Derivatives in Sustainable Finance
In recent years, sustainability has risen in scope and importance on the agenda of policymakers. In Europe, this has translated into the EU Sustainable Finance Action Plan, which aims to: i) reorient capital flows towards sustainable investments; ii) manage financial risks stemming from climate/environmental/social issues; and iii) promote transparency and long-termism in financial and economic activity.
A market that could play a significant role towards Europe’s green transition is derivatives. The market has been tightly regulated since the 2007-08 financial crisis, making it safer and more transparent. Derivatives facilitate capital-raising via the hedging of risks related to sustainable investments. Moreover, they enhance the transparency and the price formation process of the underlying securities, and thus foster long-termism.
This report highlights how derivatives markets can – through their forward dimension, their global and consolidated nature, and their proper regulation – contribute to:
- enabling the EU to raise and channel the necessary capital towards sustainable investments;
- helping firms hedge risks related to ESG factors;
- facilitating transparency, price discovery and market efficiency; and
- contributing to long-termism
Karel Lannoo is General Manager of ECMI and CEO of CEPS. Apostolos Thomadakis, Ph.D., is a Researcher at ECMI.