Responsible derivatives? New standard clauses for ESG derivatives

Despite some counter-revolutionary forces, particularly in the US, it seems likely that environmental, social and governmental ( ESG ) concerns will continue to be increasingly significant factors in the structuring and execution of derivative transactions. We've previously covered the growth of the ESG derivatives market (sometimes referred to as sustainability derivatives) in the long and short market . Derivatives linked to sustainability ( SLD ) are derivatives that embed an ESG-linked cash flow into a traditional derivative instrument (such as a spread increase associated with a counterparty failing to meet an ESG target). Unlike other ESG financial products, the use of proceeds from sustainability-related derivatives is not usually controlled (although sometimes counterparties may agree that any increased spread paid as a result of not meeting an ESG target will be used for a sustainable purpose). SLDs are typically documented within the ISDA Master Agreement and ESG-related terms are contained in the trade confirmation. (Robyn Llewellyn)