Overview of ESG-related Derivatives Products and Transactions

The transition to a sustainable economy will take a massive amount of long-term funding. The financial services sector will be an essential partner in providing this funding and managing the risks associated with sustainable investments, including project risk and interest rate and currency risks.

Derivatives markets can play an essential role in this process. Derivatives enable more capital to be channeled towards sustainable investments; help market participants hedge risk related to environmental, social and governance (ESG) factors; facilitate transparency, price discovery and market efficiency; and contribute to long-termism.

This paper is intended to help market participants further understand the potential role of derivatives in sustainable finance. The paper outlines the range of product structures and transaction types that comprise the universe of ESG-related derivatives, including sustainability-linked derivatives; ESG-related credit default swap indices; exchange-traded derivatives on listed ESG-related equity indices; emissions trading derivatives; renewable energy and renewable fuels derivatives; and catastrophe and weather derivatives.

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