At an FIA Expo panel discussion on Oct. 30, a diverse selection of experts offered the public sector, clearing, exchange, and corporate perspectives on sustainability issues. Despite the different backgrounds, all the panelists agreed that environmental, social and governance (ESG) issues are real and urgent -- and most importantly, will require an ambitious partnership between all parts of the public and private sector.
"I wanted to have something contentious we could battle about," said Eric Aldous, managing director and head of futures at RBC Capital Markets, who moderated the discussion, "but everyone is aligned on this panel."
That doesn't mean the way forward for derivatives markets is clear, however. The best way to tackle and standardize issues related to sustainability -- including how to define some of the most basic terms --- is still open to debate, and will require much work in the years ahead.
"Sustainability can mean something to each individual or each organization," said Commissioner Rostin Behnam of the U.S. Commodity Futures Trading Commission. "All of these challenges we're facing are packed into this single acronym of ESG. People in the public policy ecosystem need to figure out what each letter means to individuals and organizations. This is where the public sector needs to weigh in and have a perspective."
Speaking from the clearinghouse perspective, Andrej Bolkovic, chief executive officer of ABN AMRO Clearing Chicago, agreed that starting from a common foundation is crucial to developing ESG-related products and advancing sustainability across derivatives markets, noting that "standardization is the biggest challenge across the board."
As one concrete example, he noted the vast difference in how major ratings agencies rank companies. Bolkovic said that when it comes to the traditional trading space, major ratings agencies tend to be "90 to 95% correlated, but in the ESG space they're only around 30% correlated" on how they grade corporations.
On top of that, "asset owners create their own ESG investing policies that can be bespoke or customized," he said, noting that nuclear power is seen as a good thing from a sustainability perspective in France but is not seen that way in Germany.
Representing the exchange perspective on the panel was Vassilis Vergotis, global head of product development and strategy for equity, equity index and digital assets. He said that Eurex has launched products to meet demand for ESG-related investments, including "exclusion" indexes like its Stoxx Europe 600 ESG-X Index, a version of the large-cap Stoxx Europe 600 that screens out companies with low ESG rankings.
These products are theoretically easily deployed by firms that would provide liquidity, since they are simply variations on other indexes. However, Vergotis acknowledged the practical reality that "you need to track the benchmark or even outperform that benchmark if you want to foster lasting liquidity in these products."
Vincent Johnson, head of commercial advocacy and regulatory affairs at energy giant BP, added that even when all of these issues are solved and derivatives markets are ready for a sustainable future, the marketplace still needs an "unprescedented public private partnership to roll this together and support a transition" from legacy markets and economic models into this new world.
"It's crucial to have realism about the challenge to move forward. An energy company can't do this alone," Johnson said of BP, stressing the importance of coordinated effort along with each participant pledging "quantifiable and measurable commitments to customers, shareholders and their industry at large."
Commissioner Behnam said that he is eager to rise to this challenge, and for the CFTC to play an active role for both the cleared derivatives industry and the global financial system at large. To that end, he noted that the agency's Market Risk Advisory Committee that he sponsors convened an open meeting specifically to discuss climate-related financial market risks this summer, and pending broader CFTC approval plans to form a subcommittee focused exclusively on examining climate related financial market risk. The climate risk subcommittee will include a wide swatch of thought leaders from the industry, academia and from sustainability advocates, and could help lay the foundations for a "cohesive group effort to think about these sustainability challenges and address them in a thoughtful way."
"We all have a vested interest in transparent, safe and functional markets, but in my view there has to be a public private partnership to really move the conversation forward," Behnam said.