in a puff of smoke. You owe us."

So, as I said, all carbon credits are not created equally. You want to have some very strong no tears wording in your contract for sale, and you know what you're doing. There is a good market out there, but it's like dealing in secondhand cars. So you need to know what you're looking at and have some expertise in the field.

Thank you, Per.

Per: Very good. Thank you very much for that, Kevin. Two things stand out to me from that. One is that it's a myriad of complexities attached to this. So I think it's fair to say that it should be treated as its own asset class. Secondly, which really shown through is Kevin's affinity to airplanes and a love of flying. So I think that speaks volumes. But I think what we can conclude is that the technology advances that are being made on the back of what actually putting a unit price onto emissions is doing is quite exciting.

But when we're looking at quality and the likes of that, I think it would be fair to leave the floor to the Paul Whelan. So Paul is the Managing Director and Head of Depositary Services at CSC Global Financial Markets. He's a man who's worked in the fund industry for over 20 years, always demonstrated a keen interest in classes. So this is right up his alley.

Now, Paul is committed to becoming carbon neutral in his personal life by 2022, and I think that's much more aspirational than what we heard at COP, where the statement was I'll stop drinking in 2049 equivalent of an alcoholic. So with that, I'll leave the floor to you, Paul.

Paul: Sure. Thanks, Per. So I think first of all I'd like to look at considerations that a manager should take into account when investing into carbon credits. And I think first and foremost we have to look at the integrity of the carbon credits. And high-quality carbon credits are auditable, verifiable, and registered with an internationally recognized verification standard, such as the Gold Standard or Verra's Verified Carbon Standard. And these standards may highlight additional benefits beyond carbon, with potential contributions to one or more of the UN's sustainable development goals, such as ending poverty and hunger, creating better educational opportunities, or more sustainable communities.

So if we look at the example Kevin spoke about, there are additional benefits to this teak growing project, such as protecting biodiversity and wildlife, creating jobs for local people, equal pay for men and women, and providing additional income for farmers. So these farmers are able to enter the international timber and carbon market, which is something that would not have been [possible 00:21:54] without this project.

Secondly, I think managers should consider the strategic alignment that a project is generating the carbon credits with their core business model and responsible business priorities. And there's a number strategies they may choose from, be it nature-based solutions, such as reforestation, land restoration, sustainable land management and agriculture, renewable energy, such as hydropower or wind projects, solar power and geothermal, and waste energy, such biogas from landfill, industry, and biomass.

Cost is always going to be a factor, and the market isn't standardized, centralized, or organized, so credits can currently cost between $10 and $47 per ton, with price often being an indicator of disparity rather than quality of the carbon credit. So buyers should also check how much of their money goes directly to the project that they want to support and not to any middleman in the process.

The key for me is project quality, with buyers paying more and more attention to the quality of the projects and considering their qualifying attributes, such as standard, project type, project size, location, community involvement, and other core benefits.

Companies should make every effort to reduce their carbon footprint to an absolute minimum and then look to purchase carbon credits to offset the balance and to bring them to a net-zero status. And this is hugely important to demonstrate that overall emissions have been reduced, and firms can now be branded as greenwashing.

My final point on this is carbon credits should provide additionality. And so carbon credits should not be bought from projects that would have happened in any event, for example trees being planted through a government conservation program. The carbon in this example being sequestered would have happened in any event, and there's no additionality being generated by the project. So additionality means that the reductions in emissions achieved by the project must be above business as usual, and that means it would not have happened unless the project was implemented.

Just moving on, I'd like to just discuss the challenges with utilizing carbon credits as an asset class from a depositary and asset management perspective. So, from a depositary perspective, we have an obligation to verify the fund's ownership of the assets and maintain a registry of those assets.

So some of the more complex challenges would be making sure that the underlying asset or project exists. So mechanisms such as including GPS coordinates in the contract, satellite images, as Kevin alluded to, drone footage, and both remote and on-site due diligence can be all be utilized. Additionally, the depositary may get comfort from the certification by independent bodies, together with an understanding of the controls that the asset manager has implemented.

The depositary and indeed the manager will need to understand how the fund's ownership of the asset is enshrined in the legal contracts and have comfort that these agreements are enforceable. As the majority of the projects generating the carbon credits will be located in emerging or frontier markets, the use of reputable local and international law firms will provide some level of comfort here, as will an assessment of the stability of the region where the underlying project is located.

Expropriation, changes in regulatory structures, nationalization, political, economic, or social instability could adversely affect these projects, and many frontier or emerging market countries do not have developed rescue and rehabilitation facilities. So upon the occurrence of a natural disaster, such as flood, hurricane, or earthquake, or an incident of war or riot, the country may not efficiently and quickly recovered from such an event, and that may have a materially adverse impact on the underlying projects. So following off of that, it's important to understand whether such risks as fire, natural disaster, and disease are insurable and assess the political stability of the jurisdiction and whether political risk insurance is available.

And finally, on this point, I'd like to address the valuation of carbon credits and the underlying assets as this may be difficult since there's no regulated marketplace for these asset types. Now this may change in the coming years as the UN Framework Convention on Climate Change is expected to provide a blueprint for carbon trading in the voluntary market, and this could lead to new trading mechanisms and quality standards in addition to bringing together a universal marketplace.

And then, finally, I'd just like to talk about what are investors looking for here. Are they looking to invest with a view to offset carbon emissions and to invest for capital appreciation on the carbon credit or assets from the underlying project? And I think that will depend on the investor and their rationale for making the investment.

In general, my view is that most investors will want multiple benefits from their investment. They obviously want to offset their carbon footprint with the added bonus of a potential capital appreciation on their investment through price increases in carbon credits, but also potentially from the assets generated by the underlying project. So in Kevin's example, the investor may also benefit from a share in the profits from the sale of teak logs or other value-added teak products.

The price of carbon credits in the voluntary market has been quite stable over the past year mainly due to the effects of COVID-19, and the really only price increases have been on forestry projects, but they've been modest, around a 2% to 3% mark. However, with a growing proportion of the world's largest companies setting net-zero commitments, I would expect prices to rise going forward as demand pressures outstrip supply.

The volume of carbon credits produced in 2021 exceeded $1 billion in value for the first time, and the market is currently at $6.7 billion in total. That's clearly a growing market with carbon credit prices expected to increase by 88% over the next 10 years. And for those looking for appreciation in price of carbon credits, this is very much achievable when you look at what's happening in the involuntary market, where prices have increased significantly in the past year from $18 to $50.

So I might pass back to you, Per, at this junction if that's okay.

Per: Absolutely. Thank you very much for that. I think there's an awful lot of different types and structures at play, and it draws me straight into a conversation in and around ESG and ESG ratings similarly. I think, by the sounds of it, transparency seems to be the key for those who operate in the space and really want to take the forefront as opposed to having obscure systems for offsetting, like Kevin was alluding to about planting trees and aspirational by airlines. I think I know which airline he's talking about. But enough said about that, especially since we have a lawyer on the line now for the next bit.

And I think with that I think it's worthwhile introducing Debbie Franzese. So Debbie, she's a partner in Seward & Kissel Investment Management Group, where she focuses on advising clients regarding U.S. funds and regulatory matters. A New York-based firm. And she's been providing practical solutions, solution-oriented legal advice to clients with global operations for the past 13 years at Seward. She founded the firm's ESG task force — that leads into my little note about ESG — as well as serves as head of the same task force. And she's also recently completed a certificate program on sustainable capitalism and ESG offered by Berkeley Law School.

So with that, Debbie, the floor is yours.

Debbie: Great. Thanks, Per. I think we've had a lot interesting topics covered so far by Kevin and Paul, so I'll focus on some of the kind of legal and regulatory issues, mostly from a U.S. perspective. One thing I'll point out is obviously, as many of you may know, I think there's been significant progress in Europe in a lot of areas related to sustainability and ESG, and I think in the U.S. we are further behind the curve in both regulation and I think also investors and investment managers thinking about these issues.

But one of the first issues that I'll just talk about is really the disclosure point. So as both Paul and Kevin mentioned, when they were speaking, there are a lot of issues in relation to this particular asset class and also thinking about the underlying assets.

And so one of the most important things for managers to think about is making sure that if their fund is going to be investing in these types of assets, that they're really thoughtful about the type of disclosure that they're providing to their investors and really ensuring that all material facts are given to the investors. There's obviously a number of different risks, some of which Kevin and Paul both covered, including kind of the bilateral nature of a lot of these arrangements, which can lead to issues in relation to failures by counterparties to perform certain obligations. There could be issues of fraud, particularly in relation to some of these types of credits that maybe are not the highest quality. And those are all the types of risk factors that managers would want to make sure that they're including in their disclosure documents.

It's also important for managers to think about how this fits in with any existing strategy that they have. So, for example, if they haven't been engaged in this type of strategy before, they haven't traded in these types of carbon credits and they're looking to do it for certain purposes, whether either they're looking to do it more for investment purposes or for offsetting purposes, they want to see how that really fits in with their overall investment strategy and does that fit within their objective. What are investors really expecting?

While there's often sometimes flexible language in offering documents about the types of instruments you may invest in, managers also need to really think about what are investors' expectations. If you've historically been investing in publicly-traded securities around the world and now all of a sudden you're going to be kind of branching out into investing whether in these underlying types of projects or into the carbon credits themselves and trading them for those purposes, you want to make sure that you've really done your due diligence to make sure that you understand how this all works, that you really have the expertise to be making these investments, and that you're not kind of doing it for the purpose of being able to say that this is part of your kind of ESG or sustainable investing program without really understanding all of the risks and related obligations and really the markets and the way that this is all working.

You know, as an advisor, as a fiduciary to its clients, it's really important that that due diligence is done, particularly as has been covered already, but there could be different issues in relation to investing in emerging or frontier markets, and some of those you may, if you're trading in publicly-traded securities, you may have some of those risks, but it's going to be increased here where there isn't really that type of trading. And it's really going to be important that the manager is conducting that due diligence in advance and really has a good process in place for that.

Another thing that Paul mentioned earlier is in relation to valuation. And so this is definitely something that managers will need to think about in relation to this asset class and really make sure that they're discussing these types of issues with their auditor early on so that to the extent that you have any particular issues where maybe there's going to be a third-party valuation agent that's going to be needed or you need to kind of explain to the auditor exactly how this is being structured, that all of that is being done kind of well in advance of the audit process and also thinking about any kind of U.S. GAAP or other international financial reporting standards that you may have and may be subject to and kind of how these assets are going to be treated for that purpose. Managers should also include any of this information in their valuation policy so that investors, if they do ask for that information, it will be provided.

So there's definitely, you know, a lot of exciting opportunities I think for managers in this space, but it's also just very important to make sure that they're aware of the related risks and also that investors are fully apprised of any risks and really kind of how this fits in with your investment strategy.

The next topic that I'll cover is really just from a U.S. regulatory perspective what are some of the applicable issues and kind of who are the relevant governing bodies. And here we get into little bit more kind of alphabet soup with various regulators in the U.S.

But the first that I'll focus on is obviously the SEC, which is, you know, obviously probably the one organization that people are most familiar with. And this is particularly relevant for anyone who is an investment manager that's registered with the SEC as an advisor. The SEC is very focused on ESG and sustainable investing issues. This has been exhibited through a number of things, including the Division of Examinations' recent risk alert that occurred in April and examination focus areas.

And then most notably, during the first quarter of 2021, a climate and ESG task force was established within the SEC's Enforcement Division, and this Enforcement Division task force has a number of objectives, including analyzing disclosure and compliance issues related to investment advisors and funds ESG strategies. And so this is someplace where there really could be intense scrutiny of any information that you've provided in relation to carbon investing or to kind of the points we talked about earlier investing in these underlying projects. And so that's where the SEC is really going to look at the type of disclosure you have. Is it really adequate for the investors to really understand the risks?

In addition, the Biden administration has really focused on developing a comprehensive, government-wide strategy regarding climate issues. This is obviously in contrast to some prior administrations. But this is definitely something that the Biden administration is focused on and which is really in connection with the financial services community as well.

Paul mentioned this earlier, but obviously the SEC continues to be concerned about greenwashing, and several SEC commissioners have mentioned that in a number speeches and things like that.

But I would say probably the most kind of regulatory advice or guidance that has come out from the SEC has really been the risk alert that was issued in April, and this was really prompted by a number of things, including kind of growth in investor demand for funds that were incorporating ESG factors or funds that were more kind of impact investing, similar to what we've spoken about here, and really the fact that there's a lack of standardized and precise ESG definitions. And obviously we've seen lack of precise kind of carbon credit matters as well and that this can result in a lot of confusion for investors.

And so the SEC here is really focused on a number of things, mostly focused on the fact that your practices are really matching with what you've disclosed to investors, that you're not kind of making statements that are very aspirational and major without actually having policies and procedures to back them up. And so one thing that a lot of managers are focused on is kind of reducing carbon emissions or getting to net zero and making certain commitments. And so, obviously, we've spoken today about different things that you could do in order to really illustrate to the SEC that you're actually taking actionable steps in that regard. And so you want to be careful about the types of risks that we noted earlier, but this is a real opportunity to show that if you are engaging in investing in these types of projects or you're thinking about trading in carbon credits or carbon offsetting, that then you can really show the SEC that you've taken steps in order to get to that net-zero number.

Just to kind of further confuse things, while the SEC, it generally has jurisdiction over securities, the CFTC, which is another regulatory body in the U.S., has jurisdiction and regulations that can apply to carbon credit futures transactions in some markets. Obviously, as Kevin mentioned earlier, not everything is traded. But to the extent that there is, the CFTC would have jurisdiction there, and they've also continued to focus on sustainability issues.

They've recently established an Energy and Environmental Markets Advisory Committee, and this committee is really focused on how derivatives markets can facilitate the transition to a low-carbon economy, and they're doing some studies in that regard now. And so it will be interesting to see some future developments from that organization as well, particularly in relation to some guiding principles for how derivatives and cash markets can be used to address greenhouse gas emissions. And they've kind of started some of that reporting earlier this year. And so I would expect that they'll probably be releasing something in early 2022 on that point.

Additionally, the kind of last regulatory body that I'll talk about is if anyone is dealing with managing ERISA assets, which generally come from corporate pension funds, one thing to note here is that there has been some kind of fairly controversial information from the Department of Labor on this, and the issue is that there has been some struggling by the DOL to interpret some conditions imposed by ERISA's duties of prudence and loyalty and whether or not kind of managers can focus on collateral benefits, including, for example, some benefits that might be viewed by some of these types of projects.

And the Trump administration had imposed some potential restrictions on those types of collateral benefits that could be used in an investment process. However, in recent proposals by the Biden administration, it does look like these ESG related or sustainable factors or kind of impact investing, as we've spoken about today, really could be considered as part of an investment advisor's policy because the focus is that these factors are really viewed as having a material risk and return implications and don't really necessarily, while they may have some pecuniary benefits, don't really have kind of the same types of concerns that ERISA fiduciaries need to be worried about. And so as a result of this, this could lead to more ERISA plan fiduciaries allocating more assets to ESG dedicated funds or vehicles, such as Kevin, that he's spoken about today, regarding projects like this. And so that'll be an interesting development assuming that the rules are going to be finalized shortly.