Panelists discuss market-based initiatives for a more sustainable future

FIA's International Futures Industry Conference concluded on 18 March, with in-depth discussions on sustainability and the role and opportunities for derivatives markets to develop new products and solutions to support the world's transition to a low-carbon environment.

In a one-on-one discussion with FIA President and CEO Walt Lukken, Rostin Behnam, acting chairman of the US Commodity Futures Trading Commission, talked about the agency's formation of a Climate Risk Unit, announced on 17 March.

Behnam explained that the unit will build on the recent work of the CFTC's Market Risk Advisory Committee, which published a comprehensive report on the financial markets and climate change late last year. The unit will be staffed from across the CFTC’s divisions, Behnam said, and will explore the role of derivatives in managing "physical risks from devastating climate events."

The unit is intended to accelerate the agency's engagement in support of industry-led and market-driven processes in the climate and the larger ESG space and ensure that new derivatives products and markets fairly facilitate hedging, price discovery, market transparency, and capital allocation.

Exchange innovations

Financial markets infrastructure will play a crucial role in enabling the transition to a low-carbon economy, exchange leaders said, and major derivatives exchanges are committed to playing their part in that movement.

"I'm a strong believer that markets are powerful. They are more powerful than the decisions that we make as regulators, politicians and managers," said Jeff Sprecher, chairman and CEO of Intercontinental Exchange. "The carbon-based and renewable-oriented energy products that we list are some of our fastest-growing contracts. That attracts interest and we have seen a velocity increase in capital going into this area of the markets."

Adena Friedman, president and CEO of Nasdaq, agreed on the central role markets will play in the transition to a low-carbon world.

"Corporates are really engaging in what they can do to be more sustainable as businesses. It's quite impressive, frankly, how far we have come and how aligned the overall ecosystem is in trying to find a more sustainable way to run businesses," Friedman said. "This is carrying into the US from other parts of the world and we're seeing an enormous amount of innovation in carbon offset markets, sustainable bonds, and ways for companies to raise capital to fund sustainable projects."

Exchange leaders also talked about how they are responding to the call for financial markets to help address climate change. In Asia, for instance, Singapore Exchange continues to bring more sustainable investment and risk management solutions to global investors. It is also working alongside its customers to develop more ESG solutions, including derivatives, to help them meet their sustainability objectives, said Loh Boon Chye, CEO of SGX.  Michael Peters, chief executive of Eurex, noted that his exchange has been a proponent of sustainability products in Europe for about two years.

Financial Markets

A panel of industry experts discussed the role of financial firms in helping to build a more sustainable future and agreed that the types of products coming to market are being driven by both regulatory and client demands. This is particularly noticeable in Europe, said Meaghan Muldoon, global head of ESG integration at BlackRock.

"One of the things we've been focused on in the European market over the last six-to-nine months is the implementation of the Sustainable Financial Disclosure Regulation, which aims to ensure transparency and consistency in how products are being marketed," said Muldoon. "I'd be surprised if we didn't find that we're also at a tipping point in the US as we're already seeing a lot of changes coming into view."

Julie Winkler, chief commercial officer at CME Group, added that exchange products need to evolve to reflect changing customer needs.

"This means evolving our product suite and the benchmarks that we have been known for, over the last 175 years. We have to be at the forefront and that means helping producers and end-users manage their risk through this major transition across all markets, whether it's our energy benchmarks, our agricultural products or our mines," Winkler said.

Chris Leeds, executive director, commodity origination at Standard Chartered Bank, talked about his involvement in The Taskforce on Scaling Voluntary Carbon Markets, a private sector-led initiative instigated by Mark Carney, UN Special Envoy for Climate Action. Formed last year, the Taskforce recently came up with a blueprint for scaling voluntary carbon credit markets.

"Voluntary carbon markets are about putting a price on carbon. By having a price on carbon emissions, it enables many things to happen," said Leeds. "It changes the incentives. It changes the valuations of companies, so those that are big emitters will see costs hitting their bottom line and those that are low emitters will thrive."

Leeds continued, "There are other ways of implementing carbon pricing but the way that has evolved over the last 20 years is carbon trading and the right to emit a finite commodity. Voluntary carbon markets are the other side of the coin, where we are trying to incentivize capital to move into projects that will allow us to reduce or even remove carbon dioxide as quickly and as cheaply as possible."

He added, "We estimate that of the 50 billion tons of carbon dioxide that needs to be reduced annually to get to net-zero by 2050, up to 8 to 10 billion tons could be traded and reduced through the voluntary carbon markets."