ISDA assessed how present derivatives regulatory regimes would apply to sustainability-linked derivatives.
In a newly launched paper titled “Regulatory Considerations for Sustainability-linked Derivatives”, ISDA outlined elements for figuring out (i) whether or not SLDs could be thought-about swaps beneath U.S. laws, (ii) whether or not SLDs could be thought-about OTC derivatives beneath EU or UK laws, (iii) the affect that sustainability-linked money flows could have on derivatives in any other case exempt or excluded from sure laws and (iv) compliance points based mostly on how SLDs are categorized.
ISDA evaluated how these determinations would affect (i) threat administration and documentation necessities, (ii) reporting, (iii) disclosures, (iv) benchmark issues, (v) chapter/restoration and backbone and (vi) prudential necessities.
Individually, ISDA considered the authorized implications of voluntary carbon credit, emphasizing that “[a] robust voluntary carbon market must be grounded in a strong legal foundation.” In a white paper, ISDA provided suggestions on how regulators can present higher authorized certainty concerning voluntary carbon credit and the way the derivatives markets can facilitate elevating capital for inexperienced investments whereas mitigating dangers.
As ESG merchandise and investing acquire recognition, regulators wrestle with methods to assess and monitor monetary merchandise. SLDs have a further hurdle to beat, reminiscent of how they need to be categorized beneath U.S., EU, and UK laws. At present, ESG disclosure necessities are most intensive within the EU, the place regulatory reforms referring to sustainable financing exist already, and second-most intensive in the UK, the place the main focus has been totally on stopping greenwashing.