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| {{a|myth|{{image|Easter Islands|png|A dead [[metaphor]], yesterday.}}}}{{c2|ESG|ISDA}}{{dpn|/səsˌteɪnəˈbɪlɪti lɪŋkt dɪˈrɪvətɪvz/|n}} | | {{freeessay|isda|sustainability-linked derivatives|{{image|Easter Islands|png|A dead [[metaphor]], yesterday.}}}}{{c|ESG}} |
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| It is said that the ancient people of Easter Island felled every tree on the island while erecting statues to their Gods and ancestors. The root systems decayed, the soil eroded, nutrients washed away, plants did not grow. Eventually the whole ecosystem was wrecked. The island became all but uninhabitable. It has not recovered in 400 years. Nice statues though.
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| Quite the disaster in the service of trying to please imaginary people.
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| This “ecocide” theory, popularised by Jared Diamond a generation ago,<ref>''Guns, Germs, and Steel: The Fates of Human Societies'', Jared Diamond, 1997.</ref> 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 [[2014 ISDA Credit Derivatives Definitions]], [[2016 Credit Support Annex for Variation Margin (VM)|2016 ISDA Regulatory VM CSAs]] and [[2018 ISDA Credit Support Deed for Initial Margin|2018 ISDA Regulatory IM CSA]] being cases in point.</ref> in which a community of earnest toilers, meaning to vouchsafe everyone’s onward prosperity, but caught in the throes of a voguish collective delusion about how [[this time it’s different|everything is different this time]] sets about demolishing every tree in sight in the pursuut of mad, hypercomplicated, illogical schemes to please imaginary investors who no-one has seen, let alone heard expressing such an interest.
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| What is ISDA up to? Is It trying to stay ''relevant''? Recent clumsy land-grabs of [[ICMA]]/[[ISLA]] territory, and forays into [[2023 ISDA Digital Asset Transactions Definitions|crypto]] give that impression. In any case, the irony that its latest foray into the [[new normal]] — “sustainability-linked derivatives” — should so strikingly resemble such a notorious environmental disaster is rich.
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| And yet, this feels like a step further through the looking glass; a tumble deeper down the rabbit hole. The ’squad’s prior follies at least ''tried'' to cater to existing use cases, markets and regulatory imperatives, however cack-handedly.
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| Sustainability-linked derivatives feel like an attempt to create a new market out if — well — hot air.
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| ===How “[[SLD]]s” are meant to work===
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| If its own {{plainlink|https://www.isda.org/2022/11/21/the-way-forward-for-sustainability-linked-derivatives/|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]]. It is hard to see how this incentivises anything.
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| Now, objectively measuring environmental impact is hard,<ref>Readers are invited to [https://www.google.com/search?q=measuring+sustainability Google it] and note how many management consultancies are shilling to help you do it.</ref> and open to abuse even when you aren’t talking your own book. But even so greenwashing risk is the least of the problems here. Higher up the list is basic intellectual incoherence.
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| For a start, this is not a ''[[derivative]]'' in any normally understood sense. It is more like an arbitrary [[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 care to do to execute a rate swap (among other things, it might 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. There is a reason they don’t let athletes bet on games they are playing in.
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| So this becomes an open invitation to systematic [[insider dealing]] on ones own operations. And that is assuming a wily trader stays “long” her own firm’s sustainability performance at all times. But swaps are by their nature bilateral. What is to stop her [[Short sale|''shorting'']] her own sustainability credentials, incentivising her employer’s transition ''towards'' carbon and modern slavery?
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| And why, exactly, should a counterparty firm’s swaps trader ''care''? What has any of this to do with them? What benefit accrues to the environment when one city swaps desk does, or does not, pay sustainability-linked cash away to another? Why would my counterparties make themselves hostage to my ESG compliance effort? Why should they suffer a penalty just because I have cracked my gender pay gap? (Isn’t there reward enough in just ''doing'' that, by the way? What does it say about economic incentives to basically bribe people to promote staff fairly?)
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| In any case, commerce does not work by gifting emoluments to virtuous strangers just because they recycle shopping bags. Swaps traders certainly don’t. And besides, how are you supposed to ''hedge'' that?
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| The “[[sustainability]]” a counterparty should really care about is 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]].
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| 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.
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| 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.
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| 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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| {{Sa}}
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| *[[Credibility derivatives]]
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| *[[Stakeholder capitalism]]
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| {{Ref}}
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