European derivatives exchange Eurex is incorporating climate assessment tools in its clearing business, enabling members to examine the sustainability of their portfolios and, eventually, apply that to the €11 trillion of trades it manages every month.
Members of the central counterparty platform owned by Deutsche Börse will be able to use two tools in the ESG Clearing Compass platform: ESG Portfolio Assessments, which will let members examine the sustainability of the portfolios they deliver as collateral; and, ESG Visibility Hub, a shop-front window for them to communicate their ESG profile. The service is powered by data provided by ISS ESG, another Deutsche Börse business.
Christina Sell, chief sustainability officer for trading and clearing at Deutsche Börse, said Eurex had identified a yawning gap in sustainability data provisions for the European derivates market.
“We know that data is a pain for our members – a lot of our clients still struggle with insufficient data, inconsistent data, and also with expertise on how to apply the data,” Sell told ESG Insight. “We combine clearing data with the ESG data we receive from our sister company ISS to make a more tailor-made portfolio management tool.”
ESG Clearing Compass goes live on Monday and is the result of two years of research into creating ESG capabilities for the exchange’s 200 members, which have a collateral pool of €49 billion. Through the ESG Portfolio Assessment tool members can monitor and rebalance their holdings and identify decarbonisation pathways. It’s also expected that the ISS ESG data will help them meet evolving sustainability reporting expectations.
“You get transparency, let’s say about the carbon intensity of a portfolio, and from there, you can start to ask questions like, ‘do I want to decarbonize my portfolio?’,” said Sell.
ESG Visibility Hub will enable them to publicise their achievements via Eurex’s Report Engine, which sits on the exchange’s website and hosts annual updates in machine-readable format.
“When it comes to new clients, for example, they can easily check our website and compare the different profiles of the clearing members and identify whether a clearing member might be a suitable counterparty – maybe because it has a certain rating, for example – and others may not fit into their policies.”
ESG derivatives have grown in popularity over the past couple of years as investors seek new ways to satiate their thirst for sustainable assets. Investment channels that offered exposure to ESG-focused equities and credit markets emerged, including the Stoxx Europe 600 ESG-X, as well as foreign exchange hedges and interest rate futures.
That initial flurry of interest has slowed recently and in response European regulators are looking at ways to standardise the space and encourage further growth. Eurex believes there is still a place for futures trades, structured finance and other such instruments in investors’ ESG strategies.
“We really believe there is a demand for this,” said Sell.
ESG Clearing Compass will incorporate ISS ESG’s data into its models and analytics. The sustainability data arm of Institutional Shareholder Services, has been rapidly expanding its ESG products. It offers ratings, rankings, indexes and climate risk solutions among its data provisions and extends advisory services to clients. The most recent addition to its canon is a set of cyber risk scores.
Sell said that data has been the Achilles heel of its members’ efforts to assess their portfolios and to telegraph their sustainability.
“Everything starts with transparency, and once you have the data you can really work on the next steps,” she said. “As an infrastructure provider, we are perfectly suited to connect to different areas of the market, the pre-trade area, the post-trade area… we are perfectly suited really to channel data.”
Eurex is focusing initially on climate data, because “we believe there is the highest need at the moment,” said Sell. While the company has introduced the service to its collateral business (“because it’s easiest,” said Sell), Eurex hopes to phase in a transaction-linked tool by the end of the year.
ISS ESG is providing Scope 1, 2 and 3 emissions exposure data, carbon intensity metrics and greenhouse gas reduction targets. It’s expected that broader environmental factors, as well as social and governance themes, will be represented as the product evolves “as we gain trust from our partners”.
ESG Clearing Compass would also consider adding third-party datasets to its platform, especially if members wanted to adhere to specific disclosure frameworks.
While the service is free for members at the moment, Sell said Eurex would look at ways to monetise the service as it expands.
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