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Can Listed Derivatives Give Sustainability a Boost? – FTF News

Grygo is the chief content officer for FTF & FTF News.

In case anyone thought otherwise, exchanges for derivative instruments do have a big role to play in facilitating sustainability, according to a joint report recently released by the World Federation of Exchanges (WFE) and the United Nations Sustainable Stock Exchanges Initiative (SSE).

The joint report, “How Derivatives Exchanges can Promote Sustainable Development — An Action Menu,” was produced by an advisory group with representatives from derivatives and stock exchanges and key industry participants.

“Sustainability,” according to the good people at Investopedia, “focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. The concept of sustainability is composed of three pillars: economic, environmental, and social — also known informally as profits, planet, and people. Increasingly, companies are making public commitments to sustainability through actions like reducing waste, investing in renewable energy, and supporting organizations that work toward a more sustainable future.”

The many issues that make up sustainability have been gaining ground since 2019.

“Between 2019 and 2020, the topic of sustainability has gone from virtually unconsidered in derivatives markets to the subject of four industry papers,” according to the new report. “Exchanges, market participants, and regulators looked at sustainability topics from various angles — from the potential impact on markets to the role derivatives markets can play in meeting the sustainability imperative. The sustainability challenges of the modern world are such that addressing them requires concerted effort from all actors, including all elements of the finance sector.”

The Futures Industry Association (FIA) and the CFTC point out that derivatives can play “an important part of the overall solution, whether as providers of relevant products and services, contributors to greater data availability and transparency or as conveners of the market to address barriers to change,” according to the report.

So, what exactly can derivatives exchanges do to help sustainability?

“This document provides an overview of the role of derivatives markets generally, presents some of the things derivatives exchanges are already doing in relation to sustainability, and highlights ways in which these exchanges can support the transition to more sustainable development pathways,” according to the report, which “identifies an action menu of opportunities for all exchanges.”

The group behind the white paper suggested six areas of action items that derivative exchanges can consider for sustainable development:

  • Engage in Partnerships: “Participate in multi-stakeholder dialogue to build consensus on sustainable finance in derivatives markets. … Engage in partnerships to build consensus on sustainable finance: exchanges should ensure they are participants in the evolving field of sustainable finance to ensure agreed solutions are suitable for market deployment.”
  • Drive Standardization: “Promote market agreement on reference standards for sustainability themed products. … Use the exchange’s convening power to help drive market standardization where this is necessary to develop the market for sustainability themed products — exchanges can use their position within the market ecosystem to reach market agreement around reference standards.”
  • Enhance Transparency: “Provide solutions to enhance transparency about the sustainability attributes of traded products and market participants. …  As an intermediate step exchanges may consider providing a platform that enables market users to report on their sustainability practices and initiatives.”
  • Link Market Participation to Sustainability: “ … Exchanges may stipulate that participation in certain markets is predicated on meeting additional sustainability-aligned requirements. This could range from requiring the publication of a sustainability report to requiring demonstrated alignment (through reporting) with agreed sustainability practices.”
  • Introduce Environmental, Social, and Corporate Governance (ESG)  Data Products: “Introduce sustainability-aligned data products that support the development of the underlying markets: data products and services support the functioning of the traded market and can also be the basis for the development of new tradeable products.”
  • List Tradeable ESG Products: “Meet emergent demand for new sustainability aligned derivatives products across all asset classes. List new tradeable sustainability-aligned products to meet emergent demand whether driven by regulatory changes, or customer requirements e.g. products that support a low-carbon transition.”

SSE and WFE officials are also committing to “work with derivative exchanges to assist them in their efforts to promote sustainable development. More generally, exchanges can be supported in this work through ongoing research, facilitation of peer-learning exercises and identification of examples of best practice. Providing a central repository of exchange initiatives in this area can also provide a useful point of reference and inspiration,” according to the report.

For those who want to get work on this issue, the full report can be found here: