As an association representing firms that under the prudential framework for investment firms qualify as commodity and emission allowance dealer, EFET would only consider the risk-to-market and risk-to-firm K-Factors to be related to environmental risks.
While we appreciate that environmental risks can materialise through market risk via multiple channels (either through increased physical or transition risks), the main consequence we would expect is increased price volatility. For risk-to-firm, the current K-TCD factor already imply factors in environmental risk through changes in the market value of the commodity derivative transactions.
EFET is of the view that, while we agree that environmental factors will likely become a key risk driver, there is insufficient evidence that would allow to quantify the impact of such factor. We consider that the current regime, for the time being, considers already factors of environmental risk to an acceptable degree.
EFET does not necessarily think that a commodity and emission allowance dealer would, by their very model, be more exposed to environmental risks and should in that respect require a dedicated treatment. As explained above, we think the current regime is working.
EFET has not conducted a specific study or performed data analysis on this topic, but in terms of the K-TCD factor, it could be considered, based on supporting data, allowing a risk factor adjustment for counterparties with a positive ESG rating. Same approach could be considered for the K-NPR factor, considering exemptions for products which are made to accompany energy transition (carbon offsets, etc).