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How Derivatives Exchanges Can Promote Sustainable Development – Regulation Asia

A new report from the WFE and the UN’s SSE Initiative offers guidance on how derivatives exchanges can facilitate the sustainability transition.

The WFE (World Federation of Exchanges) and the UN’s SSE (Sustainable Stock Exchanges) Initiative have jointly published a new paper offering guidance to exchanges on how to incorporate sustainability into their operations.

A UN Partnership Programme, the SSE Initiative seeks to provide a global platform for exploring how exchanges can enhance performance on ESG issues and encourage sustainable investment. The WFE is the global industry association for exchanges and clearing houses.

The new paper builds upon an August 2019 WFE white paper on sustainability in the context of commodity derivatives markets, and is a response to demand from derivatives exchanges to further expand on it – to identify ways in which derivatives exchanges can play a role in supporting the sustainability transition.

the paper provides practical suggestions on how to make the derivatives ecosystem and derivatives exchanges’ operations more sustainable, including through introducing ESG data products, listing tradeable ESG products, enhancing transparency, and driving standardisation, among other recommendations.

In terms of integrating sustainability into commodity derivatives markets, the paper recommends four key focus areas:

  • Setting expectations on producer/trader conduct and promoting greater transparency through mandatory reporting
  • Listing new contracts that respond to growing demand driven by the transition to a low carbon future
  • Encouraging market participants to provide information about sustainability credentials or performance
  • Collaborating around market development such as through consensus building activities focused on sustainable finance

The paper provides a number of examples of exchanges that are already responding progressing on such initiatives, including the LME (London Metal Exchange), which is working to develop a lithium futures contract. Other examples provided were the UCO and UCOME futures contracts that began trading on CME in September 2020.

“Regulatory developments, such as the EU taxonomy for sustainable activities, will undoubtedly create demand for new products particularly when coupled with
regulatory incentives for investors to ‘green’ their portfolios,” the paper says. “These could include demand for new types of taxonomy-aligned index derivatives.”

The full report is available here.