On the 15th of July, the European Capital Market Institute (ECMI) published a Research Report by Karel Lannoo and Apostolos Thomadakis named Derivatives in Sustainable Finance which acknowledged that sustainability has risen in scope and importance on the agenda of policymakers.
In Europe, this has translated into the EU Sustainable Finance Action Plan, which aims to: i) reorient capital flows towards sustainable investments; ii) manage financial risks stemming from climate/environmental/social issues; and iii) promote transparency and long-termism in financial and economic activity.
A market that could play a significant role towards Europe’s green transition is derivatives. The market has been tightly regulated since the 2007-08 financial crisis, making it safer and more transparent. Derivatives facilitate capital-raising via the hedging of risks related to sustainable investments. Moreover, they enhance the transparency and the price formation process of the underlying securities, and thus foster long-termism.
This report highlights how derivatives markets can – through their forward dimension, their global and consolidated nature, and their proper regulation – contribute to:
- enabling the EU to raise and channel the necessary capital towards sustainable investments;
- helping firms hedge risks related to ESG factors;
- facilitating transparency, price discovery and market efficiency; and
- contributing to long-termism
About the authors
Karel Lannoo has been CEO of CEPS since 2000, a Leading Independent Think Tank on European Policies, ranked among the top 10 think tanks in the world. He is General Manager of the European Capital Markets Institute (ECMI) and the European Credit Research Institute (ECRI), both operated by CEPS.
Apostolos Thomadakis, Ph.D. is a Researcher at the European Capital Markets Institute (ECMI), an independent research institute run by CEPS’ Financial Markets and Institutions Unit.