New developments in ESG and sustainable finance reach the derivative markets. ESG goals become easily reachable with the corporate world’s participation.
ESG, or Environment, Social and Governance concerns, are influencing the corporate world. Sustainable finance is not just a goal anymore, but something that companies do use.
A recent development in the derivatives market shows how far the ESG concerns have gone and how companies may benefit from sustainable finance. The derivatives market is an over-the-counter market that deals with futures, forwards, swaps and options. It is mainly used for hedging against fluctuations in underlying assets and to protect investments against unexpected market moves.
Most recently, banks sold derivatives in the form of currency hedging products based on a company’s ESG goal. Therefore, the company locks in a certain rate for reaching its ESG goals, and if the target is met, it saves the difference between the swap rate and the locked-in price.
As the chart below shows, the EU greenhouse gas emissions are forecast to drop to zero by 2050. Hence, one way to stimulate companies to get engaged in sustainable finance is to offer such products to reach the long-term ESG targets.
New US Administration Back on the Fight Against Climate Change
The four years of Trump’s presidency were characterised by protectionism and isolationism. One of the most controversial decisions taken by America shortly after Trump’s election in 2016 was leaving the Paris Agreement, a legally binding international treaty on climate change.
But the new administration in Washington was quick to reverse the decision, and thus, not only Europe but also America will likely favour new ESG targets in an effort to curb the greenhouse emissions.
Renewable Energy Is On the Rise
The production and use of energy accounts for more than three-quarters of the EU’s GHG emissions. Fossil fuels dominate as the main energy resources.
However, the share of renewable energy has almost doubled in the past decade, reaching 15.3% of the overall energy mix. It even exceeds nuclear power, at 13%.
If corporations are supported in their sustainable finance efforts, reaching the ESG targets is easier and faster. The ESG factors are now part of all major US corporations, and attracting investments in reducing their carbon footprint is one way to gain public recognition and appreciation. It is a different way to build a stronger brand.
Progress comes at different speeds, and the move in the derivative market is just one example. The more popular such products become, the faster the long-term ESG goals will be reached.