Featured Product

    ISDA Report Examines Role of Derivatives in Sustainable Finance in EU

    July 16, 2020

    ISDA published a report that discusses the role of derivatives in sustainable finance in EU. The report highlights how derivatives markets can contribute by enabling EU to raise and channel the necessary capital toward sustainable investments. The derivatives markets can also help firms hedge risks related to environment, social and governance (ESG) factors; facilitate transparency, price discovery, and market efficiency; and contribute to "long-termism." This report is the result of an effort by the Center for European Policy Studies (CEPS) in Brussels, which manages the European Capital Markets Institute (ECMI).

    In this report, the use of derivatives by market participants is being examined in the context of the EU sustainable regulatory framework that is being developed. The report also examines the EU Sustainable Finance Action Plan and the most relevant policy initiatives from a derivatives’ perspective. The report calls EU Taxonomy the flagship project of the Sustainable Finance Action Plan. The EU Taxonomy sets the framework for what is regarded as sustainable, while the disclosures framework will enhance the transparency surrounding sustainable investments. Derivatives will be developed to reference these new measurements and metrics with a view to contributing to the financing of projects and funding of companies in the transition to a sustainable future. Another important aspect of the Sustainable Finance Action Plan is the development of an EU Ecolabel framework for certain financial products to be applied once the EU sustainability taxonomy is adopted. The EU draft Ecolabel for retail financial products proposes requirements for the use of derivatives by retail investment funds. The EU Ecolabel defines the minimum environmental performance of such products by defining green thresholds on portfolio level for funds, and by defining whether companies’ green economic activities fulfill thresholds.

    The report also discusses how supervisors are calling for an alignment of the prudential treatment of greens assets with the current credit risk framework. The revised Capital Requirements Regulation (CRR) 2/Capital Requirements Directive (CRD) 5 package includes a mandate (Article 501c of CRR 2) for EBA to assess, by June 2025, whether a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and social objectives would be justified (as a component of Pillar 1 capital requirements). In particular, it should determine the effective riskiness of exposures related to assets and activities associated with environmental and social objectives compared with the riskiness of other exposures; the appropriate criteria for the assessment of physical risks and transition risks and how to develop them; and the potential effects of a dedicated prudential treatment of exposures associated with environmental and social objectives and activities on financial stability and bank lending in EU. In addition, the Renewed Sustainable Finance Strategy is consulting on whether the current macro-prudential policy toolbox for the financial sector in EU is fit for purpose to identify and address potential systemic financial stability risks related to climate change. 

    The report emphasizes that European Green Deal is the cornerstone of EU response to the COVID-19 pandemic, given the massive amounts required for a sustainable and green recovery. Derivatives markets can play a significant role in the context of the European Green Deal and the transition toward a low-carbon economy. They facilitate capital raising via the hedging of risks related to sustainable investments. Moreover, they enhance the transparency and the price formation process of the underlying securities and, thus, foster long-termism. Overall, ESG products have demonstrated their resilience during the market decline caused by the pandemic and will play a pivotal role in accelerating the transition to a sustainable economy. 


    Related Links

    Keywords: International, Europe, EU, Banking, Insurance, Securities, Sustainable Finance, COVID-19, Derivatives, ESG, Climate Change Risk, CRR/CRD, Basel, Credit Risk, Disclosures, ISDA

    Featured Experts
    Related Articles

    EBA Launches Stress Tests for Banks, Issues Other Updates

    The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.

    January 31, 2023 WebPage Regulatory News

    EBA Proposes Standards for IRRBB Reporting Under Basel Framework

    The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.

    January 31, 2023 WebPage Regulatory News

    FED Issues Further Details on Pilot Climate Scenario Analysis Exercise

    The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.

    January 17, 2023 WebPage Regulatory News

    US Agencies Issue Several Regulatory and Reporting Updates

    The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.

    January 04, 2023 WebPage Regulatory News

    ECB Issues Multiple Reports and Regulatory Updates for Banks

    The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.

    January 01, 2023 WebPage Regulatory News

    HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements

    The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.

    December 30, 2022 WebPage Regulatory News

    EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR

    The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.

    December 29, 2022 WebPage Regulatory News

    CBIRC Revises Measures on Corporate Governance Supervision

    The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.

    December 29, 2022 WebPage Regulatory News

    HKMA Publications Address Sustainability Issues in Financial Sector

    The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.

    December 23, 2022 WebPage Regulatory News

    EBA Updates Address Basel and NPL Requirements for Banks

    The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.

    December 22, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8701