View source for Sustainability-linked derivatives

{{a|myth|}}{{c2|ESG|ISDA}}{{dpn|/səsˌteɪnəˈbɪlɪti lɪŋkt dɪˈrɪvətɪvz/|n}}It is said that the early inhabitants of Easter Island became so obsessed with erecting statues of their ancestors that they felled every tree on the island for rollers to transport their monoliths. The removal of root systems  compromised soil integrity, accelerating erosion, degraded fertility and eventually ruined the ecosystem, rendering the island all but uninhabitable and wiping themselves out, all in the forlorn hope of pleasing some imaginary people in a symbolic but meaningless way. 

This “ecocide” theory, popular a generation ago, is out of favour with hand-wringing [[snowflake]]y academic types nowadays. ISDA’s council of elders may feel the same way about the JC’s corresponding “swapicide” theory.<ref>Sunk without trace: [[2011 ISDA Equity Derivatives Definitions, [[2022 ISDA Securities Financing Transactions Definitions]], [[2023 ISDA Digital Asset Transactions Definitions]]. Those that did bear fruit were no great scream of exhilarating clarity: the Regulatory IM and VM CSAs and the [[2014 ISDA Credit Derivatives Definitions]] as cases in point.</ref> 

Is ISDA desperately trying to stay ''relevant''? Recent clumsy land-grabs of ICMA/ISLA territory and forays into [[crypto]] give that impression. In any case, there is irony that ISDA’s latest foray into the new normal — “sustainability-linked derivatives” — should resemble so notorious an example of environmental and social misgovernment as Easter Island:

An embedded community of toilers, supposedly there to steward the onward prosperity of the wider environment, swept up by fashionable collective delusions, wastes every tree in sight in pursuing mad, hypercomplicated and illogical schemes for imaginary investors who no-one has seen, let alone expressed demand for the product.  

Even so this feels like a step further through the looking glass, deeper down the rabbit hole.  ISDA’s previous follies at least tried to cater to existing markets and regulatory imperatives, however cack-handedly. Sustainability derivatives are an attempt to create a new one out of — ~cough~ — hot air.
===How they are meant to work===
If its discussion paper is anything to go by, not even ISDA has a clear idea what a sustainability-linked derivative would look like. Their best suggestion is that it would be some kind of plug-in to a normal swap — say an interest rate swap — containing a ratchet device to adjust the parties’ respectively spreads dependent on their compliance (or not) with certain pre-agreed  [[ESG]] [[key performance indicators]]. 

Perhaps ISDA hasn’t followed the media coverage of greenwashing, but measuring environmental impact is hard, and open to abuse.

Nor is this a derivative, but rather more of random [[penalty clause]]: a payment derived not from some observable third party indicator, but an internal metric entirely within the counterparty’s gift to game. I know what targets I can plausibly meet; my counterparty has no idea at all. This becomes an open invitation to systematic insider dealing on ones own operations. Could I short my own ''sustainability'' compliance, and incentivise my own transition ''towards'' carbon and modern slavery?

And what has any of this to do with my Counterparty? Why is paying cash away to a random stranger any kind of benefit to the environment? What incentive does a counterparty have to offer a discount to a counterparty because it cracked its own gender pay gap? Just by way if applause for its moral aspiration? That is not how commerce works. Besides, how are you supposed to ''hedge'' that?

There is force in the idea that carbon credits are derivatives not so much of environmental damage as much as of regulatory fashion.  SLDs aren’t event that. These aren’t even derivative at all. They penalise, and reward, innocent parties.
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*[[Credibility derivatives]]
*[[Stakeholder capitalism]]
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