Embedding ESG into fixed income futures

Eurex aims to leverage its experience in environmental, social and governance (ESG) solutions and offer a new way for its clients to efficiently manage their fixed income investments.

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On 27 September 2021, the global derivatives exchange and clearinghouse will launch futures on two fixed income indices that embed ESG criteria:

  • The Bloomberg MSCI Euro Corporate SRI Index; and
  • The Bloomberg MSCI Global Green Bond Index.

According to Lee Bartholomew, global head of fixed income ETD product design at Eurex, standardised derivatives offered at regulated markets play "a key role in facilitating investment and channelling liquidity to the real economy. They are essential for providing the appropriate risk management instruments to mitigate financial risks".

Environmental Finance spoke with Lee Bartholomew and Jéremie Ouaki, head of trading credit flow and indexation at Societe Generale, about what impact the new futures products could have.

Environmental Finance: Why did you decide to launch the futures?

Lee BartholomewLee Bartholomew: We aim to establish Eurex as the liquidity pool of choice across fixed income and equity index ESG benchmark derivatives, and therefore to support the adoption of these principles in both asset classes. In doing so, Eurex wishes to contribute to steering the financial system onto an economically and environmentally sustainable path.

We hope that the establishment of a new liquid fixed income derivatives class, which embeds ESG criteria, will help strengthen the European initiatives framework to promote private and public investments into the realm of sustainable finance. In addition, this should contribute, in its own way, to achieving the ambitious target of a climate-neutral continent by 2050.

EF: What was the market response when you proposed the product?

LB: The response was surprisingly positive. In our consultations, we found a very wide ecosystem of market participants that were interested in using the product.

On the one hand, these products can be used as a very efficient hedging tool. A portfolio manager holding a large corporate bond portfolio and implementing an exclusion strategy can, for example, reduce the market risk of its portfolio by entering a short position on the future.

Alternatively, fund and portfolio managers can use these futures to dynamically adjust and manage their exposure to the corporate bond benchmark indices they use to track their portfolio returns. Portfolio overlay strategies can also be used to enhance the alpha generated by the fund.

For example, a portfolio manager may decide to equitize part of its corporate bond portfolio and use the cash raised to enter into a long position in the index future, getting access to the market returns of the financial index over a period of time.

Cash management is also a very useful use case. Cash coupon payments received in a corporate bond portfolio can be easily invested in long positions in these two new fixed income futures – and get exposure to the returns of their respective share of the Euro market, with ESG filters.

EF: How do these products enrich the current trading ecosystem?

Jérémie OuakiJéremie Ouaki: In today's market, there is interest in the future of credit-related indices. The market players who are hedging their risks are using mainly rates products (e.g., Bund, OAT, BTP Futures) or products linked to credit default swap derivatives (such as Itraxx Europe Main and Crossover Indices). However, none of them are comprehensively covering the main risks in the embedded credit universe (e.g. interest rate risk, credit risk, liquidity risk, inflation risk). We have seen growth in fixed-income exchange traded funds (ETFs) from participants looking to cover this need in the last five years. However, futures offer many more possibilities in this regard – and in a more cost-effective way.

On top of that, these instruments are more innovative as the underlying indices are fixed income indices and embed ESG criteria, which complements the offering to answer clients' growing needs in this space.

Even though there is no definite market or regulatory consensus as to what qualifies as an 'ESG index', we believe launching futures on fixed income indices, which embed some ESG criteria, is a useful first step in the fixed income ESG derivatives space.

EF: How do you aim to use this product?

JO: Societe Generale has provided a platform for index-linked products for more than 15 years. We cover all types of index products, i.e., securities which are able to reproduce the risk-return profile of the indices they replicate (such as ETFs, total return swaps, certificates, warrants). We aim to use our access to provide the best price for this product as a market maker. We expect to be one of the first liquidity providers for it.

EF: Why are these products important to Société Générale?

JO: The initiative is aligned with Societe Generale's core strategy for two main reasons. We continue to invest in credit market evolutions by focusing on index-linked products – following the Commerzbank acquisition in May 2020 - and develop further innovations, such as portfolio trades, futures, and new ETF ranges. We also want to accompany innovative initiatives to follow clients' growing needs, such as this one, and pave the way for further developments in the ESG* space.

*The indices selected by Eurex for the two futures are the Bloomberg MSCI Euro Corporate Socially Responsible (SRI) Index and Bloomberg MSCI Global Green Bond Index. Societe Generale makes no representation regarding the ESG classification of these indices by their Administrator.

Contact: Fixed Income Sales
Vassily Pascalis
Phone: +44-20-78 62-7211
Email: vassily.pascalis@eurex.com

Contact: Fixed Income Product Design
Davide Masi
Phone: +44-20-78 62-72 67
Email: davide.masi@eurex.com