Derivative Exchanges

From the products they trade to their role within the broader derivatives market ecosystem, exchanges have the opportunity to contribute positively to the achievement of the Sustainable Development Goals (SDGs).

UN member States agreed 17 SDGs to be accomplished by 2030. The specific SDGs that an exchange is able to impact will depend on the nature of the products that it trades and its broader operating environment. For commodity derivatives exchanges, the following goal and targets are particularly relevant: 

Target 12.6: Encourage companies, especially large and trans-national companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle

The Goal

In response to this growing appreciation of planetary boundaries and social imperatives, policymakers, regulators and private sector actors are placing greater emphasis on the need to achieve environmental and social sustainability and the funding required to achieve this. In addition to focused public sector investment, there is a need for a significant mobilization and reorientation of private finance. UNCTAD estimates that the annual investment gap between existing and required levels of investment to meet the SDGs in developing countries alone is in the order of $2.5 trillion per year.

Derivatives exchanges are an important part of the overall solution, whether as providers of relevant products and services, contributors to greater data availability and transparency or as conveners of the market to address barriers to change.

Commodity derivatives markets, for example, provide a direct link to the underlying market and therefore present a unique opportunity for supporting sustainable development. The products that are traded in these markets are both exposed to sustainability risks (such as climate change and biodiversity loss/destruction of ecosystem services) and contributors to such risks. The production of these commodities can be both a source of economic development as well as having negative environmental and social impacts. Operators of commodity derivatives markets therefore have a specific opportunity to support a shift to more sustainable production and consumption patterns. Derivatives exchanges could also list products that support action on climate change and mitigation of the impacts of climate change (SDG 13) or that enhance access to reliable, affordable, sustainable and modern energy for all (SDG 7).

 

An action menu for derivative exchanges to promote sustainable development

While the role of stock exchanges and equity markets has been well-explored over the past decade, the potential role of derivatives and derivatives markets is less understood. The SSE and WFE’s guidance document on “How derivative exchanges can promote sustainable development” identifies an action menu of opportunities for all exchanges. Some of these actions (e.g. product development) may happen in response to market signals and opportunities created by regulatory developments. Others will depend on an exchange’s assessment of where it is able to have an impact given its operating environment and level of support from participants in its ecosystem. Ultimately there are opportunities for all exchange operators to ensure their markets are responding to the sustainability imperative.

The Tools

SSE and WFE Guidance Document

How derivative exchanges can promote sustainable development 

In this new joint report, SSE initiative and WFE provide an overview of the role of derivatives markets generally, present some of the things derivatives exchanges are already doing in relation to sustainability, and highlight ways in which these exchanges can support the transition to more sustainable development pathways.

This report can be found on the SSE’s publications page here.

Technical Assistance: The SSE works with derivatives exchanges to advance sustainable development in their markets through donor-sponsored technical assistance. For more information, please contact the SSE team directly.

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