‘It’s important that it’s the right product at the right time, not necessarily the perfect product.’
Environmental markets are “transitioning to an asset class in their own right,“ said Gordon Bennett, managing director of utility markets for ICE and a panelist at a FIA IDX’s Tuesday presentation, “Exchanges and the Roll Out of New Sustainability Products.”
“They’ve changed a lot in the last two to three years” and are not just about carbon markets anymore, Bennett said. “Clearly, more people are getting involved” in ESG-related markets, Bennett added, noting that data in the CFTC’s Commitments of Traders Reports are starting to reflect a wider diversity of market participants.
Products like the CME’s E-mini S&P ESG 500 Futures, launched in November 2019, and E-mini S&P Europe 350 ESG Index futures, launched in May 2021, are important, said Owain Johnson, CME Group managing director and global head of research and product development.
But ensuring that the benchmarks we already have are environmentally sustainable is also important, Johnson said. That casts a wide net philosophically and includes initiatives like more humane treatment for livestock (the CME trades live cattle futures), he said.
On August 31, the London Metal Exchange launched a register it calls the LMEpassport to digitally store sustainability credentials for metals trading on its platform. The requirement for warehouse companies to start using it will be rolled out gradually over 18 months, starting with aluminium in October 2021.
“We have a strong connection to the physical markets” our contracts are based on, said Hugo Brodie, vice president of sustainability at the LME. “But what we need is a fundamental agreement on what constitutes sustainability,” he said. “That’s still really contentious. … So what we are trying to do is to get aluminum producers to start reporting on what they are doing” in terms of the environment and human rights, Brodie told the IDX audience.
“Exchanges are a little too prescriptive … they are looking to develop a perfect product for a future world,” said Richard Heath, head of business development for global commodities at the European Energy Exchange. “But people need products to hedge risk in this period of change and transition,” he said. “It’s important that it’s the right product at the right time, not necessarily the perfect product.”
FIA moderator Emma Davey asked Johnson about the CME Group’s Sustainable Derivatives Clearing Service, launched earlier this month with a stated goal of helping market participants track and report on how their trading activities advance their sustainability goals. The development of the service was in response to clearing members, who “came to us with a mandate to create more sustainable products” and to benchmark those products, Johnson said. “Greenwashing is the enemy of everything we are trying to do.”