ESG Derivatives Overview

ISDA’s work in the ESG space has been primarily geared toward supporting the transition towards a more sustainable economy. While we are primarily engaged in sustainability issues that impact derivatives trading, our work spans across multiple ISDA policy groups—legal, risk and capital, and public policy.

ISDA’s ESG Derivatives working groups:
ISDA conducts work on ESG Derivative issues through a variety of working groups, however there are four specific working groups focused on this asset class:

To request to join an ISDA working group: (1) Create an account on the ISDA website; and (2) After you create an account, log in and go to the Committees section to view your ISDA Committee Dashboard. You can request to join and leave working groups and distribution lists.

News on current ESG Derivatives initiatives:
Legal

  • ISDA has provided standardized documentation for the trading of Voluntary Carbon Credits and has published multiple papers analyzing the legal nature of VCCs across multiple jurisdictions.
  • ISDA is in the process of creating a library of standardized clauses that can be utilized for trading Sustainability-Linked Derivatives.

Risk & Capital

  • Scenario analysis is a core tool to help inform strategy and business decision-making by assessing the scope and severity of these risks. However, much of the focus from regulators and banks has so far been on credit risk impacts in the banking book. How these risks affect the trading book has received less attention and research. ISDA published an initial paper in H2 2022 outlining the challenges that banks face and a further paper published in H1 2023 providing a conceptual framework for climate scenario analysis in the trading book.
  • ISDA has investigated whether the regulatory treatment of carbon credit trading under the FRTB is justified. The appropriate treatment is important as overly stringent capital requirements would impair the functioning of the carbon market and hamper the willingness of firms to invest in the transformation to a green economy. ISDA has published 2 papers supported by market data (using EU data and other global data) which suggest that further changes should be made.

Public Policy

  • ISDA’s public policy team has stayed abreast of ESG issues across the globe with our advocacy efforts primarily concentrated in the EU given the bloc’s strategic lead in the ESG area. We have responded to numerous consultations from EU regulatory authorities over the past years and published a number of policy papers (CEPS/ECMI paper on the role of derivatives in sustainable finance & ISDA’s overview of ESG-linked Derivatives) highlighting how certain derivatives can contribute to sustainability objectives. Our policy focus remains on fostering understanding of the necessary role of derivatives in raising and allocating trillions of capital to green finance, hedging climate-related risks and enabling longer-term investments via the efficient hedging of investment risks. ISDA has also submitted a number of comment letters to US and UK regulators in response to climate-related regulatory proposals that impact derivatives regulations.

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