Eurex launches ESG-focused derivatives amid new ISDA sustainability standards

The simultaneous developments at ISDA and Eurex mark a significant step in the integration of sustainability considerations into the fabric of financial trading. These efforts not only cater to the growing demand for ESG-compliant investment options but also signal a broader shift in the industry towards sustainable and responsible trading practices.

In a significant move within the trading industry, Eurex, Europe’s leading derivatives exchange, has announced the launch of new derivatives focused on Environment, Social, and Governance (ESG) indices.

This development comes closely on the heels of the International Swaps and Derivatives Association (ISDA) introducing a comprehensive sustainability-linked derivatives (SLD) clause library.

ISDA’s pioneering effort for SLDs

ISDA’s new clause library aims to standardize the burgeoning field of SLDs. These derivatives incorporate sustainability-linked cash flows, relying on key performance indicators (KPIs) to ensure adherence to ESG targets. The initiative, led by ISDA Chief Executive Scott O’Malia, promises to streamline negotiation processes and reduce risks in this highly bespoke market segment.

“By their nature, SLDs are highly bespoke transactions, but the language that describes the terms and the objectives doesn’t have to be. The ISDA SLD Clause Library is designed to eliminate unnecessary differences and bring greater standardization to this market. This will bring more efficiency to the negotiation process and reduce risks, setting the foundations for this market to develop further,” said O’Malia.

The ISDA SLD Clause Library, available on the ISDA MyLibrary platform, includes provisions for evidence of sustainability performance, mechanisms for adjusting cash flows based on ESG target compliance, and options for handling disruptions.

Eurex’s expansion into socially responsible investing

Aligning with these industry advancements, Eurex is set to broaden its ESG derivatives offerings. Starting 22 January, Eurex will introduce futures on various Socially Responsible Investing (SRI) indices, including STOXX Europe 600 SRI, MSCI SRI Europe, USA, World, and Emerging Markets. These derivatives are designed to meet the needs of investors with stringent ESG mandates, such as asset managers for endowment funds or foundations.

According to Randolf Roth, a member of the Eurex executive board, this move reinforces Eurex’s commitment to responsible investing. “We are very pleased to further strengthen our leading role in the ESG segment with two strategically strong index providers. Our offering will certainly appeal to new user groups that have stricter ESG mandates and need to invest responsibly, such as asset managers who invest on behalf of endowment funds or foundations,” Roth stated.

Eurex’s product suite already includes sustainable versions of established benchmarks, with a methodology ranging from negative ESG screening to best-in-class approaches. Since introducing its first ESG derivatives in 2019, Eurex has seen a steady increase in trading volumes, cementing its position as a leading liquidity pool for ESG derivatives globally.