ISDA 35th AGM: Are Derivatives a Green Solution?

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Suzanne Cosgrove

Suzanne Cosgrove


“None of this is easy; we are making this up as we go along.”

Unraveling how to effectively mitigate the economic and market risks associated with climate change was the focus of an ISDA meeting session on Tuesday, but while the panel of international regulators and banking officials outlined their considerable and ongoing efforts, a clear path to a uniform solution remained elusive.

“We in derivatives understand complexity,” said panel moderator Steven Kennedy, ISDA’s global head of public policy. Even so, he said, understanding the breadth and scope of ESG and climate change is truly a challenge.

Sarah Breeden, executive director, Bank of England, said her mission was “green finance and finance green” to support the orderly transition of the economy to net zero.

The stakes are high, said Rupert Thorne, deputy to the secretary general, Financial Stability Board. If the transition is disorderly, the markets could see financial instability and unexpected shocks, he warned.

Thorne stressed the importance of having comparable numbers — both metrics and targets — among nations to enable market participants and their regulators to make solid decisions. He pointed to standards around climate-related risks recently proposed by the International Organization of Securities Commissions (IOSCO) and the Taskforce on Climate-related Financial Disclosures as models.

Julie Ansidei, head of strategy and sustainable finance at Autorite des Marches Financiers (AMF), promoted high-quality disclosures. “A move to a carbon-neutral economy will result in significant changes in the economy and in business models,” Ansidei said. The rapid change makes it important to have a common understanding of what is acceptable, she said.

Hester Peirce, a commissioner at the Securities and Exchange Commission, took a very different view, saying the SEC’s role “is the same as it’s always been — to help get investors the materials they need for investments.

“I don’t think there is anything specific we need to do regarding disclosures,” Peirce said. “It’s business as usual. …The solutions lie in the markets rather than in the metrics.”

Disclosures mean different things, Kennedy noted. Many companies now disclose in their 10-Qs (SEC-mandated quarterly reports) that they have exposure to climate risk, but regulators want to know what other risks are out there, systemic or otherwise, he said.

The Commodity Futures Trading Commission is not a disclosure regime, as is the SEC, said Dan Berkovitz, a CFTC commissioner. Nonetheless, intermediaries disclose to their customers, and swap dealers to their FCMs and the CFTC.  He added, “There is a variety of specificity and sometimes detail,” and it is important to standardize those disclosures to make sure the risks are identified internally.

The CFTC is managing the transition by making sure markets in its jurisdiction offer appropriate market-based solutions, Berkovitz said.  We want to encourage innovation to help manage these risks, and also ensure existing markets contribute to the solution, he said.
“Potentially, there will be a primary market, a secondary market and a derivatives market,” he said. “We want to be sure they are appropriate.”

The Bank of England has articulated its supervisory expectations on climate risks to its member banks since 2019 — an effort designed to manage those risks in a strategic, forward-looking approach, Breeden said. The goal is that “no one will have the excuse that they don’t know what to do to manage these risks.” 

Breeden said her team is working to construct a variety of scenarios using forward-looking metrics about the climate’s impact that the bank plans to make available online. The process “gets pretty granular,” she said, for example, projecting carbon prices ahead by many decades. 

“None of this is easy; we are making this up as we go along,” Breeden added.




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