How derivative exchanges can promote sustainable development

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How Derivatives Exchanges can Promote Sustainable Development – An Action Menu, is a 2021 paper by the Sustainable Stock Exchange (SSE) initiative and the World Federation of Exchanges (WFE). The paper provides an overview of the ways that derivative markets can encourage more sustainable and just business models among players in the financial system. Key is their activity relevant to their supply chains — producers, traders and manufacturers - as well as the banks, institutional investors, and hedge funds that are the speculators and investors who provide their everyday business. The paper presents current actions by derivatives exchanges in the sustainability space, and highlights an action pathway to support the transition to more sustainable development pathways. [1].

Structure of the paper[edit]

The first section of the report provides context on sustainable development policy and investments, while offering an introduction to derivatives and how derivative exchanges operate. This section also highlights how derivative products hedge price risk and enhance price transparency, supporting the effective functioning of the underlying markets. The second section looks at exchange activities related to sustainability, which include products such as equity index derivatives that cater to sustainable investment and energy and carbon-linked products, as well as initiatives such as responsible sourcing requirements for commodity producers. The third and concluding section explores ways in which derivative exchanges can contribute to sustainable development. It finds that derivative exchanges have several avenue to explore and lays out an action menu. [2]

Derivative exchange action menu[edit]

The paper proposes this action menu for derivative exchanges to become active in a transition to use of ESG in the financial markets.

1. Engage in Partnerships: Participate in multi-stakeholder dialogue to build consensus on sustainable finance in derivatives markets.

2. Drive Standardization: Promote market agreement on reference standards for sustainability themed products.

3. Enhance Transparency: Provide solutions to enhance transparency about the sustainability attributes of traded products and market participants.

4. Link Market Participation to Sustainability: Can range from requiring sustainability reports to requiring demonstrated alignment with agreed sustainability practices.

5. Introduce ESG Data Products: Introduce. sustainability-aligned data products that support the functioning of the traded market and can be the basis for new tradeable products.

6. List Tradeable ESG Products: Meet emergent demand for new sustainability aligned derivatives products across all asset classes.[3]