Exchanges are optimistic on the demand for derivatives related to environmental, social and governance strategies as milestones have been reached in open interest and new products are being launched.

Alessandro Romani, head of European equity derivatives at Nasdaq, told Markets Media that the exchange launched ESG futures 12 months ago due to clear demand from institutional clients in the Nordic region.

“Sustainability is of paramount importance in the full chain of the investment process,” he said. “The lack of ESG-screened index futures had become a pain point for some clients.”

Nasdaq introduced futures based on the OMXS30 ESG Responsible index, developed in cooperation with Nordic asset managers, on October 15 2018. This month Nasdaq said trading of the ESG future had reached one million contracts with more than 80% of volume from institutional clients. At the start of this month open interest was SEK 4.6bn ($469m), or 28,365 contracts.

Magnus Linder, responsible for derivative trading at asset manager Swedbank Robur, said in a statement: “Money raised through OMXS30 ESG has ensured that one of our index funds (Access Sweden) is fully invested and has money for cash withdrawals – a very real example of how sustainable investments create real value for investors.”

Romani continued that investors with sophisticated ESG strategies additionally need customised derivatives for their products. “We are working on custom basket forwards in our futures offering which should launch next year, subject to regulatory approval,” he said.

He added there is a clear trend towards increased use of ESG products and the Nordic region is a leader. Nasdaq expects to be offering more ESG products in 12 months time.

Eurex 

Deutsche Börse’s Eurex launched three futures covering STOXX Europe 600 ESG Exclusions, EURO STOXX 50 Low Carbon and STOXX Europe Climate Impact in February this year.

Today the exchange began trading options based on STOXX Europe 600 ESG-X Index.

With today´s launch of #ESG options, @EurexGroup brings the issue of #sustainability and the financial industry closer together. https://t.co/3Tmqu1ehMA

— Deutsche Börse Group (@DeutscheBoerse) October 21, 2019

Vassilis Vergotis,  head of equity & index strategy and product design at Eurex, told Markets Media: “The liquidity in the Europe 600 ESG-X futures contract has increased to a level that allows us now to introduce options on that popular exclusion index allowing investors to deploy more sophisticated investment strategies.”

Eurex said this month that trading in STOXX Europe 600 ESG-X Index Futures was more than  over 362,000 contracts, with 55% of the flow coming from end clients and asset owners. During the peak of the most recent roll period open interest reached 85,000 contracts, worth €1.2bn in notional value.

“Clients look at several performance metrics in order to determine their participation in a futures market,” added Vergotis. “Reaching €1bn of notional in open interest in our Europe 600 ESG-X futures contract was an important milestone.”

Vergotis continued that an important factor to the success of an ESG derivatives instrument is the methodology of the underlying index construction that mirrors the respective ESG investment policy/methodology. He said Eurex is in constant discussions with clients and index providers to make sure that the exchange reflects any developing ESG investment trend into its product roadmap.

“We are optimistic about the ESG derivatives segment as it capturing the needs of a very dynamic market and has the potential to change the way that firms structure their investments in the future,” added Vergotis.

CME Group 

CME Group is also launching ESG contracts, E-mini S&P 500 ESG Index futures, which are due to start trading next month.

Looking for investments that reflect your values? Get ready for CME S&P 500 ESG futures coming November 18. https://t.co/fKeKyIQJNh pic.twitter.com/FdWf2GP5sK

— CMEGroup (@CMEGroup) October 21, 2019

Reid Steadman, global head of ESG indices at S&P Dow Jones indices, said in a statement: “Investors are no longer simply viewing ESG indices and benchmarks as niche market tools, but are increasingly integrating ESG metrics to manage their core portfolios. We believe demand for innovative ESG index-based products, especially in the U.S. and Europe, will continue to grow and become more mainstream as market participants seek to better align their sustainability and investment goals.”