Sign posts reading8/28/2023 1 Although these use cases remain relevant for climate investing, derivatives can also contribute to the overall climate profile of the portfolio.ĭerivatives transfer risk exposure from one market participant to another. In this blog post, we address two questions: Can derivatives linked to climate indexes impact the real economy? And what are the climate impact, financial risk and opportunity metrics of the indexes’ underlying climate futures contracts?Ĭlimate derivatives and change in the real economyĭerivatives have long contributed to the investor toolkit by facilitating portfolio management that may not be readily accomplished through direct share ownership, such as efficient market access, index replication, cash equitization, hedging strategies, completion portfolios and transition management. To meet the demands of institutional investors seeking to implement and manage climate strategies, an expanding array of index-linked financial products has come to market, including ETFs, futures and OTC swaps. Investors can play a critical role in the transition to net-zero by allocating capital to companies with credible net-zero targets. The transition to a low-carbon economy is in motion, with a growing coalition of countries, institutions and corporations pledging to achieve net-zero emissions. Misalignment between a climate benchmark and derivatives exposures could lead to notable differences in impact metrics, financial risk metrics and tracking risk.Futures linked to the MSCI Climate Action Indexes could support institutional investors who seek to finance companies’ emissions reductions to drive climate change in the real economy.Derivatives have a role to play in climate risk management, exposure to green opportunities and alignment with the transition to net-zero.
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