A rush by companies to boost their sustainability claims has reached foreign exchange markets in the form of currency hedging products where the cost is tied to a firm’s environmental, social and governance (ESG) goals.
Sustainable finance to date has mostly centred around the issuance of debt to fund ‘green’ environmental or climate-related projects, or with interest payments linked to the achievement of social and governance targets.
But energy firms Drax and Italy’s Enel are among those to have recently signed up to ESG-linked FX derivatives, the price of which depends on anything from cutting greenhouse emissions to improving workforce diversity.
Keen to promote their own sustainability pledges, banks selling the derivatives, which lock in a future exchange rate, tout them as a way for companies to tap into demand for ESG finance, a market that has soared in popularity but which critics say is often more marketing gimmick than a true incentive for change.
Early adopter Olam, a commodity trader, last year bought a U.S. dollar/Thai baht forward contract at a discount to a conventional forward, on condition it meets several targets including cutting carbon emissions and boosting farmer training.
How a value is assigned to an ESG goal, and hence how such products are priced, for now remains between banks and their clients in the fledgling market, but Fabio Madar, global head of FX sales and structuring at NatWest Markets, said there can be decent financial gains for clients…