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ESG derivatives: Weapons of green distraction? – Euromoney magazine

Warren Buffett famously described derivatives as “financial weapons of mass destruction” in 2003. This did not mean that the legendary investor was swearing off the use of swaps and options. He actually made his biggest personal derivatives trades in the years after this quip, including a multi-billion dollar bet on the long-term price of equity indices that was placed via put option sales.

Buffett was instead concerned that derivatives could be deployed to mask exposure, adding in 2007 that: “More and more imaginative ways of using them are introducing more and more leverage.”

Derivatives are now being used to speed the development of the environmental, social and governance (ESG) markets – also in increasingly imaginative ways. New uses of derivatives are helping to tailor ESG exposure and hedges, in order to broaden green and socially responsible trades from equity investments to the entire fixed income product suite.