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Sustainability-linked derivatives: Difference between revisions
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If its discussion paper is anything to go by, not even ISDA has a clear idea what a sustainability-linked derivative would look like. The best guess is that it would be a sort of plug-in to a normal swap — say an IRS — containing a ratchet device to adjust the parties’ respective spreads dependent on their own compliance (or not) with certain pre-agreed [[ESG]] [[key performance indicators]]. | If its discussion paper is anything to go by, not even ISDA has a clear idea what a sustainability-linked derivative would look like. The best guess is that it would be a sort of plug-in to a normal swap — say an IRS — containing a ratchet device to adjust the parties’ respective spreads dependent on their own compliance (or not) with certain pre-agreed [[ESG]] [[key performance indicators]]. | ||
Now objectively measuring environmental impact is hard, and open to abuse even when you aren’t talking your own book | Now objectively measuring environmental impact is hard, and open to abuse even when you aren’t talking your own book. But greenwashing risk is the least of the problems here. | ||
Nor is this a ''[[derivative]]'' in the sense normally understood. It is more like a 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: it knows what targets it can and cannot plausibly meet; its counterparty has — short of due diligence no-one will be bothered to do (seeing as it will bugger up your marginal carbon footprint) —no idea at all. | Nor is this a ''[[derivative]]'' in the sense normally understood. It is more like a 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: it knows what targets it can and cannot plausibly meet; its counterparty has — short of due diligence no-one will be bothered to do (seeing as it will bugger up your marginal carbon footprint) —no idea at all. | ||
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Speaking of whom, what has any of this to do with one’s trading counterparties? What benefit accrues to the environment when one swaps desk does, or does not, pay, cash away to another? Why would someone else’s swaps desk make itself hostage to my compliance effort? Why should it suffer a discount — a penalty — just because I have cracked my gender pay gap? (Isn't there reward enough in just ''doing'' that?) Commerce does not work by offering emoluments to virtuous strangers. Swaps traders certainly don’t. Besides, how are you supposed to ''hedge'' that? | Speaking of whom, what has any of this to do with one’s trading counterparties? What benefit accrues to the environment when one swaps desk does, or does not, pay, cash away to another? Why would someone else’s swaps desk make itself hostage to my compliance effort? Why should it suffer a discount — a penalty — just because I have cracked my gender pay gap? (Isn't there reward enough in just ''doing'' that?) Commerce does not work by offering emoluments to virtuous strangers. Swaps traders certainly don’t. Besides, how are you supposed to ''hedge'' that? | ||
The sustainability a counterparty should really care about is that of its counterparties’ ''solvency''. | The sustainability a counterparty should really care about is that of its counterparties’ ''solvency''. ''That'' kind of good corporate governance — and sorry, millennials, the [[JC]] is with Milton Friedman on this: that means focus solely on [[shareholder capitalism|shareholder return]] — is after all reflected in my [[credit spread]]s: how likely does the market regard my [[bankruptcy]]. | ||
My brokers will not let me off my credit premiums just because I care about the polar bears. If they don’t get their money back the knowledge that I did my bit for African water scarcity will be cold (wet?) comfort. | |||
This is coded into my spreads when I trade swaps. But once traded, these are not then adjusted during the life of the trade — hence a rich lifetime of employment for [[credit value adjustment]] traders. But in any case, my incentive is to manage my business as best I can so that ''when I trade I achieve the tightest spreads''. That is all the incentive the market has needed, until now, to promote sustainability. Hardcore [[Libtard]]s may differ — we are all libtards now — but nothing has changed. | |||
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. | 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. | ||