ESG Derivatives – a Silver Bullet? November 2020

Dan Humble

As an industry, we have reached the point of near saturation in terms of the ‘noise’ surrounding ESG. What remains to be seen, however, is how the vast majority of buy-side firms will put the theory into practice. Many market participants will be wondering if the emerging pipeline of ESG derivatives could present the answer they have been waiting for.

October saw the introduction of futures and options on ESG indices by Eurex, while Nasdaq aims to offer ESG contracts based on customizable baskets of stocks in 2021. Whilst the use of these products can serve as worthy additions to an ESG strategy, it will be rare that it can be a strategy in and of itself. Complex ESG swaps have also been mooted, under which exposure to the ‘good’ parts of a company or group can be separated from the ‘bad’. Leaving aside the potential conflict with principles of stewardship and engagement (a large part of the ‘G’ in ‘ESG’), these also appear only to be a partial solution.

For an existing fund seeking to add an ESG overlay to an established portfolio and investment strategy, the emergence of ESG derivatives as tools is welcome, but it is not a silver bullet.

A bespoke and detailed ESG policy, including tolerances, which allows fund managers to keep all the tools currently at their disposal requires consideration beyond simply selecting from the plug-and-play products on offer today.

We have seen a great deal more engagement from the buy-side in terms of how firms are approaching ESG investing. The real test is whether firms are able to practice what they preach and deliver investment returns as part of a comprehensive, coherent and credible ESG policy.

If you wish to discuss this topic in more detail, please contact your relationship partner or Dan Humble at

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