ISDA published a statement emphasizing the importance of derivatives market in the transition to a sustainable economy. ISDA has convened the Sustainable Finance Working Group to discuss how ISDA can ensure better alignment with cash products and identify areas where the development of standard terms and definitions for environment, social, and governance (ESG) derivatives may be necessary. In the statement, ISDA espouses that, along with the development of ESG derivatives products, work will be needed to promote standardization across jurisdictions and market segments.
ISDA has always been a strong proponent of standardization in documentation, market practices, operational processes, and wherever else it might make economic sense. This is just as important in a relatively new area like ESG as it is in more established markets. ISDA documentation and definitions are already being used to document ESG transactions. For example, swaps that are linked to a client’s performance against a set of sustainability targets have been documented under the 2006 ISDA Definitions. ISDA has also started to expand the range of ISDA templates for environmental trading to include renewable energy certificates. If needed in the future, ISDA will amend the existing ISDA templates for transactions with particular relevance to ESG and sustainable finance, such as emissions allowances, weather, and other commodities. Recently, ISDA also hosted a virtual conference on ESG and derivatives. In addition, ISDA had cooperated with the Center for European Policy Studies (CEPS) on a report, which was published in July 2020, on the role of derivatives in sustainable finance. Among other issues, the report discussed how supervisors are calling for an alignment of the prudential treatment of greens assets with the current credit risk framework.
Keywords: International, Banking, Securities, Derivatives, ESG, Sustainable Finance, Climate Change Risk, ISDA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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