Thoroughly interesting recent publication from CEPS on Derivatives In Sustainable Finance: Enabling the green transition.
Sustainable finance across Europe is likely to see a significant influx of capital over the coming years both as part of the natural development of the sector but also stemming from initiatives such as the European Commission's EU Sustainable Finance Action Plan.
Derivatives will need to play a key role in this transition as market participants look to manage their exposure and hedge against common financial risks (interest rate, credit and/or currency) alongside the push for long-term investment in green financial products. The regulatory overhaul of the derivatives market in recent years (with a view to reducing systemic risk and creating a safer, more transparent market) has made sustainable finance products involving derivatives a more appealing option in terms of risk perception, transparency and accessibility.
Outside of retail and institutional investment, products such as ING's sustainability improvement derivative (linking, in one case, interest rate risk on the construction of an offshore production facility to (in part) the underlying company's sustainability performance (as verified by an independent assessment of ESG criteria)) are testament to the innovative derivative products currently being developed in the sustainable sphere.
Should you wish to discuss any matters relating to sustainable finance, please do reach out to me (Cayman / BVI), Zoe Hallam (Guernsey) or Tristan Maultby (Jersey).
The derivatives market could play a significant role in Europe’s transition to a green economy.