Sustainability gains momentum in derivatives industry

Sustainability has become a buzzword across virtually every industry. Decades of environmental initiatives have combined with “woke” consumers to place increased pressure on companies to look at their products and operations from a perspective that places a value on sustainability. But how much value? The commodities industry wields massive influence over the sustainability initiatives being embraced around the world. So, when it comes to answering that question about the value of sustainable products and operations, financial derivatives can play a crucial role. 

I’ve been covering financial services conferences for a dozen years. Speakers and panels discussing sustainable investing are nothing new. In the past, such sessions often felt like polite lip service. “Green washing” hadn’t entered the lexicon a decade ago, but looking back on it, that’s what many of those sessions were.

But now, something has changed.

At the 15th Annual Asia Derivatives Conference in Singapore this week, the importance of sustainability was woven into numerous conversations on the main stage. The industry appears united in recognizing the importance of ESG investing measures, but the conference also offered some clear-eyed perspectives on just how difficult it can be to establish some of the fundamentals needed to expand ESG investing.

The very same global reach of the derivatives industry that helps it act as a facilitator of ESG investing also adds levels of complexity due to different understandings of key certifications. For example, Jenny Cosco, who is Managing Director and Co-Head of Governmental Affairs for Asia-Pacific for Goldman Sachs, notes how China classifies clean coal as green, while the European Union does not. Even neighboring countries differ on what they view as sustainable: Germany views nuclear power as a detriment to the environment, while France sees nuclear power as a key tool for combating climate change.

Building out financial products that solve for sustainability issues while keeping their appeal for investors isn’t easy. John Ho, who is Head of Legal for Financial Markets for Standard Chartered, pointed out that some basic definitions need to be established before global progress can be made on green finance. For example, what makes an investment green? Such definitions currently vary from country to country and region to region, so Ho believes a global taxonomy must be established before universal investment products can grow. 

The shift in societal views on sustainability means many people want to see changes happen immediately. But it isn’t that easy. How raw materials are produced, gathered, transported and priced involves massive amounts of complexity.

It must be said that some market participants have been trying to solve challenges related to sustainable investing for quite a while. The London Metals Exchange is one such organization. The exchange has been working for years to develop protocols for certifying that commodities traded on its platform are compliant with various ESG principles. William Fyfe is the Head of Singapore for LME and he says commodities firms are not against adhering to sometimes stringent rules. In fact, Fyfe says some firms welcome the LME certification process because it can save them the headache of having to verify compliance with numerous other stakeholders.

Even commodities firms that are not yet “all in” on adopting sustainable operations are starting to ask questions about what they can do better. According to Peter Zaman, who is a partner at ReedSmith, even companies that are unable to stop doing things that harm the environment realize there are steps they can take to lessen the damage. Zaman added that his firm has had more client inquiries this year about carbon matters than ever before.

Forward-looking governments are even getting into the sustainable investing game. Phua Wee Ling from the Monetary Authority of Singapore said the city-state is “putting its money where its mouth is” and allocating $2 billion to asset management firms that focus on sustainability.

Congyan Tan, Vice President at the China Institute of Finance and Capital Markets, outlined how China is working to be a global leader in three key areas of sustainable investing: green bonds, ESG disclosures and carbon finance. He added that China will soon open an exchange that is solely dedicated to the trading of carbon finance futures. 

One of the strongest voices on sustainability at the conference has been Stefan Ullrich, who is the director of sustainable finance for Singapore-based Paia Consulting. Ullrich believes one of the problematic perceptions about sustainable investing is that it is associated with “doing good.” Ullrich asserts that the “doing good” connotation is in fact dangerous because it implies there is a choice. According to Ullrich, sustainable finance is a necessity, not a choice.

Ullrich also thinks some participants in the derivatives markets might be getting a bit too exotic with the products they are structuring. Frothy products might promise all kinds of returns for investors, but Ullrich cautions that if those products lose sight of the overall goal of having a positive impact on the environment, then they are pointless. 

So, has the derivatives industry reached a tipping point on sustainability? To quote Elvis Presley, discussions about sustainability at this week’s conference seemed to reveal a derivatives industry that is primed for a little less conversation and a little more action.

But maybe I am wrong. Maybe I am just a guy who has sat through a few too many conference panels and is perceiving a shift in the mindset of market participants that isn’t real. If I am, then I am not alone.

“The wake-up moment is happening,” says George Harrington, Managing Director & Global Head of Exchanges & Americas Structured Products of MSCI. “This is a very real turning point for the industry.”