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Sustainability-linked derivatives: Difference between revisions
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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. | 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. If it is a derivative, it is a self-referencing one. They don’t much ''like'' those, usually, at ISDA. | ||
So this becomes an open invitation to systematic insider dealing on ones own operations. And that is assuming a wily trader stays long only. But swaps are by their nature bilateral. What is to stop buisnesses [[Short sale|''shorting'']] their own sustainability credentials, incentivising their own transition ''towards'' carbon and modern slavery? Why should another swaps trader care? | So this becomes an open invitation to systematic insider dealing on ones own operations. And that is assuming a wily trader stays long only. But swaps are by their nature bilateral. What is to stop buisnesses [[Short sale|''shorting'']] their own sustainability credentials, incentivising their own transition ''towards'' carbon and modern slavery? Why should another swaps trader care? | ||