A silver lining of the ongoing COVID-19 pandemic is the fact that cleared derivatives markets worked as shock absorbers during the severe economic downturn in March. There will undoubtedly be economic curves in the road ahead as we slowly recover from Coronavirus, but our markets remain well-positioned to help with this recovery thanks to their innovation and resilience.
Beyond the pandemic, however, the world's financial system is also facing another major problem: climate change.
Last year, I wrote that climate change is a global problem that requires a global response. And in FIA’s September policy paper on climate-related risks for financial markets, our organization highlighted real-world examples of how exchanges, market participants and the broader derivatives industry are working on a coordinated market-led response to sustainability issues.
More recently, FIA was asked to be part of a consultative group of market and climate change experts to develop recommendations for the Taskforce on Scaling Voluntary Carbon Markets under the leadership of former Bank of England Governor and current UN Special Envoy for Climate Action Mark Carney. This global private sector-led initiative is working to scale an effective, efficient and functioning voluntary carbon market to help meet the goals of the Paris Climate Agreement. The final report, published on 27 January, reflects numerous FIA member recommendations. Notably, the report supports the introduction of standardized carbon spot and futures contracts, which will assist with price formation and transparency and, in turn, should increase liquidity.
“A robust voluntary carbon market is one important tool the private sector can use to address climate change and reach net-zero emissions by 2050," wrote Bill Gates in a forward for the report. “While this market is important for a number of reasons, I am most excited because I believe it has the potential to drive early investment in green technologies, especially those that are difficult to commercialize.”
This report could not have been timelier. The new year of 2021 began with European Union carbon allowance prices hitting an all-time high. These record high prices demonstrate an increasing demand for market-based solutions to reduce carbon emissions and address climate risk.
Industry-led solutions are ramping up at a time that political and regulatory bodies around the globe are also getting serious about climate change. In Europe, pandemic relief efforts last year were tied into the region’s Green Deal to make EU member states climate neutral by 2050. Late last year, Chinese President Xi Jinping said the nation will aim to hit peak emissions before 2030 and carbon neutrality by 2060. And in the US, the incoming Biden administration has elevated addressing climate change to one of its top priorities and has rejoined the Paris Climate Agreement.
The private sector has a vital role to play in these efforts. As proof, in November Eurex continued its development of sustainability-related derivatives contracts, with the launch of DAX 50 ESG and EURO STOXX 50 ESG Indices to allow global investors to integrate ESG factors into their portfolios. In December, CME Group began providing futures on the Nasdaq Veles California Water Index (NQH2O) as a way for farmers, commercial end-users and even municipalities to manage their risks in a world where fresh water may become increasingly scarce. And in the wake of a discussion paper published late last year, global metals marketplace LME is pushing ahead in 2021 with plans to launch LMEpassport, a platform that will store and maintain essential provenance documents for traded metal to prove they have been sustainably sourced.
FIA is proud that our industry can play a role in meeting these private and public commitments and the transition to a sustainable global economy. Cleared derivatives markets are sure to play a prominent role in these areas, and to continue developing the necessary tools to manage transition risks.
Editor's Note: FIA believes strongly in the power of market-led solutions to face the challenge of climate change, and we’re eager to keep sharing your stories of resilience and success. Please email jreeves@fia.org if you want to share the work of your firm on sustainability-related issues in 2021.
