FIA Expo: ESG Derivatives Evolve, But Growing Pains Remain

Suzanne Cosgrove

Suzanne Cosgrove


Industry buzz about exchange-traded environmental, social and corporate governance (ESG) products has grown, but getting traction on ESG derivatives can be challenging, a panel of industry specialists said.

Speaking in a Eurex-sponsored FIA Expo-V session on the evolution of ESG in derivatives in equity and fixed-income sectors on Wednesday, Megan Morgan, global head of equity and index sales for Eurex, said the exchange’s efforts in the field began in 2018, spurred by asset managers who  were looking for sustainable investment opportunities.

Nearly two years later, Eurex offers derivative products on 10 ESG indexes.

But “the desire to trade ESG derivatives has not yet translated into trading ESG derivatives,” Morgan said.

“When it comes to derivatives, liquidity and order book pricing are key,” Morgan said. But building liquidity is not easy and its growth does not go in a straight line, she noted.

“We can only get the market to that inflection point (of liquidity) if inventors truly believe the underlying index provides a standard proxy for their underlying principles. And in a world where there is no common agreement on what defines ‘E’ and what defines ‘S’ and what defines ‘G’ it’s been quite a challenge to find a methodology that everyone can agree on,” she said.

Eurex’s approach to derivatives has been to get a product as close to a standard index benchmark as possible and use a simple exclusion process that takes out products like gambling, tobacco, controversial weapons and coal, she said. MSCI ESG Indexes use a similar methodology, Morgan noted.

Eurex launched its first ESG futures in February 2019, on the STOXX 600 ESG-X, which comprised the STOXX 600 index excluding non-ESG friendly products.

As of the close of trading on Monday, November 9, Eurex boosted open interest in an assortment of ESG products, including 129 billion euros in MSCI EM ESG Screened, 787 million in MSCI Europe 600 EGX and 48 million in MSCI ESG Leaders Select 20.   

Davide Masi, a fixed-income strategist at  Eurex, said investment in the ESG sector has been slower in the fixed-income space, but it is growing. A recent Eurex survey of European asset managers showed that just less than half the respondents indicated they have implemented ESG strategies or integrated ESG principles in their investments strategies in the fixed-income space, he said.

Patrick Kondarjian, global head of ESG sales at HSBC, described navigating market liquidity as a balancing act. “It’s a trade off between how much you customize your (ESG) index or product and how much liquidity you get out of it. The more you customize your criteria,” the less liquidity, he said.

For people with very stringent criteria, it’s more likely that they will deviate and go into an over-the-counter trade that is customized, Kondarjian said. But if investors want a reference point, they need an index, he added.

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