- By Lynx Sustainability Forum, Lynx Asset Management AB
In recent years, investors have been increasingly considering environmental, social and governance (ESG) factors when evaluating the non-financial performance of their investments. Additionally, governments and regulators in some regions have begun establishing sustainability standards for their constituency to follow; the adoption of the UN 2030 Agenda for Sustainable Development in 2015 and the introduction of the sustainable development goals (SDGs) provided the basis around which nations could directly address these issues. Various methods have been devised to encourage environmentally and socially responsible behavior.
In equities and credit, many investors screen and score companies based on their adherence to ESG principles, using their capital to influence management behavior. However, there is no broadly accepted framework in place for categorizing derivatives such as futures contracts based on ESG factors and responsible investing methods applied with corporate securities cannot easily be adapted.
The global cleared derivatives industry has steadily evolved over the last several years developing new products and building sustainability standards into their existing contracts. Some exchanges have introduced futures contracts incorporating ESG factors to address this issue – the OMX Stockholm 30 ESG Responsible Index launched by Nasdaq in October 2018 was the first ESG contract traded on a global futures exchange. Lynx Asset Management has been carefully monitoring the development of these contracts and – with the ambition to be an early adopter – started trading the OMX ESG index (and some others) during the first quarter of 2021. The liquidity in most contracts is still relatively low and the asset class representation rather narrow, but our expectation is that the market will continue to grow, driven by regulatory pressures and growing investor demand.
Integrating sustainability factors for Commodity Trading Advisors (CTAs) is challenging. Futures contracts play an important role in achieving long-term financial market sustainability by enhancing transparency and allowing businesses to hedge their risks efficiently. However, they do not convey legal ownership or control of the underlying assets, limiting our ability to have much direct impact other than on price. Collaboration among market participants - investors, peers, and regulators - could help CTAs establish a common understanding of the challenges and opportunities faced when attempting to incorporate ESG and sustainability principles in their approach. Developing a framework for managers to communicate and report on the key performance indicators most relevant to their investors and regulators will necessarily be an iterative process. Transparency – as well as data quality and uniformity – are substantive issues that will need to be addressed to achieve a robust solution.
Additionally, engaging with exchanges could support the development of more ESG-focused futures. Currently, many futures exchanges are actively exploring and implementing solutions, including redefining delivery specifications, verifying sourcing and production methods, and introducing new contracts explicitly meeting certain prescribed ESG standards.
Ultimately, open and honest discourse is imperative. Only by asking relevant questions and engaging directly on these topics will CTAs be able to maximize their ability to effect positive change.
About Lynx Asset Management: Lynx Asset Management AB is a quantitative asset manager headquartered in Stockholm, Sweden. We employ around 75 people with predominantly scientific backgrounds specializing in a wide range of fields, including physics, statistics, finance, and software engineering. Today the firm manages USD 6.9 billion in assets mainly on behalf of global pension funds and other institutional investors. The flagship Lynx Program is a diversified CTA with a live-track record since May 2000.