A Sustainable Future: Rostin Behnam, US CFTC Acting Chairman

Commissioner Rostin Behnam, Acting Chairman of the US Commodity Futures Trading Commission, discusses climate risk in the US financial system.

What does climate risk represent to the US financial system? Listen to Jason Mitchell discuss with Commissioner Rostin Behnam, Acting Chairman of the US Commodity Futures Trading Commission, about how the CFTC is thinking about climate risk, what those implications mean for derivatives markets and why well-developed carbon and carbon offset markets will support the transition to a net zero economy.

Recording date: 20 May 2021


Commissioner Ross Behnam

Commissioner Ross Behnam is Acting Chairman of the U.S. Commodity Futures Trading Commission (CFTC). As sponsor of the CFTC’s Market Risk Advisory Committee, Chairman Behnam led the development of the report, Managing Climate Risk in the US Financial System, published in September last year. Previously, he was a senior counsel to Senator Debbie Stabenow (D-MI) at the Senate Agricultural Committee, focusing on policy and legislation related to the CFTC and the Department of Agriculture.


Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

Hi everyone. Welcome back to the podcast and I hope everyone is staying safe and well.

Our industry has a tendency to use a lot of jargon to describe climate risk. But there’s a phrase that particularly sticks with me from this podcast episode: “extreme but plausible.”

Why? Because that phrase represents something altogether different when regulators use it to describe systemic and even sub-systemic risks to the financial system. So when you hear that phrase, it’s well worth paying attention.

Which is why this episode is so compelling on several counts.

First, it’s about the genesis in the closing months of the Trump administration of work by the US Commodity Futures Trading Commission or CFTC which culminated in a report titled, Managing Climate Risk in the US Financial System. At 200 pages and with a litany of policy recommendations, the report sent an unequivocal call to action to regulators about the emerging risk of climate change.

And it’s worth keeping in mind that this was a time when climate change-related research was being systematically suppressed across pretty much all US agencies. Case in point, the Environmental Protection Agency only last month managed to publish its first Climate Change Indicators report since 2016.

Jason Mitchell:

And second, this episode is also about widening the lens of sustainable investing beyond traditional cash equities and corporate fixed income into the world of commodity and futures markets. It’s about exploring the distinction between the nature of physical and derivatives markets since this goes largely overlooked in the responsible investment sphere.

Which is why it’s great to interview Acting Chairman Rossteen Behnam.” Behnam is the Acting Chairman of the US CFTC. We talk about how the CFTC is thinking about climate risk, what those implications mean for derivatives markets and why well-developed carbon and carbon offset markets will support the transition to a net zero economy.

As sponsor of the CFTC’s Market Risk Advisory Committee, Chairman Behnam led the development of the report, Managing Climate Risk in the US Financial System, published in September last year. Before the CFTC, Chairman Behnam was a senior counsel to Sen. Debbie Stabenow at the Senate Agricultural Committee, focusing on policy and legislation related to the CFTC and the Department of Agriculture.

The CFTC is the independent federal agency that oversees and regulates commodity futures and options markets in the United States.

Jason Mitchell (02:57):

Welcome to the podcast Chairman Behnam. It's great to have you here and thanks so much for taking the time.

Rostin Behnam (03:03):

Thank you Jason it's a pleasure to be with you and thanks for having me, looking forward to the conversation.

Jason Mitchell (03:07):

So Chairman, we have a lot of great stuff to talk about, but I'd like to start with a little bit of scene setting. I'd like to actually start out with the genesis and the backdrop behind the managing climate risk in the US financial system report. How did this effort develop, particularly in the backend of the Trump administration, a period when it seemed like most climate policy and regulatory discussions were pretty much systematically suppressed?

Rostin Behnam (03:34):

It was a multi-year effort. And as I think about it today, where we are and nearly mid 2021, or just coaching up on June, I think about where I started both at the CFTC and in my previous jobs, which you mentioned working for Senator Debbie Stabenow in the United States Senate on agricultural policy, in addition to financial services and CFTC issues, and really the genesis, which is a nice word because it's, it's really the interrelationship between a lot of my professional background in financial markets, as an attorney, as a counsel supporting an elected official. And then for those nearly six and a half years, I spent as counsel to Senator Debbie Stabenow working on in part agricultural issues. Climate change was a huge focus, continues to be a huge focus for her. And it has always been. So I always was thinking about climate change in the context of agriculture production agriculture.

Rostin Behnam (04:33):

And I had many different responsibilities as I worked for her, including financial services, post sort of financial crisis Dodd-Frank reforms and implementation, but also working on a number of agricultural issues as it pertained to US production agriculture. So when I came to the CFTC, which was in September of 2017, I kind of started putting together the pieces of this puzzle and thinking about the relationship between climate change and financial market risk. I certainly wasn't the only person at the time. And I have to give a lot of credit to folks overseas, especially in Europe and to some extent, Asia, to start thinking about this issue. And that really, I think informed me and my decision making process as a commissioner at the CFTC. With all that in mind, that intersection of my previous experience some expertise, and then the current role I had as a commissioner, I had this great opportunity to raise awareness about this issue and really engage with the market, both from a different perspective, agricultural end-users, energy end-users, large financial institutions, both banks and asset managers, and start to really dig into this issue about climate related financial market risk.

Rostin Behnam (05:45):

Your point about the politics at the time is interesting. I get this question a fair amount, and I, I didn't really think about it as a political issue or exercise. I actually quite frankly think it was my responsibility as a commissioner, as someone who thinks about financial market risk, financial market stability, and overseas derivatives markets in the US we obviously went through the financial crisis over 10 years ago, and that was a unique set of circumstances that led to that crisis. But as we go forward, as we think about new issues and new challenges that the markets face, I thought this was a natural, uh, concern and natural issue that I felt a responsibility to think about. I don't think I need to be necessarily always focusing on past issues and past crises. I have a responsibility to look forward and see what potential future crises might be future issues for financial markets and try to address those.

Rostin Behnam (06:43):

So in many respects, I think it was my responsibility, but that all said, you know, I'm not blind to that. The political challenge at the time, like I said, I started this effort probably in earnest in late 2018. And then the 2019 really kicked it off. I knew what the risks were, but I thought, you know, at the time it was too important. I had seen some validation from outside market participants, other regulators and policy makers. And I just thought it was really important to take on the challenge and to manage those risks as needed, but really push forward and see if I could, uh, gain some traction with individuals, institutions, and put out some policy work.

Jason Mitchell (07:24):

Why the CFTC, I guess I wonder why not the SEC or the Fed, I'd seen parts of the Fed publish some papers around climate risk in the financial system, fairly small ones. Is there a story? What does it say about the CFTC? Natural sensitivity and awareness to risk more broadly defined than just financial risk?

Rostin Behnam (07:45):

There's sort of two parts of that question. One, I can't speak to why or why not other agencies did or did not do anything. And then you, you rightly point out the fed has done a fair amount of work and in for a number of years, especially at the regional federal reserve offices, but for me, this was, this was an individual endeavour, I think for your listeners who may not know, you know, you pointed out what the responsibilities are at the CFTC, but we are a commission. We're a five member commission. So there are five commissioners. And one of the commissioners is appointed chair and that's me right now. But when I took on this issue back in 2018 and 2019, I was a commissioner in the previous administration. So we have this unique structure where we work together. We balance each other's ideas. We disagree a lot, but we find ways to agree.

Rostin Behnam (08:34):

And ultimately I think we all care deeply about our markets and want to come up with the best policy outcomes. But it's the unique sort of friction of our differences that I think ends up leading to the best possible policy outcomes. In the case of the CFTC. I just, I had this, you mentioned this earlier that the report was pushed out of the market risk advisory committee. Each of the commissioners sponsors and advisory committee, and at the CFTC, we have several advisory committees related to technology or global markets, agriculture, energy, and environmental issues. And I oversee the market risk advisory committee, and I thought this was the perfect venue market risk to examine these climate related issues. That's the sort of procedural answer to your question. The other part, which I think is a little bit more nuanced is I actually think the CFTC is a perfect venue to have this discussion.

Rostin Behnam (09:25):

You know, a lot of the policy outcomes are rightfully focused on policies in the SEC's jurisdiction or the Federal Reserve's jurisdiction. But the CFTC is unique because we oversee derivatives. But more importantly, because we oversee a variety of commodity asset classes from agricultural commodities to energy, commodities, precious metals, and then a huge part of our jurisdiction is focused on financials. And then our constituency is very broad as well. Everything from farmers and ranchers and large energy producers to large financial institutions, banks, asset managers, and pensions. So we have this very diverse constituency. And I think when you think about, when I think about climate change and the economy and the challenges we're going to face in the future, the CFTC is actually a pretty unique agency in that sense, you know, we've been thinking about weather. If you break climate change down to just simply weather, weather affects all the commodities that we oversee, the physical commodity, obviously agriculture, but certainly the other commodities as well, the energies and precious metals.

Rostin Behnam (10:27):

And we've been thinking about these issues for decades. Our market participants or stakeholders have been coming up with innovative ideas from a product production and development standpoint for years. So I do think in many respects, this was a natural place to have and to conduct this exercise on climate related financial market risk. And what I'm most proud of is, again, going to that constituency point, we were able to get together and bring together a lot of different economic participants to share their views and their expertise so that we could come up with the best policy recommendations.

Jason Mitchell (11:01):

Yeah. And it happened partly through a pretty interesting time. The pandemic and I'm wondering, I mean, the pandemic is a thread and frequent reference that figures in throughout the report, but I'm wondering how did it animate and help reframe the discussion around the implications of systemic? And I've heard you talk about sub-systemic shocks in financial systems.

Rostin Behnam (11:21):

We're in a pandemic, right? It is a tail risk of tail risks. Certainly people have been talking about the pandemic and the likely or possible outbreak of a flu virus and how we would deal with it, but it is an extreme but plausible scenario in extreme applause while I use that phrase, because that's a phrase we use at the CFTC, and I know a lot of other financial regulators use it in terms of risk management. Um, it's about being prepared and understanding what you could face in terms of risks and how need to prepare for them. Um, there's so many different elements of climate change and the pandemic, which I know are the subject of studies, whether the spread of infectious diseases and its relationship to heat and flooding and storms. So there's so many elements. I think of the pandemic that both motivated and drove the subcommittee to both move forward and connect more dots.

Rostin Behnam (12:17):

But really when you think about climate change in a pandemic there, tail risks, there issues and challenges that you need to prepare for. And if you're better prepared, you can better risk manage. If you can identify the risks of those issues and those challenges, then you can prepare for them better. And then you can really blunt or at least reduce the outcomes, the negative outcomes. So I think there was a lot of things to learn from the pandemic. And I think living through it while the report was being drafted, if nothing else, as I said motivated, and I think, you know, to not use this word lightly inspired the members to move forward, understanding what was at stake and that we didn't want to live through another circumstance, however rare or unlikely. We just need to be better prepared.

Jason Mitchell (13:04):

You mentioned this just now, but it's been interesting from European context to see sort of policy formation in the sustainable finance space regulations start to set, what were your expectations or hopes from issuing this report? I mean, the report isn't binding, there are a very long list of 53 recommendations, but they're not binding, but these publications tend to signal evolving public policy in emerging, call it regulatory expectations.

Rostin Behnam (13:32):

A hundred percent. Um, this is what we do. You know, I think this is the power of the government with the convening power is to get people together, to think about ideas collectively as a community, whether it's in the financial market space or the economy writ large, I think with respect to this particular issue, when I thought about my goals and the goals evolved and they changed even during the process because of those risks that I was facing, I think personally, or thinking about what challenges we were facing, whether it was the political risks, whether it was COVID and the pandemic, whether it was having 34 individuals representing institutions in many circumstances, but also representing themselves come to consensus on a huge, huge effort on a very sensitive subject, right. But that was always my standard from the start was let's be aggressive and let's try to get consensus on issues and understand that we have to work together.

Rostin Behnam (14:26):

It is in many respects, the perfect example of a public private partnership. And if you look at the group and I sort of signaled this a little bit earlier, but we had large financial institutions, both US and non US we had the largest asset managers as well. Some of them, at least we had representatives from academia. We had representatives from the NGO community, the environmental community and public interest as well. And then from financial markets perspective, we have financial market intermediaries exchanges, clearing houses, data providers you name it. So it's this really fantastic mix of individuals and institutions that play an important role in the financial market system, but also in the economy. And this broad coalition. When I, when I think about my days on Capitol hill, or even my time in Washington now, which is nearing 10 years and thinking about politics and getting policy done, and over the finish line, it's just building broad, diverse coalitions.

Rostin Behnam (15:22):

And this is what this subcommittee really represented with a broad coalition of market participants of economic participants coming together and finding consensus on climate change issues. So when I think about where the, where the issue was at the time and where we are now and what this policy paper represented, it was in many respects to raise awareness and to have the strongest coalition raising that awareness so that people would buy into it. And not, I don't say that I don't mean to say that in a negative way, but it's to really inform and to give people a sense of what the broader economy is thinking about with respect to climate change, how they're thinking about it, and hopefully playing a role in the public's perception of climate risk. And again, thinking about where we were then and where we are now, um, you know, a lot of factors contribute to where we are now and where the climate risk conversation is. But, you know, I hope that at least in a little part, the climate report that managing climate risk report contributed to the public awareness of this issue.

Jason Mitchell (16:23):

Was there much interaction with the European policy makers just given how progressive they've been in this area? I mean, one thing, one anecdote I do find interesting, I've been involved in a European commission supported group called the European financial reporting advisory group. And I distinctly remember in one of those meetings, when this report came out, there was a clear acknowledgement of it. Um, and, and I think it was sort of felt as, as a potential pivot point, you know, should administration change.

Rostin Behnam (16:50):

I Think it's important to point out a few things. One on a personal level, I've been engaging with leaders overseas, especially in Europe, on this issue for a number of years, both before the exercise and the effort, and then during, and certainly now so much of what we did. And more specifically the advisory committee did, was I think, driven or influenced by a lot of the work that had been done overseas in Europe and both in the continental 27, but also the UK as well. And I've mentioned Mark Carney in the UK and being sort of a first mover. And you think about the work that they had done setting the table. TCFD was a huge exercise and effort that I think influenced our efforts at the advisory committee level, but looking at the membership level, the institutions, and then the individuals, whether whereas Bob Letterman himself, or representatives from Saxby, or, you know, we had a representative from a European bank.

Rostin Behnam (17:44):

These are the touch points that I think really influenced the relationship between two continents and the work that had been done overseas with respect to the U S efforts. So, you know, it's good to hear what you said about people thinking this was an inflection point. I agree with that. I noticed that when the report came out in September, we just had a massive rollout that was, you know, in my view, very successful, but a lot of individuals reached out and were just very pleased that the US had done something. Right. And even if it was to your point, not binding, it was an inflection point in the sense that we, first of its kind government document that addressed climate risk and climate-related financial market risk. And as with anything, you know, there was certain circumstances that followed the report, you know, namely the election and where we are now. And that was fortuitous. I think, especially for me personally, as someone who cares deeply about this issue. But like I said, you know, with the previous question, I think we played a huge part in this both domestically and globally and raising awareness, educating and informing people. And then most importantly, really giving a sense to individuals and institutions, what others are thinking and how folks are thinking about climate change and climate risk.

Jason Mitchell (18:59):

There's this tendency to reduce the climate debate purely into economic incentives, namely a carbon price. Bob, Letterman's been on this podcast and we've talked about this as well. And clearly that's a key recommendation or the key recommendation for him. We've got to price carbon, but in the absence of a nationally legislated carbon price, how do regulators like the CFTC see the financial system begin to start to reflect climate risks? How do you create resilience without that kind of carbon price signal?

Rostin Behnam (19:28):

It starts with the recognition of the risk, right? If you start to recognise the risks, then you'll start to price in the risk it's risk measurement and then risk management, and think about TCFD. Think about SASB. At least I do. These are venues that for the past few years have really been successful in raising the acknowledgement that climate poses risks to financial markets and the economy. And once you start to recognise those risks, then the financial markets, the assets will start to price in those risks. So it can happen without a carbon price, right? A carbon price I think from, as you pointed out, this is Bob's priority. And he understands from an economic perspective that it will shift incentives and capital allocation, but there are certainly different ways I think, to move the conversation in terms of financial system, risk management and climate risk.

Rostin Behnam (20:21):

And I think those efforts are happening. They don't have to necessarily be governmental, it's local governments and state governments who are either in areas that are prone to wildfires or floods taking measures and taking actions to mitigate those risks that they see year over year, whether it's in the U S as Northwest or the Gulf coast. So those are the types of actions I think that can mitigate climate risks without this, you know, carbon price or signal from the top. And then, you know, you're seeing the development, I think from a corporate standpoint, this commitment to net zero, that's going to influence action. Um, that's, you know, I think creating the incentives and, and supporting the development of voluntary carbon offset markets and many other, I think vehicles are venues where risk can be acknowledged and then risks can be priced accordingly, given the risks that I think folks understand that climate poses.

Rostin Behnam (21:14):

So depending on your view of the world, and I think I agree with you in terms of the likelihood or unlikelihood of a carbon price. There's certainly daily conversations about it here in the U S and at the state level it's becoming quite developed both regionally and individually. So, you know, much of what policy drives here in the US is state level action. And if there's enough inertia at the state level, you know, the federal government will follow because given the relationship between the states, it just makes sense to have a federal action instead of a state by state rule set. But there's certainly regulations and rules and policies that can be built in. I think that can recognise the risks and then ultimately price in these risks.

Jason Mitchell (21:57):

I saw the announcement in March of the CFTC new interdivisional group called the climate risk unit or CRU, which supports the role that derivatives can play to address climate risk and transition to the net zero economy. One area that feels still a little bit unreconciled, even a bit controversial is sort of the carbon offsets market. I don't think many people would disagree around carbon markets, but how do you think about the CFTC helping to develop carbon offset markets in a sort of a credible way? Yeah, so

Rostin Behnam (22:29):

There's obviously this voluntary effort, which has been quite successful in building up participation for carbon offset markets. I think naturally it feels like every day we open the newspaper turn on our iPad and we see a new commitment from a large corporate or country making a commitment over the next couple of decades to net zero or even net negative. And naturally these commitments are going to have to be matched with some offset. And that's why I think there's going to be this growth. We're seeing this growth from a markets perspective, from a public policy perspective, I'm very encouraged. And I think it's great that the private sector is initiating this effort and really building it from the ground up and framing it and seeing how the market would function so that we could achieve those goals on the backend. This is in many respects, the same process with which TCFD has been doing its work over the past couple of years, and coming up with what is now a voluntary disclosure system, which will likely become mandatory at some point in the US in some variety or form.

Rostin Behnam (23:31):

And I don't see that the carbon offset market any different where we're having this voluntary market stand up, being stood up by the private sector. And then at some point, this is really my point with respect to the Cru is going to cover a number of issues. If we can be helpful in this particular space, I would love to be is, you know, we're on markets regulator. We have a long, long history of overseeing and regulating financial markets and the related intermediaries, whether it's, you know, an FCM, which is our futures commission merchant, or a swap dealer, or an introducing broker. And then obviously the relationship with the clearing houses. These are the structural underpinnings of financial markets and given our history and our expertise I certainly think we can bring a lot of credibility, both from a structure standpoint, but also from the enforcement standpoint. There's naturally going to be bad actors, there always are in markets.

Rostin Behnam (24:25):

And we need to ensure, I think as high credibility as possible, because ultimately with respect to this issue, and we see this as well, right? The credibility of, of a certain carbon offset and where it came from and how it's being used, what the price is. These are the mechanisms, and these are the challenges that I think the carbon offset markets are going to face. And I think this is what the voluntary effort is working through now, but if there's a place for the CFTC as a commodity regulator and carbon is a commodity, certainly would welcome the opportunity to participate in and share our expertise in this space so that we can really lift up and scale this carbon offset market as quickly as possible. So that both we would invite more institutions and countries to make these commitments, but also make that transition towards net zero or possibly even net negative smoother.

Jason Mitchell (25:20):

It's a huge opportunity. And it feels like, you know, there's a big part of the market that is overlooked, particularly in this area. I mean, I was going to even wonder as well. Like how do you think about this? The fundamental distinction between physical markets in derivatives markets in the context of climate risk, there's this prevailing assumption that because derivatives facilitate trading with a future, you don't technically take physical delivery of that. Let's call it a coal future. They should be held less accountable for the underlying carbon emissions and climate implications. So there's this sort of disconnect about sort of the nature of the instrument and cash markets versus derivatives markets.

Rostin Behnam (25:58):

It's a good question. And just to draw a quick comparison and then I'll pull it back to the derivative space. You know, you think about securities market, equities markets and some of the efforts by thinking about, you know, Glasgow Financial Alliance for net zero, the Paris alignment, investment initiative, UN PRIs. These are all organisations that over the past few years, and in some cases, just the recent months have been driving public perception and really are driving action by private markets, by companies, by firms to think about climate change differently, and to think about how they operate their businesses. And this affects asset prices. This will drive customer demand, consumer preferences and policy in many respects, and ultimately on the backend affect asset prices. I don't think it's any different in the derivative space. You know, we're a critical tool for main street. You know, we help manage risk and we help discover prices.

Rostin Behnam (26:56):

And this could be anything from items in a grocery store to, you know, fueling up your car for a summer road trip. Uh, and the counterparties to a derivative are driving. Whether that's an agricultural commodity, whether it's an energy commodity, whether it's a precious metal, they're driving the price on, on that particular commodity and those preferences as they change and evolve, I think will push the price in different directions. So it's the price discovery function, which is very important to our markets. And I think, you know, it's no different in what we're sitting on the equity side and the security side that, you know, consumer preferences and the counterparties can drive that price discovery function. And, you know, the other thing I think about oil, one of the most common commodities out there when you see oil quoted, you know, on a news channel, on a business channel or in the newspaper, it's, you know, they're quoting the futures price.

Rostin Behnam (27:54):

So there's, there's this relationship regardless of that natural separation, which you rightfully point out, but there's a relationship between the futures price and the cash market that has to exist this parallel, this movement that works together in order for us and I think the economy to be able to use derivatives as the hedging tool that they are. And if that reflection in that relationship doesn't exist, then the hedging mechanism really will break down. And that would not be a good thing either for our markets or the economy writ large. So it's a good question, but I do think that the relationship exists and consumer preferences and demand can drive it and push it, but ultimately, you know, the futures markets are very much the beginning point in terms of price, risks, and recognition of sort of economic indicators that we have to deal with across the globe.

Jason Mitchell (28:43):

How do you think about commodity markets in the context of not specifically climate risks, but maybe much more broadly ESG risks, as we've seen, financialisation's increasing volatility in the underlying commodities. And it seems like commodities are somewhat challenging from, from an ESG perspective. I guess what I mean is that financial actors might not have a very long-term price impact on any given commodity, there's a lot of research to support that, but they could certainly have a very short-term inflationary price impact on those commodities and the people reliant on those commodities.

Rostin Behnam (29:18):

I think on an individual commodity by commodity basis, it's really hard. I think for us as a regulator to evaluate that, I think that in some respects, like my previous response to the last question is the counterparties really have to drive that. And that's going to be preferences on the commodities that they choose to purchase or sell. And then ultimately that goes back to the consumer, right? If it's the coffee beans that they choose, knowing the sourcing of those connect coffee or the oil, or, you know, the precious metals and where they're being mined, those consumer preferences and data points will really push the price of the commodity up or down. And that in essence is ESG and it's almost existed for years. We've seen this come up in different contexts in the policy space for a number of years with these few commodities that I even just pointed out as examples, the ESG conversation, we have a number and it's a growing space, both here in the US and Europe, the ESG sort of linked to futures products.

Rostin Behnam (30:18):

And then I know there's an emerging field in the swap space as well. That becomes a little bit more tricky. And I think we, as a regulator definitely have a very prominent role in sort of ensuring taxonomies and the data that feeds into these indices or these products as a whole. And this is a larger conversation that I think all regulators, not just the CFTC really has to deal with the report, the managing climate risks report was very clear about these particular issues about getting the right data to inform product development. We use the same language because that's really what taxonomy is. Are we all reading from the same book? Using the same language so that there is a standardised set of rules and tools and terms that we're using. So that investors in the sort of backend of financial markets can make the most informed decisions.

Rostin Behnam (31:13):

And so this space is developing. There's a lot of work again being done in the private sector, you know, individual third party index providers. I think, you know, there's a lot of credible ones that have been doing this business for years and years and years. So I think naturally it makes sense for them to be taking a lead on the ESG space, but with that as well, there's a role for the agencies, the CFTC and other market regulators and prudential supervisors to ensure credibility, to ensure accuracy of data and to enforce any bad actors or wrongdoing in this space. So it's evolving, it's developing, it's obviously very new, it's growing at a massive clip, so we have to really keep up with it, but there, you know, ultimately there's a demand for it right now. And I think that, like my example of getting volunteers to be on the committee is the best validation of the growth of the space and the asset class, as a general matter, if there's this demand for it from the retail and the institutional investor, I think it's incumbent on me as a regulator and others to keep up with that demand and to frame the issue, to, to have rules of the road, make sure they're comparable across jurisdictions, to an extent they're always naturally going to be a little bit of arbitrage and that could be cultural or just different regulatory policy, but to really work together, particularly on this issue, because climate change is a global challenge and we have little room for error in terms of differences in and regulation.

Rostin Behnam (32:39):

And then that goes to the taxonomy question, right? It's just going to be one of the biggest challenges I think we face globally over the next couple of years.

Jason Mitchell (32:47):

It's an interesting road though. I mean, when you talk about taxonomy, I mean, there's, the EU has obviously gone through that, but it's very prescriptive. It's very, rules-based obviously it's doing two things. It's offering protections against greenwashing, but it's also, I think in the most explicit way, steering capital towards sustainable investments as defined by the EU in a way from unsustainable investments. And I do wonder when we think about convergence in this area, policy, convergence standards, convergence, how do you sort of marry that top-down capital steering with much more market driven and market adoption approaches, let's say SASB, for instance.

Rostin Behnam (33:25):

Right? I've had this question a lot over the past couple of years. And I think as my mindset necessarily hasn't changed, but I think what I've noticed, especially in the past four to six months, and it's because the conversation has changed so much, you know, I talked about this inflection point globally. The US is a huge part of that the fact that, you know, President Biden wants to make this an all of government exercise, climate change has pushed this conversation forward so much faster than it has been moving in the past couple of years. Um, I think naturally other countries are ramping up what they've done and what they've said that Europe, you know, has been a leader in this space for many years. Uh, and we can, we, I think from a us perspective and we're going to learn from them, in many respects. The challenges that I see now in my seat is, you know, when I started this exercise, there was no one in this space, right?

Rostin Behnam (34:19):

Especially from the US perspective, like I was kind of out there on my own doing this, taking on these risks, but also being a little bit innovative and inventive, knowing how important the issue was now, the field is so crowded, right? And it's almost so crowded that the new risk in terms of reaching our ultimate goal is that we're going to have too many players debating policy and wanting to inject their points of view. So I get this question from a lot of private sector participants, like what can we do to work through this, this little, this fog that's going on? And, and I think it's important and you're seeing this, I think across the globe is to really have from the highest levels of government presidents, prime ministers, finance ministers, really giving clear directives to individuals like me and other regulators, to be clear, to coordinate into the flexible.

Rostin Behnam (35:11):

And I can't emphasize that word enough. That was a huge part of the managing climate risk report. We all have very different ways of regulating, setting regulatory policy and thinking about policy as a general matter. We saw this with the financial crisis and the reforms that were implemented after 2008 and really starting from the G 20 on down. And I think we're going to face the same challenges are going to be greater in this particular circumstance. Because like I said earlier, the room for error is smaller in the climate space. You know, there's naturally going to be regulatory arbitrage, especially in the derivative space because markets are global. We have to do everything we can to limit that arbitrage opportunity to work with our counterparts across the globe, and to create different systems where we can leverage each other's expertise and leverage each other's location policy.

Rostin Behnam (36:05):

And I mean that in a way that I can work with Japanese regulators, I can work with UK or EU regulators and say, you're the expert on the ground. There let's have comparable regulations and policy and leverage each other's relationship to the constituent, to the market participant in that particular jurisdiction. And I have to do the same thing here in the US. I don't think it's necessarily much different in the climate space, but we just have to understand that these differences that we might have, we have to tighten them up so much because in the climate conversation with respect to climate risk and how climate change is going to evolve over the next couple of decades, we have to be nimble. We have to be able to change. And I've used this word a couple of times. We kind of have to be humble.

Rostin Behnam (36:52):

We have to be humble in the sense that whether your principles based or more prescriptive, we have to find a medium where we're going to work with each other, leverage each other's expertise and experience and come up with the best possible outcome that's going to address these issues. Otherwise we're just going to spin wheels. And I'm worried about that, right? I do think there's clear enough directive right now. We're moving in a great, great direction. I would much prefer where we are today than where we were two years ago. So I don't want there to be any doubt about that. Um, I think the world is heading in a right direction with respect to the climate change conversation, but there's a lot to do, and we're going to have bumps along the way, but that's where they sort of humility the compromise, the coordination, the flexibility, all these buzz words, become critical because the larger goal has to be achieved. There's, there's no room for error on this one.

Jason Mitchell (37:45):

I mean, just on that point though, I know that some regulators, I know that asthma and federal fiend in Belgium have loosely alluded to guidance about how to treat commodity futures, for instance, in an ESG context, but there hasn't been much guidance they've been sort of responses to consultations. Do you think that there should be explicit guidance out there and, and who, who should provide that?

Rostin Behnam (38:11):

With respect to commodity futures I do think I just kind of goes back to my earlier response. It depends what type of underlying product you're discussing, right? If it's on an individual basis, whether it's a metal, whether it's an energy, whether it's an ag commodity, the information is out there. I think it's incumbent on the value chain, including the regulator to sort of shed light on the sourcing, the production and what exactly involved in terms of the commodity and the traded asset class. And from that standpoint, the counter party can make his or her own decision about, you know, I think the direction of the price and whether or not that's something that they want to purchase or sell, but in terms of more ESG related indices, yes, I think there needs to be guidance at a minimum, but we have to work through these standardisations, these taxonomies to ensure that whatever is being listed as an index or as an asset class or a product the information about that particular product is clear.

Rostin Behnam (39:08):

And this goes to the greenwashing conversation, as you mentioned, and in many respects, it feels like it's been around for years, which it has been, but in many respects, the emergence and growth of it is so exponential. Even in the recent past that we have to, you know, really wrap our heads around what's going on, how it's evolving and how it's changing and work together so that we can come up with guidance or potentially a more prescriptive rule that sets standards across the board so that these products can be fair, transparent, and ultimately provide as much information as possible to the end user and the investor.

Jason Mitchell (39:49):

So it's a great way to end it. There's clearly a lot more work to do in this area. So it's been fascinating to discuss how the CFTC is thinking about climate risk, what those implications mean for derivatives markets and why well-developed carbon and carbon offset markets will support the transition to a net zero economy. So I'd really like to thank you for your time and insights. I'm Jason Mitchell, co-head of responsible investment at Man Group here today with Chairman Behnam of the US commodity futures trading commission, many thanks for joining us on a sustainable future. And I hope you'll join us on our next podcast episode. Thank you so much, Chairman.

Rostin Behnam (40:25):

Thank you, Jason. I appreciate it.

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