The Derivatives Industry is Gaining Momentum in Favour of Sustainability Measures

Almost every industry has adopted the term “sustainability” as a catchphrase. Over the past few decades, an increasing number of environmentally conscious and socially aware consumers have pushed businesses to take sustainability into account in the design and production of all of their products. However, how much worth is there in this? The commodities industry exerts a tremendous influence on the global adoption of sustainability initiatives. Financial derivatives can play an important role in answering the question of the value of sustainable products and operations.

In that time, I’ve covered a slew of industry events. Sustainability-focused panelists and speakers have been around for a while now. In the past, such meetings were viewed as a kind of polite courtesy. The term “greenwashing” had not yet been coined a decade prior to these meetings, but looking back on it, many of them were just that.

Something, however, has shifted recently

This week’s Asia Derivatives Conference in Singapore featured a number of speakers who stressed the importance of sustainability. The industry appears to be united in its recognition of the importance of ESG investing measures, but the conference also provided some clear-eyed perspectives on just how difficult it can be to establish some of the fundamentals required to expand ESG investing.

Despite its global reach, the derivatives industry also complicates the process of ESG investing because of a wide range of interpretations of key certifications and standards. The European Union does not classify clean coal as green, for example, according to Jenny Cosco, Managing Director and Co-Head of Governmental Affairs for Asia-Pacific at Goldman Sachs. While France sees nuclear power as a vital tool in combating climate change, the German government sees nuclear power as a threat to the environment.

It’s not easy to create financial products that address sustainability concerns while also remaining appealing to investors. Standard Chartered’s Head of Legal for Financial Markets, John Ho, said that before global progress can be made on green finance, some basic definitions must be established. As an example, what constitutes a green investment? He believes a global taxonomy must be established before universal investment products can grow because definitions currently vary from country to country and region to region.

In light of the shift in society’s views on sustainability, many people are eager to see changes implemented immediately. But it’s not as simple as that. There is a tremendous amount of complexity involved in the production, gathering, transportation, and pricing of raw materials.

Some market participants have been working on sustainable investment issues for a long time now. One example is the London Metals Exchange. As part of a long-term effort, the exchange has been developing protocols for certifying that commodities traded on its platform adhere to various ESG principles. The head of the LME’s Singapore office, William Fyfe, says commodities firms aren’t opposed to following sometimes strict regulations. According to Fyfe, some companies look forward to the LME certification process because it relieves them of the burden of having to verify compliance with numerous other stakeholders.

Even commodity firms that haven’t yet embraced sustainable practices are asking themselves what they can do to improve their operations. Companies that can’t stop harming the environment know that there are steps they can take to lessen the damage, says ReedSmith partner Peter Zaman. Zaman went on to say that his firm has received more inquiries from clients this year than ever before about carbon issues.

Future-oriented governments are even entering the sustainable investment game. The Monetary Authority of Singapore’s Phua Wee Ling stated that the city-state is “putting its money where its mouth is” by allocating $2 billion to sustainable asset management firms.

A Vice President at the China Institute of Finance and Capital Markets, Congyan Tan, outlined how China is working to be a global leader in three key areas of sustainable investing: green bonds, ESG disclosures, and carbon finance. In addition, he said that China will soon open a carbon finance futures exchange.

Stefan Ullrich, director of sustainable finance at Singapore-based Paia Consulting, has been one of the conference’s most prominent voices on sustainability. This “doing good” mentality, according to Ullrich, can be a problem when it comes to sustainable investing. According to Ullrich, the connotation of “doing good” is actually harmful because it implies that there is a choice. According to Ullrich, sustainable finance is not a choice but a necessity.

In addition, Ullrich believes that some participants in the derivatives markets are creating products that are far too exotic. Ullrich warns that if frothy products lose sight of the overall goal of having a positive impact on the environment, then they are pointless for investors to invest in.

In other words, have we reached a point of no return for the derivatives industry? This week’s conference on sustainability revealed a derivatives industry ready for less talk and more action, to paraphrase Elvis Presley.

However, I could be wrong. There is a chance that I’m seeing things that aren’t there because I’ve sat through way too many conference panels. If I am, then I’m not the only one.

MSCI’s George Harrington, Managing Director and Global Head of Exchanges and Americas Structured Products, believes that “the wake-up moment” has arrived. As a result of this, the industry has entered a new phase.

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