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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. 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]]. | 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. | Perhaps ISDA hasn’t followed the media coverage of greenwashing, but objectively measuring environmental impact is hard, and open to abuse. | ||
Nor is this a derivative, but rather more | Nor is this a ''[[derivative]]'' in the sense normally understood, but rather more 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: 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, especially since swaps are by their nature bilateral. What is to stop buisnesses [[Short sale|''shorting'']] their own sustainability credentials, and incentivise their own transition ''towards'' carbon and modern slavery? | |||
And what has any of this to do with my counterparty? Why is paying, or not paying, cash away to a random stranger any kind of benefit to the environment? Why would a counterparty make itself hostage to my compliance effort? What incentive does it have to offer a discount just because I have cracked my own gender pay gap? Just by way of applause for its moral aspiration? That is not how commerce works. Besides, how is it supposed to ''hedge'' that? | And what has any of this to do with my counterparty? Why is paying, or not paying, cash away to a random stranger any kind of benefit to the environment? Why would a counterparty make itself hostage to my compliance effort? What incentive does it have to offer a discount just because I have cracked my own gender pay gap? Just by way of applause for its moral aspiration? That is not how commerce works. Besides, how is it supposed to ''hedge'' that? | ||