ESG Derivatives: A Look At Their Use And Regulation

1. Introduction

Environmental, social and governance ("ESG") concerns are fast becoming a major driver of investment flows. Investors are increasingly seeking out and prioritising ESG investment opportunities, while many corporates strive to align their business models with ESG principles. In the middle sit the banks and broker-dealers who are scrambling to meet the sky-rocketing demand for ESG-driven financing solutions. At the EU level, authorities are keen to both promote and regulate this emerging area, in an effort to ensure that socially responsible economic activity is adequately financed while also protecting investors. Initiatives like the Sustainable Finance Disclosure Regulation ("SFDR")¹ seek to prevent "greenwashing" in the financial sector, while the Taxonomy Regulation² aims to establish a common language to facilitate ESG-related discourse and disclosure. Matheson's ESG Advisory Group has previously issued a number of publications in relation to