Derivatives in Sustainable Finance

Karel Lannoo and Apostolos Thomadakis

ECMI Papers from Centre for European Policy Studies

Abstract: In recent years, 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: i. enabling the EU to raise and channel the necessary capital towards sustainable investments; ii. helping firms hedge risks related to ESG factors; iii. facilitating transparency, price discovery and market efficiency; and iv. contributing to long-termism.

Pages: 46 pages
Date: 2020-07
New Economics Papers: this item is included in nep-cwa and nep-env
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eps:ecmiwp:29791

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