WFE Explores Sustainability Standards for Commodity Markets

In a new white paper, the WFE explores potential ways for commodity derivatives exchanges to address the impact of sustainability.

The WFE (World Federation of Exchanges) has published a white paper exploring sustainability in the context of commodity derivatives markets.

The paper follows from the WFE Sustainability Principles, which in October 2018 constituted a formal declaration by the industry body and its members of their commitment to taking a leadership role to promote sustainable finance.

According to the new paper, users of commodities increasingly demand greater oversight and understanding of the supply chain, to ensure the commodities they use accord with some definition of sustainability.

“This demand will impact not only commodity spot markets, but potentially the corresponding derivative markets,” the WFE says.

In the absence of a single set of sustainability standards that specifies requirements for a commodity to be deemed sustainable, the WFE is exploring potential ways for commodity derivatives exchanges to address the impact of sustainability.

One way is to create new risk mitigation and investment tools allowing users to manage evolving risk. The WFE notes that some exchanges – notably ICE and CME – already have listed contracts that respond to environmental challenges.

Another way is to incorporate sustainability elements into existing contracts, such as by amending them or introducing parallel ’sustainable’ versions. A premium could also be incorporated to recognise a “verifiably sustainable version of the existing underlying”, the WFE says, though this could present liquidity challenges.

The paper highlights that there is limited agreement around what constitutes a sustainably-produced commodity, despite “the plethora of sustainability standards”, and that not all commodities lend themselves to full supply chain traceability, among other issues.

The paper offers starting principles to promote discussion to address these issues, and ultimately, develop guidelines for integrating sustainability into commodity derivatives markets.

The white paper is available here.

 

 

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