Amid rising concerns about economic and environmental sustainability, derivatives markets need to be thinking about ways to address these concerns in their own businesses, suggests a new white paper from the World Federation Of Exchanges (WFE).
The global industry trade group for exchanges and other market infrastructure firms published a paper on Tuesday that aims to stimulate discussion in the derivatives industry about sustainability, particularly in the commodity derivatives space.
The WFE noted that growing demand for sustainability among commodity users will also impact derivatives markets.
Yet, without a single set of sustainability standards, there’s no single solution to issues such as differences in supply chain oversight, liquidity concerns and potential technical challenges for exchanges.
The paper examined various ways for derivatives exchanges to address sustainability concerns.
Among other things, it looked at the prospect of exchanges creating new investment tools, such as renewable energy certificates, tradable emissions allowances and more environmentally sound energy contracts that “allow users to manage evolving risk.”
It also considered introducing sustainability elements to existing contracts “by amending contracts to incorporate specific sustainability factors; introducing parallel ‘sustainable’ versions; or incorporating a premium to recognise a verifiably sustainable version of the existing underlying.”
“The sourcing of many underlying products in this marketplace is impacted by environmental, social and governance issues, and demand for greater transparency around traceability is appropriate,” said Nandini Sukumar, CEO of the WFE. “We believe that as an industry, we can work together to develop guidelines that the world’s formal commodity derivatives markets may be able to weave into their strategic thinking, as they steward their firms towards a more sustainable financial future.”