This note provides an overview of the intersection of environmental, social and governance (ESG) considerations with Australian financial services regulatory requirements. Australian Carbon Credit Units (ACCUs) and Eligible International Emissions Units (EIEUs) (together Regulated Emissions Units) are financial products pursuant to section 764A of the Corporations Act 2001 (Cth) (Corporations Act). The financial services regulatory requirements therefore must be taken into account when engaging in conduct involving Regulated Emissions Units.
The Kyoto Protocol to the United Nations Framework Convention on Climate Change was adopted in Kyoto, Japan on 11 December 1997. It set binding emission reduction targets for 37 industrialised countries and economies. In order for Australia to meet these targets, the Government of the Commonwealth of Australia looked to carbon trading as a market-based approach to reducing carbon emissions. In 2011, the Carbon Farming Initiative was established under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act) to enable farmers and land owners to generate carbon credits through improved farming and land usage practices and sequestration. In 2014, the CFI Act was amended to create the Emissions Reduction Fund (ERF). The ERF is a voluntary scheme that incentivises businesses to engage in projects that, among other things, offset Australia’s emissions growth in order to obtain ACCUs that are then able to be purchased by the Government of the Commonwealth of Australia or traded on secondary markets. The Clean Energy Regulator is the statutory entity responsible for the administration of the ERF. The Clean Energy Regulator’s responsibilities include the registration of projects, the issue of ACCUs for carbon abatements achieved by registered projects, the conduct of auctions of offers to sell ACCUs to the Clean Energy Regulator and the acceptance of offers and the entering into of contracts for the purchase of ACCUs by the Clean Energy Regulator on behalf of the Government of the Commonwealth of Australia.
An ACCU is a unit issued by the Clean Energy Regulator under the CFI Act that represents one tonne of carbon dioxide equivalent net abatement that has been achieved as a result of eligible activities that have been undertaken generally in the form of an eligible offsets project. There are a number of requirements that must be met in order to qualify as an eligible offsets project, including an approved methodology and the delivery of abatements.
A key driver for the introduction of the ACCUs was the Kyoto Protocol. In order to meet Australia’s climate change targets under the Kyoto Protocol, ACCUs are issued as either:
The Kyoto abatement deadline was 30 June 2012 for emissions avoidance projects and 31 December 2012 for sequestration projects.
After being issued, both Kyoto and non-Kyoto ACCUs are able to be traded on secondary markets like other financial products. However, only Kyoto ACCUs can be sold to the Government of the Commonwealth of Australia which is facilitated under a carbon abatement contract. Corporations Regulations 2001 (Cth) (Corporations Regulations) regulation 7.1.07J, provides that carbon abatement contracts are not financial products.
EIEUs are defined in the Australian National Registry of Emissions Units Act 2011 (Cth) as units that have been issued under mechanisms established by the Kyoto Protocol and its supporting instruments, including:
Like ACCUs, EIEUs are also able to be traded on secondary markets.
As stated above, Regulated Emissions Units are financial products that are regulated under the Corporations Act.
However, there are a number of other emissions and environmental units that are currently traded in markets in Australia and internationally, including:
These emissions and environmental units are not currently defined to be financial products because they do not meet the elements of the general definition of a financial product pursuant to section 763A of the Corporations Act and are not a specific financial product pursuant to section 764A of the Corporations Act. However, derivatives created over these units and interests in managed investment schemes that hold these units will generally be considered financial product that are regulated under the Corporations Act.
Subject to specific exemptions or relief provided by ASIC, section 911A of the Corporations Act provides that a person who carries on a financial services business in Australia must hold an Australian financial services (AFS) licence or alternatively become a representative of an AFS licensee. A person provides financial services if they undertake specified activities, including:
Generally, a person will be required to hold an AFS licence in order to provide financial services in relation to Regulated Emissions Units, however there are a number of exemptions that may apply. The key exemptions include:
Corporations Regulation 7.6.02AG also contains exemptions for FFSPs having to hold an AFS licence to provide certain financial services to professional investors in Australia in relation to financial products that include Regulated Emissions Units.
A person must hold an Australian market licence in order to operate a financial market in Australia. A person will be considered to be operating a financial market if they operate a “facility” through which:
A “facility” is broadly defined. Section 762C of the Corporations Act provides that a facility includes intangible property, an arrangement or term of an arrangement, or a combination of intangible property and an arrangement or term of an arrangement. ASIC Regulatory Guide 172 Financial markets: Domestic and overseas operators at paragraph [172.36] provides that a facility may comprise of an integrated infrastructure that consists of multiple components.
“Operating a market” is different to “making a market” (which is a financial service that requires a person to hold an AFS licence unless an exemption applies).
Market operators are able to rely on the low volume financial markets exemption which provides relief from Part 7.2 of the Corporations Act and the requirement to hold an Australian market licence if, in a 12-month period, no more than 100 completed transactions are entered into and the value of these transactions does not exceed $1.5 million. While this exemption applies to managed investments schemes with an ESG overlay, it does not apply to Regulated Emissions Units.
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