Sustainability-linked derivatives

Myths and legends of the market
The JC’s guide to the foundational mythology of the markets.™

Index: Click ᐅ to expand: Mythology

Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Sustainability-linked derivatives
/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 attempt to please some imaginary people in a symbolic but utterly meaningless way.

This “Ecocide” theory, popular a generation ago, is out of favour with hand-wringing snowflakey academics nowadays, and ISDAs council of elders nay hope the JC’s corresponding theory, “swapicide” falls similarly out if academic favour. Well, it gas to fall in to favour first. So here goes.

Some might detect irony in ISDA’s latest product — “sustainability-linked derivatives” — should call too mind so notorious an example of poor environmental and social government.

It adds heft to the JC’s growing collection of examples of an organisation which says it is devoted to “safe, efficient markets” going out of its way to baffling, over-wrought and ultimately doomed^[1] work-creation schemes, felling more and more trees in the cause of pumping out white papers, new products and territorial land-grabs.

A sustainability-linked derivative is like a normal one — say and interest rate swap — except that spread one pays on one’s floating leg is adjustable measured by ones satisfaction of ESG key performance indicators

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

References

Credibility derivatives

↑ sunk without trace: [[2011 ISDA Equity Derivatives Definitions, 2022 ISDA Securities Financing Transactions Definitions, 2023 ISDA Digital Asset Transactions Definitionswere dead on arrival and those that did get used were no great scream of exhilarating clarity: the Regulatory IM and VM CSAs and the 2014 ISDA Credit Derivatives Definitions as cases in point.

[1] sunk without trace: [[2011 ISDA Equity Derivatives Definitions, 2022 ISDA Securities Financing Transactions Definitions, 2023 ISDA Digital Asset Transactions Definitionswere dead on arrival and those that did get used were no great scream of exhilarating clarity: the Regulatory IM and VM CSAs and the 2014 ISDA Credit Derivatives Definitions as cases in point.

[1]