As individual and institutional investors increasingly invest in environmental, social and governance (ESG) activities, the role of derivatives to help meet ESG goals has grown.
Regulatory Considerations for Sustainability-linked Derivatives(pdf)
One particular area of growth is sustainability-linked derivatives
(SLDs), which have gained increasing prominence in the EU, UK and US. As
market participants make greater use of these products to further their
sustainability goals, it is important for the effectiveness and
integrity of the SLD market to assess whether and how these nascent
contracts fit into existing derivatives regulatory regimes.
This paper analyzes two categories of SLDs in the context of the
regulatory frameworks established for derivatives in the EU, UK and US
following the 2008 financial crisis. Specifically, this paper considers:
for Regulatory Considerations for Sustainability-Linked Derivatives
- Whether SLDs could be classified as swaps under US regulations
and/or over-the-counter (OTC) derivatives under EU and/or UK regulations
and, if so, what exemptions or exclusions might be available;
- The impact of sustainability-linked cashflows on derivatives that
would otherwise be excluded or exempt from certain requirements under
those regulatory regimes; and
- Compliance issues for market participants to consider if SLDs are classified as swaps and/or OTC derivatives contracts.
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