Eurex Derivatives Forum: Fixed Income Looks For a Recipe For ESG Success

Eurex Deriivatives Forum
Suzanne Cosgrove

Suzanne Cosgrove


Sustainable investments are new by most measures. This is especially true in the fixed-income sector, where ESG products are in their infancy and clients tend to be more conservative investors, according to members of a panel who addressed the issue on Wednesday at the Eurex Derivatives Forum.

Live-streamed from Frankfurt, the discussion had a decidedly European flavor. The EU has imposed deadlines to reach sustainability goals and many firms are struggling to become compliant with ESG principles.

“ESG is on everybody’s mind,” said Lee Bartholomew, head of fixed-income derivatives product research and development at Eurex. “It comes up at every meeting.”

That dialog is evident among fixed-income fund managers. “It is a new phase,” said Dennis Hansel, global head of ESG advisory for the asset manager DWS. Clients starting with the integration of ESG in the equity markets, he said, but now have “holistic ESG targets for their entire portfolios.”

The challenge is to blend ESG, which has been mostly an equity story so far, with fixed-income products, the panelists said.

Fixed income remains the dominant investment class for institutional investors, Hansel noted. When integrating ESG goals into corporate bond investments, it’s important to offer clients the same flexibility with ESG as without it, he said.

In addition, ESG ratings are the same for equities as they are for corporate bonds, but the products have to be structured differently, he said. “We need derivatives,” Hansel added. “We need products that will enable our clients to handle market volatility…. We have volatility as well as sustainability targets.”

Clients are looking for more innovation, Hansel said. “We have to convince them that it is possible to get all the exposure they like the traditional way, but with new sustainability targets.”

Eurex’s Bartholomew said an ESG ecosystem is beginning to develop for fixed income, much as it has for equities where there are established products. Eurex stock index futures offerings, for example, include an ESG version of its STOXX Europe 600 futures contract as well as MSCI World ESG screened futures.

In Europe, it was important to have a “lit” market for equities — where buy and sell orders looking for execution are displayed in an order book — so data could be captured to develop tradeable indices,  Bartholomew said. 

That information allowed the value chain to develop as market participants gain an understanding of the underlying, Bartholomew said. With ESG, it’s not one approach, he said. Having a combination of products is important to develop liquidity.

Establishing liquidity in a new market is always difficult. From an exchange perspective, “we have to understand the nuances between fixed income and equities — that we are not always able to transpose the equity model onto fixed income,” Bartholomew said. He said credit markets “are making inroads and the process is accelerating” on the ESG front. “What you’re seeing now is the transition of the O-T-C market to semi-electronic,” he said.

At Goldman Sachs, “we expect product usage will take a big leap … once we find a standardized methodology we can all agree on,” said Abel Elizalde, the global head of the credit market strategy team. “We believe that the [ESG] ecosystem — ETFs, listed products and swaps — will feed each other.”

For now, Elizalde said he is looking at ESG versus non-ESG performance data. “We want to efficiently take advantage of the differences,” he said. 

“For DWS, every new product must include ESG,” said Hansel. He said that push started on the fixed-income side with both passive and active investment, where the most popular asset classes are European and U.S. corporate bonds in different durations. 

Futures on ESG are a natural extension of the markets’ appetite, said Bartholomew. He said Eurex hopes to come to market with new products in the first half of 2021, “with ESG seen as the leader.”

“When we are able to offer them [clients] the same standardization and the same liquidity as we have in non-ESG instruments, I strongly believe our clients will use them,” said DWS’ Hansel. “This journey started in 2020 and still our clients rely on traditional investments,” he said. The challenge is to show these clients how they can combine those investments with sustainable goals, he added. 

“We as asset managers want to come together,” said Hansel. “It’s very good for a longer-term risk-return profile. The faster we can get these instruments, the better we can transform our investments into ESG.” 

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