Worldwide: ISDA Assesses Regulatory Considerations For Sustainability-Linked Derivatives
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ISDA assessed how existing derivatives
regulatory regimes would apply to sustainability-linked
derivatives.
In a newly released paper titled “Regulatory Considerations
for Sustainability-linked Derivatives”, ISDA outlined factors
for determining (i) whether SLDs would be considered swaps under
U.S. regulations, (ii) whether SLDs would be considered OTC
derivatives under EU or UK regulations, (iii) the impact that
sustainability-linked cash flows may have on derivatives otherwise
exempt or excluded from certain regulations and (iv) compliance
issues based on how SLDs are classified.
ISDA evaluated how those determinations would impact (i) risk
management and documentation requirements, (ii) reporting, (iii)
disclosures, (iv) benchmark considerations, (v) bankruptcy/recovery
and resolution and (vi) prudential requirements.
Separately, ISDA considered the legal implications of
voluntary carbon credits, emphasizing that “[a] robust
voluntary carbon market must be grounded in a strong legal
foundation.” In a white paper, ISDA offered recommendations on
how regulators can provide greater legal certainty regarding
voluntary carbon credits and how the derivatives markets can
facilitate raising capital for green investments while mitigating
risks.
Commentary
As ESG products and investing gain popularity, regulators
struggle with how to assess and monitor financial products. SLDs
have an additional hurdle to overcome, such as how they
should be classified under U.S., EU, and UK regulations.
Currently, ESG disclosure requirements are most extensive in the
EU, where regulatory reforms relating to sustainable financing
already exist, and second-most extensive in the UK, where the
focus has been primarily on preventing greenwashing.
Primary Sources
- ISDA Press Release: Regulatory Considerations for
Sustainability-Linked Derivatives - ISDA Press Release: Legal Implications of
Voluntary Carbon Credits - ISDA White Paper: Regulatory Considerations for
Sustainability-Linked Derivatives - ISDA White Paper: Legal Implications of Voluntary
Carbon Credits
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