Skip to main content Accessibility help
×
Hostname: page-component-745bb68f8f-cphqk Total loading time: 0 Render date: 2025-01-31T10:06:44.082Z Has data issue: false hasContentIssue false

26 - Climate Risk and Financial Markets

The Case of Green Derivatives

from Part V - Financial Innovation and Sustainability

Published online by Cambridge University Press:  30 January 2025

Kern Alexander
Affiliation:
University of Zurich
Matteo Gargantini
Affiliation:
University of Genoa
Michele Siri
Affiliation:
University of Genoa
Get access

Summary

The European financial markets have been placed on the path to a sustainable and green transition. The European Commission embraced with the EU Green Deal a new growth strategy built on a sustainable economic model that aims at making the EU the first carbon neutral continent by 2050. This generational economic and industrial transition set by the EU Green Deal will require at least 1 trillion euro in public and private sustainable investments. This chapter analyzes how derivatives markets can contribute to support the green transition, enable private markets to raise capital towards sustainable goals, and help market participants to manage the market and transition risk to a sustainable economy. “Green derivatives” like ESG- linked swaps, emission allowance futures, extreme weather events derivatives, are examples of financial innovation is dealing with climate-related risk. This chapter focuses on the EU Strategy for Financing the Transition to a Sustainable Economy in the EU and offers a looks at what the Commodities Futures Trading Commission is doing in the US on climate-related risk and derivatives markets. The chapter offers some early critical considerations on the private-public synergies and opportunities that might result from the growth and expansion of sustainable derivatives markets and the possible risks that policymakers should consider in the evolution process of such markets.

Type
Chapter
Information
The Cambridge Handbook of EU Sustainable Finance
Regulation, Supervision and Governance
, pp. 663 - 685
Publisher: Cambridge University Press
Print publication year: 2025

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Alvarez, N., Cocco, A. and Patel, K. (2020), ‘A new framework for assessing climate change risk in financial markets’, Chicago Fed Letter, Essay on Issues, available at: www.chicagofed.org/publications/chicago-fed-letter/2020/448.Google Scholar
Awrey, D. (2019), ‘Split derivatives: Inside the world’s most misunderstood contract’, Yale Journal on Regulation, 36(2), 495.Google Scholar
Baker, C. (2022), ‘Derivatives and ESG’, American Business Law Journal, 59(4), 725.CrossRefGoogle Scholar
Balasta, S. (2020), ‘Enel issues £500 million of sustainability-linked bond’, available at: https://bit.ly/3Pyy31Q.Google Scholar
Beylin, I. (2020) ‘Designing regulation for mobile financial markets’, UC Irvine Law Review, 10, 497, available at: https://scholarship.law.uci.edu/ucilr/vol10/iss2/5.Google Scholar
Beylin, I. (2023), ‘ESG-linked swaps and the next chapter of regulatory innovation’, Review of Banking and Financial Law, 42, 755, available at: https://bit.ly/4ctlDSG.Google Scholar
CFTC (Commodity Futures Trading Commission) (2020), Managing Climate Risk in the U.S. Financial System, Report of the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission, available at: https://tinyurl.com/4p4etb35.Google Scholar
CFTC (Commodity Futures Trading Commission) (2021a), ‘Acting Chairman Behnam establishes new climate risk unit’, available at: www.cftc.gov/PressRoom/PressReleases/8368-21.Google Scholar
CFTC (Commodity Futures Trading Commission) (2021b), ‘Acting Chairman Behnam establishes new Climate Risk Unit Interdivisional Group will focus on derivatives markets’ role in addressing climate-related risk and transitioning to low-carbon economy’, Press Release, 83698-21, March 17, 2021, available at: www.cftc.gov/PressRoom/PressReleases/8368-21.Google Scholar
CFTC (Commodity Futures Trading Commission) (2021c), ‘Transcript: Energy Markets Advisory Committee Meeting on June 3, 2021’, available at: https://bit.ly/3x9eK96.Google Scholar
CFTC (Commodity Futures Trading Commission) (2021d), ‘Transcript: Energy Markets Advisory Committee Meeting on September 15, 2021’, available at: https://bit.ly/43xPW6X.Google Scholar
CFTC (Commodity Futures Trading Commission) (2022a), ‘Notice, Request for Information on Climate Related Financial Risk’, available at: https://bit.ly/4cu5Wur (accessed February 18, 2023).Google Scholar
CFTC (Commodity Futures Trading Commission) (2022b), ‘CFTC Releases Request for Information on Climate-Related Financial Risk’, available at: www.cftc.gov/PressRoom/PressReleases/8541-22.Google Scholar
Culp, C. L. (2004), Risk Transfer: Derivatives in Theory and Practice (Hoboken, NJ: Wiley Finance).Google Scholar
ECB/ESRB (European Central Bank/European Systemic Risk Board) (2021), ‘Project team on climate risk monitoring, climate-related risk and financial stability’, July 2021, available at: https://bit.ly/4cnzslT.Google Scholar
Enel (2020), ‘Enel successfully launches new multi-tranche 4 billion U.S. dollar sustainability-linked bonds’, available at: https://bit.ly/4cHUmwf.Google Scholar
Engel, J. (2019), ‘The politics of commodity derivatives reform in the EU and in the USA’, in Avgouleas, E. and Donald, D. (eds.), The Political Economy of Financial Regulation (Cambridge, UK: Cambridge University Press), 310344.CrossRefGoogle Scholar
ESMA (European Securities and Markets Authority) (2022), ‘Emission allowances and associated derivatives’, available at: https://bit.ly/4crdQox.Google Scholar
European Commission (2019a), ‘Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions – The European Green Deal’, COM(2019) 640 final, December 12, available at: https://tinyurl.com/5n7s54kr.Google Scholar
European Commission (2019b), ‘A European Green Deal’, available at: https://bit.ly/43wb4dC (accessed January 10, 2023).Google Scholar
European Commission (2019c), ‘The European Green Deal Investment Plan and Just Transition Mechanism Explained’, available at: www.eea.europa.eu/policy-documents/com-2019-640-final (accessed 26 February 2023).Google Scholar
European Commission (2021a), ‘Communication from the Commission to the European Parliament, the Council, The European Economic and Social Committee and the Committee of the Regions, Strategy for Financing the Transition to a Sustainable Economy,’ COM(2021) 390 final, July 6, 2021, available at: https://tinyurl.com/3s849txw.Google Scholar
European Commission (2021b), ‘Development of EU Ecolabel criteria for Retail Financial Products’, available at https://susproc.jrc.ec.europa.eu/product-bureau/product-groups/432/documents (accessed 26 February 2023).Google Scholar
Ferrarini, G. and Saguato, P. (2015), ‘Regulating financial market infrastructure’, in Moloney, N., Ferran, E., and Payne, J. (eds.), The Oxford Handbook of Financial Regulation (Oxford: Oxford University Press), 568595.Google Scholar
Financial Stability Oversight Council (FSOC) (2021), ‘The Financial Stability Oversight Council’s response to climate-related financial risk’, available at: https://bit.ly/3PBhrXo.Google Scholar
Futures Industry Association (2020), ‘How derivatives markets are helping the world fight climate change’, available at: www.fia.org/sites/default/files/2020.Google Scholar
Futures Industry Association (2022), ‘Comment for Federal Advisory Committees and Subcommittees’, 85 FR 21840, available at: https://bit.ly/3PBl13P.Google Scholar
Giglio, S., Kelly, B. and Stroebel, J. (2021), ‘Climate finance’, Annual Review of Financial Economics, 13, 1536, available at: https://bit.ly/3PBhtP0.CrossRefGoogle Scholar
Greenspan, A. (2005), “Transfer and financial stability” (May 5), available at www.federalreserve.gov/boarddocs/speeches/2005/20050505.Google Scholar
Hauman, M., O’Leary, L. and Wockener, K. (2020), ‘EU Sustainable Finance Consultation – Ensuring the grass is greener on the other side’, available at: https://bit.ly/43ynzoT.Google Scholar
Hirtenstein, A. (2020), ‘JPMorgan currency deal highlights finance’s green shift’, Wall Street Journal, October 26, available at: https://on.wsj.com/43zyLSu.Google Scholar
ING (2020), ‘Introducing the world’s first sustainability improvement derivative’, available at: https://bit.ly/3TyM8NY.Google Scholar
ISDA (International Swap and Derivatives Association) (2020), ‘Derivatives in sustainable finance: Enabling the green transition’, available at: www.isda.org/a/KOmTE/Derivatives-in-Sustainable-Finance.pdf.Google Scholar
ISDA (International Swap and Derivatives Association) (2021a), ‘Overview of ESG-related derivatives products and transactions’, available at: https://bit.ly/3TuDoZk.Google Scholar
ISDA (International Swap and Derivatives Association) (2021b), ‘Regulatory considerations for sustainability-linked derivatives’, available at: https://bit.ly/3PviI2g.Google Scholar
ISDA (International Swap and Derivatives Association) (2021c), ‘Sustainability-linked derivatives KPI guidelines’, available at: https://bit.ly/3PwewPC.Google Scholar
ISDA (International Swap and Derivatives Association) (2021d), ‘Role of derivatives in carbon markets’, available at: https://bit.ly/3PAxkxn.Google Scholar
ISDA (International Swap and Derivatives Association) (2022a), ‘Sustainability-linked derivatives: Where to begin’, available at: https://bit.ly/43upivC.Google Scholar
Kennedy, A. and Zahabi, E. (2021), ‘European green bonds and sustainability-linked derivatives – A brief update’, available at: https://bit.ly/3TyOj3Y.Google Scholar
Landry, E., Schlosser, C. A., Chen, Y.-H. H., Reilly, J. and Sokolov, A. (2019), MIT Scenarios for Assessing Climate-Related Financial Risk, MIT Joint Program on the Science and Policy of Global Change. Report No. 339.Google Scholar
Lannoo, K. and Thomadakis, A. (2020), ‘Derivatives in sustainable finance’, CEPS-ECMI Study, Centre for European Policy Studies.Google Scholar
Lovells, H. (2021), ‘ESG derivatives: New tools unlocking sustainable capital’, available at: https://bit.ly/3TvFKqL.Google Scholar
Ritchie, G. and Ainger, J. (2021), ‘Exotic world of ESG derivatives triggers warning from regulator’, available at: https://bloom.bg/3TnF06U.Google Scholar
Rudebusch, G. (2021), ‘Climate change is a source of financial risk’, Federal Reserve Bank of San Francisco, 70, 1.Google Scholar
Saguato, P. (2024), ‘Green Bets?’ (on file with author).Google Scholar
Sandor, R. (2012), Good Derivatives – A Story of Financial and Environmental Innovation (Hoboken, NJ: Wiley).CrossRefGoogle Scholar
Schwarcz, S. (2020), ‘Regulating derivatives: A fundamental rethinking’, Duke Law Journal, 70(3), 546606, available at: https://scholarship.law.duke.edu/dlj/vol70/iss3/2/.Google Scholar
Sciarrone Alibrandi, A. and Grossule, E. (2017), ‘Commodities derivatives’, in Busch, D. and Ferrarini, G. (eds.), Regulation of the EU Financial Markets – MiFID II and MiFIR (Oxford: Oxford University Press), 439467.Google Scholar
Siemens Gamesa (2019), ‘Siemens Gamesa pioneers the green foreign exchange hedging market’, available at: https://bit.ly/3TpPRxk.Google Scholar
Siemens Gamesa (2020), ‘Siemens Gamesa in ESG-linked interest rate swap’, Economic Times: Energyworld.com, March 12, available at: https://bit.ly/3vwHBDF.CrossRefGoogle Scholar
So, E. (2021), ‘ESG derivatives’, available at: www.whitecase.com/insight-our-thinking/esg-derivatives.Google Scholar
Société Générale (2019), ‘Enel electrifies sustainability market with inaugural green-linked bond and swap’, available at: https://bit.ly/3vA3Dp4.Google Scholar
Stafford, P. (2020), ‘US regulator welcomes water futures as tool to manage climate risk’, available at: www.ft.com/content/0368fd8b-67d5-4fc2-94ba-a06e180b7a65.Google Scholar
Steele, G. (2020), ‘Confronting the ‘climate Lehman moment’: The case for macroprudential climate regulation’, Cornell Journal of Law and Public Policy, 30, 109157, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3542840.Google Scholar
Tondel, L. (2009), ‘Introduction to derivatives’, in Aicher, R.D. (ed.), Derivatives: Legal Practice and Strategies (Boston, MA: Aspen), § 1.01.Google Scholar
White & Case (2020), ‘The EU Taxonomy: The answer to the question “what is green”?’, August 20, available at: https://bit.ly/3IQCvoR.Google Scholar
Wockener, K. and Hauman, M. (2019), ‘EU Sustainable Finance Regulation’, available at: https://bit.ly/3Tylh4R.Google Scholar

Save book to Kindle

To save this book to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×