Derivatives linked to the price of water will be essential in helping businesses and investors manage the increasingly dramatic risk of climate change, a leading US market regulator has said.
Comments from Rostin Behnam, a commissioner with the Commodity Futures Trading Commission – which oversees the US derivatives markets – underscore the growing attention of regulators to the impact of the environment on the stability of the global financial system.
CME, which manages the Chicago futures exchange, announced last week that it would begin trading the world’s first future water contracts, linked to prices in California.
The contracts are “a very good thing,” Behnam told the Financial Times. Water derivatives and other investment products linked to environmental, social and governance factors “will help stakeholders manage the risk that will continue to confront us,” he added.
A committee convened by Mr Behnam earlier this month warned that the increasing frequency of extreme weather events such as large-scale fires, droughts and hurricanes poses a risk to the financial stability of the United States. The report was the first of its kind from a Wall Street regulator.
“Whenever I mention it, these weather events only validate the need for action,” Behnam said, highlighting fires in Australia and the United States, as well as warming in the Arctic.
CME’s contract is based on the Nasdaq Veles California Water Index, which aims to track the spot price of water in the state, based on water rights – the rights to divert water from natural sources. The group hopes it will become a benchmark for the severity of water scarcity in California and around the world. He highlighted the UN forecast that two-thirds of the world’s population are expected to face some sort of water scarcity by 2025.
Trading in environmentally related futures has traditionally been a specialized market. For two decades, the CME has offered weather derivatives, which allow investors to protect themselves against a deviation in air temperature. They are used by utility companies and farmers to protect against unexpected conditions, but there are currently less than 4,000 open positions on the exchange.
The CFTC report called for more innovation in derivatives offered by exchanges and clearing houses, “to reflect on how products are structured and to incorporate sustainability issues,” Mr. Behnam.
As the ESG industry has grown, so has regulatory oversight of the claims of investment managers. Securities and Exchange Commission commissioner Hester Peirce last week called on asset managers who say they are sensitive to ESG issues to make their investment strategies more clear.
“I’m not sure whether or not the water futures in themselves are favorable to ESG,” said Gary de Waal, attorney for Katten Muchin Rosenman in New York. “However, they will help meet the farmers’ need to guard against expected price fluctuations of water resources.”
Derivatives linked to the price of water will be essential in helping businesses and investors manage the increasingly dramatic risk of climate change, a leading US market regulator has said.
Comments from Rostin Behnam, a commissioner with the Commodity Futures Trading Commission – which oversees the US derivatives markets – underscore the growing attention of regulators to the impact of the environment on the stability of the global financial system.
CME, which manages the Chicago futures exchange, announced last week that it would begin trading the world’s first future water contracts, linked to prices in California.
The contracts are “a very good thing,” Behnam told the Financial Times. Water derivatives and other investment products linked to environmental, social and governance factors “will help stakeholders manage the risk that will continue to confront us,” he added.
A committee convened by Mr Behnam earlier this month warned that the increasing frequency of extreme weather events such as large-scale fires, droughts and hurricanes poses a risk to the financial stability of the United States. The report was the first of its kind from a Wall Street regulator.
“Whenever I mention it, these weather events only validate the need for action,” Behnam said, highlighting fires in Australia and the United States, as well as warming in the Arctic.
CME’s contract is based on the Nasdaq Veles California Water Index, which aims to track the spot price of water in the state, based on water rights – the rights to divert water from natural sources. The group hopes it will become a benchmark for the severity of water scarcity in California and around the world. He highlighted the UN forecast that two-thirds of the world’s population are expected to face some sort of water scarcity by 2025.
Trading in environmentally related futures has traditionally been a specialized market. For two decades, the CME has offered weather derivatives, which allow investors to protect themselves against a deviation in air temperature. They are used by utility companies and farmers to protect against unexpected conditions, but there are currently less than 4,000 open positions on the exchange.
The CFTC report called for more innovation in derivatives offered by exchanges and clearing houses, “to reflect on how products are structured and to incorporate sustainability issues,” Mr. Behnam.
As the ESG industry has grown, so has regulatory oversight of the claims of investment managers. Securities and Exchange Commission commissioner Hester Peirce last week called on asset managers who say they are sensitive to ESG issues to make their investment strategies more clear.
“I’m not sure whether or not the water futures in themselves are favorable to ESG,” said Gary de Waal, attorney for Katten Muchin Rosenman in New York. “However, they will help meet the farmers’ need to guard against expected price fluctuations of water resources.”