Sustainable Finance meets Financial Innovation:

from Green Investments to ESG Derivatives

Dr. Ebbe Rogge

Hazelhoff Research Paper Series no. 13

Leiden Law School

Submitted to SSRN on 10 July 2023

Authors: Ebbe Rogge is an Assistant Professor, Hazelhoff Centre for Financial Law, Leiden
University, The Netherlands, and Senior Policy Advisor, Dutch Authority for Financial Markets.
The opinions expressed herein are solely those of the author and in no way represent those
of the Dutch Authority for the Financial Markets.

Please note: This is a pre-copyedited, author-produced version (12 Dec 2021) of an article
published in Journal of International Banking Law and Regulation and should not be cited in
publications. The definitive published version is available online on Westlaw UK.
Recommended citation:

Ebbe Rogge, ‘Sustainable finance meets financial innovation: from green investments to ESG
derivatives’ 37(3) Journal of International Banking Law and Regulation (2022) p. 103-110.

Acknowledgments: The author would like to thank Lara Hartman-Ohnesorge and Marloes van
Rijsbergen for comments on an earlier version.

Abstract: In order to achieve the internationally agreed climate objectives, a transition

towards a more sustainable economy is required. As part of this transition, a new range of
financial products is being designed including green bonds, climate benchmarks, and
sustainability-linked derivatives. It raises the question whether these new products will indeed
assist in redirecting capital flows towards green and sustainable projects, and what would be
necessary conditions for these products to do so. This paper argues that, for those products
which have the potential to assist in the transition, clear objectives, meaningful transparency,
and independent performance measurement are a prerequisite.

Keywords: Corporate social responsibility; Derivatives; Financial products; Green bonds;

Sustainability; Transparency.

JEL Codes: G15; G20; K22; K23; K32; Q54.

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 Ebbe Rogge, Sustainable Finance meets Financial Innovation

Key findings: This paper has sought to provide an overview of some of the developments and
innovations in sustainable finance and examine whether they have the potential to contribute
to the transition towards a more sustainable economy. Whereas some of the historically
developed products with a link to the effects of climate change, such as catastrophe bonds,
do little to redirect capital flows towards green projects, the more recent innovations, such as
Climate Benchmarks, ESG derivatives, and Emission Trading, do have the potential to
contribute. The point is that, whilst historically developed products may provide some
insurance for the effects and impact of climate change, they lack the direct link between the
sustainable project and its source and cost of funding. The more recently developed products,
however, do appear to contribute to some form of internalization of costs emanating from
the contribution to climate change. Various products increase funding costs when green
objectives are not hit, whilst others reduce funding costs when capital raised is spent on
sustainable projects. What they all appear to have in common is a need for transparent,
reliable and comparable non-financial information, measurable objectives, and some
independent verification.

3
Table of contents:

1. Introduction
2. Historical Developments
3. Financial Innovation through Sustainable Finance and Green Investments
3.1. Debt Financing: Green Bonds and Sustainability Linked Loans
3.2. Equity Financing: the Rise in Index Investing and Climate Benchmarks
3.3. Information Standards for Debt and Equity Finance
4. Sustainability-Linked Derivatives or ESG Derivatives
4.1. What are ESG Derivatives?
4.2. Defining, Measuring, and Verifying Performance in ESG Derivatives
5. Carbon Emission Allowances and Trading Schemes
6. Conclusion

4
 Ebbe Rogge, Sustainable Finance meets Financial Innovation

1. Introduction

Sustainable finance, according to the European Commission, refers to the finance process
which takes Environmental, Social, and Governance (ESG) factors into account.1 Research
appears to support positive findings for ESG investments, highlighting a stable and positive
ESG impact on corporate financial performance.2 At the same time, there is a swift growth in
the offering of ESG driven financial products as investors are increasingly looking to make an
impact in achieving both financial returns as well as advancing social or environmental goals.3
Consider for example Green Bonds and Climate Benchmarks, or more complex ESG-rating-
linked derivatives, which will all be discussed in this paper.4 Financial innovation in the ESG
area is proceeding swiftly and global investment banks are making a push into the ESG
derivatives markets.5 This article examines these financial innovations and poses the
questions whether they could in principal support achieving climate change policy objectives
and, if needed, what could be done to make these innovations work better in assisting the
transition to a sustainable economy.

In its recent report, the United Nations Intergovernmental Panel on Climate Change (IPCC)
brought together the latest research on climate change, reporting that human influence has
warmed earth’s atmosphere, ocean and land at an unprecedented rate. The summer of 2021
in Europe alone has seen, amongst others, severe floods in Germany, Belgium and the

1
European Commission, “Overview of Sustainable Finance” https://ec.europa.eu/info/business-economy-
euro/banking-and-finance/sustainable-finance/overview-sustainable-finance_en ; Dirk Schoenmaker and
Willem Schramade, Principles of Sustainable Finance (2021) Oxford University Press.
2
Gunnar Friede, Timo Busch and Alexander Bassen, “ESG and financial performance: aggregated evidence from
more than 2000 empirical studies” (2015) Journal of Sustainable Finance & Investment, 5:4, p 210-233, DOI:
10.1080/20430795.2015.1118917
3
E. van Duuren, A. Plantinga and B. Scholtens “ESG Integration and the Investment Management Process:
Fundamental Investing Reinvented” (2016) Journal of Business Ethics 138, p 525–533,
https://doi.org/10.1007/s10551-015-2610-8 ; Brian Trelstad “Impact Investing: A Brief History” (2016)
Capitalism and Society Vol. 11: Iss. 2, Article 4.
4
ECMI, https://www.isda.org/a/KOmTE/Derivatives-in-Sustainable-Finance.pdf
5
Greg Ritchie, “JP Morgan plots derivatives path into new era of ESG Finance” (Aug 16, 2021) Bloomberg News
https://www.bloomberg.com/news/articles/2021-08-16/jpmorgan-plots-derivatives-path-into-new-era-of-esg-
finance
5
Netherlands,6 as well as wildfires7 and temperatures8 of around 55°C (or 131°F) in the
Mediterranean. Addressing such issues has become embedded in the United Nations
Sustainable Development Goals, in particular number 13: ‘take urgent action to combat
climate change and its impacts’.9 In December 2015, the Paris Agreement was adopted by 196
nations at the Conference of the Parties (COP) 21, setting the target to ‘limit global warming
to well below 2, preferably to 1.5°C, compared to preindustrial levels’.10 The recent COP 26
summit in Glasgow affirmed action is needed to make the swift transition to a sustainable and
climate neutral economy.11 There can be little doubt corporations play an important role in
the transition.12 Therefore, sustainable finance is becoming an increasingly important
instrument in combatting climate change: investments should be diverged away from
companies or projects causing significant harm to our climate and the environment.13

Given this important role of sustainable finance in combatting climate change, it raises the
aforementioned question whether financial innovation, such as Climate Benchmarks and ESG
Derivatives, materially contribute towards achieving the targets set in Paris?14 This question
is certainly justified given the concerns raised by commentators about financial innovation:
such innovation has not always been to the benefit of customers or other stakeholders, and

6
Jonathan Watts, “What is causing the floods in Europe?” (Jul 16, 2021) The Guardian
https://www.theguardian.com/environment/2021/jul/16/what-is-causing-floods-europe-climate-change
7
AFP in Cologin, “Thousands forced to evacuate by wildfire near Saint-Tropez” (Aug 17, 2021) The Guardian
https://www.theguardian.com/world/2021/aug/17/thousands-forced-to-evacuate-by-wildfire-near-saint-
tropez-france-portugal-spain
8
Helena Smith, “‘Apocalyptic’ scenes hit Greece as Athens besieged by fire” (Aug 7, 2021) The Guardian
https://www.theguardian.com/world/2021/aug/07/apocalyptic-scenes-hit-greece-as-athens-besieged-by-fire
9
United Nations, “Sustainable Development Goals”
https://sustainabledevelopment.un.org/topics/sustainabledevelopmentgoals
10
United Nations (UNFCCC), “The Paris Agreement” https://unfccc.int/process-and-meetings/the-paris-
agreement/the-paris-agreement ; European Commission, “Paris Agreement”
https://ec.europa.eu/clima/policies/international/negotiations/paris_en
11
United Nations, “COP26: Together for our planet” https://www.un.org/en/climatechange/cop26 ; UNFCCC,
“The Glasgow Climate Pact”
https://unfccc.int/sites/default/files/resource/cma3_auv_2_cover%2520decision.pdf
12
S. Dietz, C. Fruitiere, C. Garcia-Manas, et al. “An assessment of climate action by high-carbon global
corporations” (2018) Nature Climate Change 8, p 1072–1075. https://doi.org/10.1038/s41558-018-0343-2
13
Camilla Hodgson and Stephen Morris, “Global finance industry sinks $119bn into companies linked to
deforestation” (Oct 21, 2021) The Financial Times https://www.ft.com/content/ff1eccc8-645a-497b-a02d-
6eb38efe6219
14
UNFCCC (n 10)
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 Ebbe Rogge, Sustainable Finance meets Financial Innovation

when mishandled could lead to consumer detriment, scandals, or worse.15 In order to answer
this question, this paper examines various innovations. Climate change policy initiatives, such
as the EU Green Deal, include enabling and moving investment towards sustainable firms and
projects.16 These do so by making non-financial (or ESG) information available in an accessible
and comparable way, allowing investors to make an informed choice.17 By publishing this
information, the cost of funding for firms or projects should be changed in accordance with
their sustainability. This approach is in line with the polluter pays principle, historically applied
to environmental damages.18 In the current setup, those who embark on a sustainable path
should find their costs of funding lower than those who are more damaging to climate and
environment. This in a way is internalizing some of the costs to the environment, which are
currently externalized outside the company. Of course, if these innovations indeed have the
potential to make a positive contribution, the follow up question would be what is to succeed?

The next section sets out a short historical overview of the development of climate related
products, such as weather derivatives and catastrophe bonds, which were introduced at the
time when climate change and its link to finance was not as mainstream as it currently is. The
following section examines innovations in ‘ordinary’ methods for corporate finance, i.e. debt-
and equity financing, such as green bonds, sustainability-linked loans, and climate-linked
equity benchmarks. The fourth section covers ESG- or sustainability-linked derivatives: these
are the ‘ordinary’ derivatives, such as interest rate swaps, used by corporates to manage their
financial risk but with a green feature on top of it. The last product covered, in the fifth section,
is Emission Trading, which allows for corporates to buy the rights to emit a particular quantity

15
Vincenzo Bavoso, “Financial Innovation, Derivatives and the UK and US Interest Rate Swap Scandals: Drawing
New Boundaries for the Regulation of Financial Innovation” (2016) Global Policy 7(2) p. 227-236
https://doi.org/10.1111/1758-5899.12300
16
European Commission, “Commission action plan on financing sustainable growth” (Mar 8, 2018)
https://ec.europa.eu/info/publications/sustainable-finance-renewed-strategy_en#action-plan and https://eur-
lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52018DC0097&from=EN ; European Commission, “A
European Green Deal” https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en
17
Lara Ohnesorge and Ebbe Rogge, “Europe's Green Policy: Towards a Climate Neutral Economy by Way of
Investors' Choice” (2021) European Company Law 18(1) p 34-39.
18
United Nations, “Rio Declaration on Environment and Development” (1992)
https://www.un.org/en/development/desa/population/migration/generalassembly/docs/globalcompact/A_CO
NF.151_26_Vol.I_Declaration.pdf in particular “Principle 16: National authorities should endeavour to promote
the internalization of environmental costs and the use of economic instruments, taking into account the
approach that the polluter should, in principle, bear the cost of pollution, with due regard to the public interest
and without distorting international trade and investment.”
7
of greenhouse gasses. The paper ends with a conclusion, examining to what extent all these
innovations may assist in the transition towards a sustainable economy and what would be
needed to make them work in practice.

2. Historical Developments

The concept of financial products linked to atmospheric or other environmental conditions is

not entirely new, although they may not have been linked directly with sustainable objectives.
Consider for example the category of weather derivatives. The payout of such derivatives was
typically based on the amount of days within a specified period the temperature would fall
below or above a certain temperature, so called cooling or heating degree days (CDDs or HDDs
respectively).19 A variation would be based on the rainfall exceeding a certain threshold for a
number of days. There are a variety of business risks for which the above products could be
used as a hedge. For example, agricultural industry could use these to protect themselves
against heavy rainfall, drought, or heat, all negatively affecting harvest. Similarly, electricity
companies could hedge themselves against unfavorable temperatures negatively affecting
earnings, or simply as a tool to stabilize earnings.

The Chicago Mercantile Exchange (CME) (still) has a number of temperature based index
futures and options.20 Some of the advantages are obvious: these are traded on venue,
providing more transparency, and they are centrally cleared (through CME Clearing) in order
to manage counterparty credit risk. Temperature based indexes cover some of the major US
cities, such as New York, Dallas and Chicago, as well as London, Amsterdam and Tokyo.21 Since
their inception two decades ago, however, liquidity in these weather derivatives has been
relatively small, mostly because liquidity providers do not have a natural risk layoff, or
opposite position.22 For this reason, it can be argued that it is mostly the large reinsurance

19
See, for example: US Energy Information Administration, “Units and calculators explained: Degree days”
https://www.eia.gov/energyexplained/units-and-calculators/degree-days.php ; US Environmental Protection
Agency, “Climate Change Indicators: Heating and Cooling Degree Days” https://www.epa.gov/climate-
indicators/climate-change-indicators-heating-and-cooling-degree-days
20
CME Group, “Weather Products” https://www.cmegroup.com/trading/weather/#
21
CME Group, “Temperature Based Indexes” https://www.cmegroup.com/trading/weather/temperature-
based-indexes.html and CME Group, “Weather Products – Heating (HDD)”
https://www.cmegroup.com/trading/weather/#heating
22
CFTC, “Managing Climate Risk in the US Financial System - Report of the Climate-Related Market Risk
Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission” (2020)
8
 Ebbe Rogge, Sustainable Finance meets Financial Innovation

firms or funds which may be suited to take on opposite side in OTC weather derivatives
contracts, due to their large and diverse worldwide exposures.23

With climate change resulting in more adverse and extreme weather events, the demand for
weather derivatives is likely to increase.24 The main objective of these products is, as referred
to earlier, to mitigate the risk of adverse weather conditions. As such, within the context of
climate change, they can be used by firms to mitigate the negative effects of climate change.25
Note that the valuation of these derivatives will take into consideration the statistical trends
in rising temperatures as a consequence of climate change as expectations on for example the
number of HDDs may increase.26

It is worth mentioning another financial innovation from around the same time as when
weather derivatives were introduced: the catastrophe bond, also known as CAT Bonds. These
bonds are linked to natural catastrophes, the occurrence of which means that the initial
principal payment is not returned.27 Those firms issuing CAT bonds, typically insurance and
reinsurance firms, can thus use the original proceeds of the principal to cover their losses from
such extreme events. In return, they pay a high spread (typically rated around BB). Buyers of
these bonds are either specialist investors (hedge funds) or those seeking to diversify their
portfolio. Afterall, CAT Bonds are typically exhibiting low correlation with other financial
assets: they perform relatively well during an economic crisis, e.g. in the period following the
collapse of Lehman Brothers.28 In the context of climate change, and in line with the damage

https://www.cftc.gov/sites/default/files/2020-09/9-9-
20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-
%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf p 113.
23
Hilary Till, “Why Haven’t Weather Derivatives Been More Successful as Futures Contracts? A Case Study”
(Dec 2014) Working Paper EDHEC-Risk Institute https://risk.edhec.edu/sites/risk/files/edhec-working-paper-
why-haven-t-weather-derivatives_1436278088665.pdf
24
CFTC (n 22).
25
Dominic Sutton-Vermeulen, “Managing Climate Risk with CME Group Weather Futures and Options” (Jan 20,
2021) CME Group https://www.cmegroup.com/education/articles-and-reports/managing-climate-risk-with-
cme-group-weather-futures-and-options.html
26
ibid.
27
Michael Edess, “Catastrophe Bonds: An Important New Financial Instruments” (July 2014) Working Paper
EDHEC-Risk Institute https://risk.edhec.edu/sites/risk/files/edhec-working-paper-catastrophe-bonds-an-
important_1410341092999.pdf
28
Rosalind Mann and Katie Green, “Spotlight on catastrophe bonds” (Oct 2013) Schroders Insights
https://www.schroders.com/en/sysglobalassets/digital/insights/pdfs/cat-bonds-october-2013-final.pdf
9
caused Superstorm Sandy in 2012, CAT Bonds are being issued with events linked to storm
surge, wind damage, and earthquakes.29

As with weather derivatives, these CAT Bonds may be used to mitigate some of the potential
financial losses ultimately resulting from climate change. And similarly, whilst it may reduce
the financial consequences of climate change, it does not stimulate directly a move towards a
more sustainable business model. This emanates from the fact that these products are used
to hedge climate change risks more generally, rather than those caused specifically by the firm
seeking to mitigate them. Consider, in extremis, the example of a power generating firm
seeking to smooth its revenues caused by periods of extreme warmth or cold: the firm in our
example could easily be generating power using wind turbines or gravitational energy from
waterfalls, in other words it could be a ‘green firm’ still seeking to mitigate climate risks. In
other words, a causal link between the firm seeking to mitigate climate change risk and the
events due to climate changes is not necessarily present. Hence, whilst the costs these firms
have to made may be a reflection of the monetary impact of climate change, these costs do
not necessarily originate from these firms. This situation would be contrary to the polluter
pays principle, as the costs are no longer (solely) paid for by those polluting. The costs are not
internalized by the polluting companies, instead they remain externalized and are added as
insurance costs for others. In the context of transitioning towards a sustainable economy,
these financial products do not assist in changing capital flows towards more sustainable
projects or companies. Of course, they were historically developed for a different purpose, as
opposed to some of the more recent development described in the remainder of this paper.

3. Financial Innovation through Sustainable Finance and Green Investments

3.1. Debt Financing: Green Bonds and Sustainability Linked Loans

There are generally two ways to finance a company: debt and equity. This section deals with
the former, the next section will cover the latter. Debt financing can be done by way of loans,
provided for example by banks or a consortium of banks, or by issuing debt instruments in the
capital markets. Commencing with the latter, bonds are a typical debt instrument used by

29
CFTC (n 22) p 115.
10
 Ebbe Rogge, Sustainable Finance meets Financial Innovation

sovereigns as well as larger corporations to raise funding for either specific projects or for the
entire firm. In the context of sustainable finance, there are several variations on the normal
bonds. The Green Bond is probably the most well-known, and generally refers to bonds used
to finance sustainable projects. The World Bank issued its first Green Bond in 2008, which was
used to finance environmental projects and was externally monitored by the Centre for
International Climate and Environmental Research (CICERO).30 Since then, it has raised over
US$ 13 billion though more than 150 green bonds in a variety of currencies. 31 The market for
Green bonds is growing very quickly worldwide.32 There was another record issuance in 2019
of US$ 257.7 billion33 growing towards around US$ 500 billion forecasted for 2021.34

The World Bank issued a report evaluating ten years of Green Bond issuance,35 as well as a
report on issuance specifically by the International Bank for Reconstruction and Development
(IBRD).36 It turns out the initial Green Bond issuance has become a blueprint for future
products: it combines relatively safe investment with a positive social or environmental impact
and with an independent verification mechanism to ensure that the financing was indeed used
for these objectives. These elements have evolved further into various international standards
or guidelines. For example, the International Capital Market Association (ICMA) has set out
Green Bond Principles in 2014, 2018, and again 2021.37 They identify some of the key elements
for successful issuance, which include a clear description of the use of proceeds and targets;

30
World Bank, “From Evolution to Revolution: 10 Years of Green Bonds” (Nov 27, 2018) Feature Story World
Bank https://www.worldbank.org/en/news/feature/2018/11/27/from-evolution-to-revolution-10-years-of-
green-bonds
31
ibid.
32
Brandon Faske, “Turning Billions into (Green) Trillions: Tracking the Growth and Development of the Green
Bond Market in China, France, India, and the United States” (2018) 31 Tulane Environmental Law Journal 293
33
Climate Bonds Initiative, “Green Bond Highlights 2019: Behind the Headline Numbers: Climate Bonds Market
Analysis of a record year” (Feb 6, 2020) https://www.climatebonds.net/2020/02/green-bond-highlights-2019-
behind-headline-numbers-climate-bonds-market-analysis-record-year
34
Climate Bonds Initiative, “2021 Green Forecast Updated to Half a Trillion – Latest H1 Figures Signal New
Surge in Global Green, Social & Sustainability Investment” (Aug 31, 2021)
https://www.climatebonds.net/2021/08/climate-bonds-updates-2021-green-forecast-half-trillion-latest-h1-
figures-signal-new-surge
35
The World Bank, “Green Bond Impact Report 2018: Ten years of Green Bonds, from evolution to revolution”
(2018) https://thedocs.worldbank.org/en/doc/632251542641579226-
0340022018/original/reportimpactgreenbond2018.pdf
36
The World Bank, “Sustainable Development Bonds and Green Bonds 2020” (June 2021) The World Bank
Impact Report https://issuu.com/jlim5/docs/world-bank-ibrd-impact-report-2020?mode=window
37
International Capital Market Association (ICMA), “Green Bond Principles” (June 2021)
https://www.icmagroup.org/assets/documents/Sustainable-finance/2021-updates/Green-Bond-Principles-
June-2021-140621.pdf
11
timely and accurate reporting; and external reviews or independent verification. Others, such
as Climate Bond Initiative, also highlight the importance of post-issuance reporting.38 The
European Commission has recently set out its agenda for an EU Green Bond Standard, which
includes alignment with the EU Taxonomy Regulation and the need for external verification.39
The reason for this emphasis on standardized reporting and verification is clear: investors will
want to avoid greenwashing and ensure that their financing is used for sustainable objectives
as promised.40

Green Bonds, like other securities offered, will be covered by a prospectus containing the
specific additional ‘green’ terms. However, in the event moneys were used for objectives or
projects other than those initially set out, there are various difficulties surrounding the
enforcement mechanisms normally available to investors.41 First, such an event would not
constitute a default or put event, in other words, the bondholders would not be able to
redeem or accelerate payments. Second, because there is no clear financial or economic loss
for the bondholders as coupons are continued to be paid, there is no effective redress for a
claim of contractual breach. Third, and finally, the relevant terms are not always included in
the prospectus, or if they are, then they are drafted in a purposely vague manner so as not to
form any basis for potential litigation. Whilst standardized reporting and external verification
go some way to addressing these risks, bondholders would benefit further from including
specific terms or events triggered in case of non-compliance. Another approach is to include
terms which increase the coupon paid on the bond in the event of non-compliance with the
‘green promises’, and was included for example in bonds issued by Enel, an electricity firm.42

38
Climate Bonds Initiative, “Post-issuance reporting in the Green Bond market” (March 2019)
https://www.climatebonds.net/files/reports/cbi_post-issuance-reporting_032019_web.pdf
39
European Commission, “Questions and Answers: European Green Bonds Regulation” (6 July 2021)
https://ec.europa.eu/commission/presscorner/detail/en/QANDA_21_3406
40
Kevin M. Talbot, “What Does Green Really Mean: How Increased Transparency and Standardization Can
Grow the Green Bond Market” (2017) Villanova Environmental Law Journal 28 p. 127 ; Nathan Bishop, “Green
Bond Governance and the Paris Agreement” (2019) N.Y.U. Environmental Law Journal 27 p. 377.
41
Scott Breen & Catherine Campbell, “Legal Considerations for a Skyrocketing Green Bond Market” (2017)
Natural Resources & Environment 31(3) p. 16.
42
Gareth Gore, “Enel ditches green bonds for controversial new format” (Oct 4, 2019) Reuters Financials
https://www.reuters.com/article/enel-ditches-green-bonds-for-controversi-idUSL5N26O403 ; the feature was
repeated in recent issuance, see: World Business Council for Sustainable Development (WBCSD), “Enel
successfully places a triple-tranche 3.25 billion euro sustainability-linked bond in the eurobond market, the
largest sustainability-linked transaction ever priced” (Jun 8, 2021) WBCSD Member Spotlight
https://www.wbcsd.org/Overview/News-Insights/Member-spotlight/Enel-successfully-places-a-triple-tranche-
12
 Ebbe Rogge, Sustainable Finance meets Financial Innovation

This sort of innovation would directly increase funding costs when sustainability targets are
not hit due to the step-up mechanism in the coupon.43

One can easily imagine many variations on the theme, as issuing Green Bonds proceeds
broadly the same way as the issuance of ‘ordinary’ bonds but with a ‘green’ element which is
added on top of that. One such variation is the Blue Bond where performance is typically
linked to the conservation and sustainable use of the oceans.44 An example of Blue Bonds is
the issuance done by the Seychelles, raising money to fund sustainable marine and fishery
projects.45 Finally, it is worth noting that the idea of linking the payment structure towards
goals other than climate or environment is growing as well: an example of this are social bonds
where performance is linked to human rights performance.46

The other approach to debt financing is via loans, as already indicated at the outset of this
section. Rather than using the capital markets, a bank or consortium of banks provide a loan
to the company, which has to be redeemed usually in combination with interest payments. As
with bonds, loans can be linked towards some ESG or sustainable targets.47 In order to
facilitate the development of this market, industry groups such as the Loan Market Association
(LMA) have set out Green Loan Principles.48 An example is a major loan granted by

3.25-billion-euro-sustainability-linked-bond-in-the-eurobond-market-the-largest-sustainability-linked-
transaction-ever-priced
43
Jacob Michaelsen, “In defence of Enel’s SDG-linked bond” (Dec 6, 2019) Environmental Finance
https://www.environmental-finance.com/content/analysis/in-defence-of-enels-sdg-linked-bond.html
44
Waram Ahmed, “Blue bonds: What are they, and how can they help the oceans” (June 6, 2019) World
Economic Forum https://www.weforum.org/agenda/2019/06/world-oceans-day-blue-bonds-can-help-
guarantee-the-oceans-wealth/
45
The World Bank, “Seychelles launches World’s First Sovereign Blue Bond” (Oct 29, 2018)
https://www.worldbank.org/en/news/press-release/2018/10/29/seychelles-launches-worlds-first-sovereign-
blue-bond
46
Stephen Kim Park, “Social Bonds for Sustainable Development: A Human Rights Perspective on Impact
Investing” (2018) Business and Human Rights Journal 3 p. 233
47
See also Mindy Hauman, “ESG factors in loan finance: moving the needle on sustainable finance” (2019)
Butterworth Journal of International Banking and Financial Law 34(10) p 677-679 http://ln-multi-
web.cloudapp.net/blog/docs/default-source/loan-ranger-documents/jibfl_2019_vol34_issue10_nov_pp677-
679.pdf
48
Loan Market Association (LMA), “Green Loan Principles, Supporting environmentally sustainable economic
activity” (Dec 2018)
https://www.lma.eu.com/application/files/9115/4452/5458/741_LM_Green_Loan_Principles_Booklet_V8.pdf
13
MedioBanca to Infrastructure Wireless Italiane with sustainability-linked terms.49 The costs of
borrowing, i.e. the rate paid, will typically increase in case certain sustainability targets are not
met. In summary, both these sustainability-linked loans and Green Bonds appear to provide a
more attractive funding mechanism due to the lower rates paid by the borrower. This would
mean that funding sustainable projects becomes more attractive than others, thereby
providing incentives to redirect capital flows in line with creating a more sustainable economy.

3.2. Equity Financing: the Rise in Index Investing and Climate Benchmarks

The other major form of financing is equity financing, where an investor puts money in the
business in exchange for partial ownership of the business. There is, of course, an ongoing
debate on the role of shareholders, corporate governance, agency theory, and the purpose of
the corporation.50 A thorough discussion of these issues would be beyond the scope of this
paper, however, there are some points worth making in the current context. In particular,
there is the question on how an investor may influence the company most effectively in
becoming more sustainable. Note the recent divestment of the large Dutch pension fund APG
in Royal Dutch Petroleum (Shell).51 Some argue that no longer investing in fossil fuel but in
alternative energy companies is the way forward. Others argue that instead of divesting,
shareholders should ‘engage’, i.e. use their influence to force fossil fuel companies to make
the transition, for example by motions at the shareholder meetings or by appointing non-
executive directors with this objective. The latter argument appears to be strengthened as
activist investors call for the breakup of Shell into a fossil fuel business and a green business,
seeking to shield revenue and dividends for shareholders from the fossil fuel side being used

49
White & Case, “White & Case advises on INWIT’s €500 million first sustainability linked financing” (April 22,
2021) https://www.whitecase.com/news/press-release/white-case-advises-inwits-eu500-million-first-
sustainability-linked-financing
50
For a critical discussion, see for example: Malcolm Rogge, “Bringing Corporate Governance Down to Earth:
From Culmination Outcomes to Comprehensive Outcomes in Shareholder and Stakeholder Capitalism” (2021)
Notre Dame Journal of Law, Ethics and Public Policy 35(1) p 241-300
https://jleppdotorg.files.wordpress.com/2021/05/6rogge.final_.pdf
51
Chris Flood and Josephine Cumbo, “Dutch pension giant ABP to dump €15bn in fossil fuel holdings” (Oct 26,
2021) Financial Times https://www.ft.com/content/425d7c82-e69a-4fe2-9767-8c92bda731e7
14
 Ebbe Rogge, Sustainable Finance meets Financial Innovation

to finance the transition.52 This observation would suggest a need for active investors
behaving as stewards focusing on the longer term.53

Equity investors are, however, often passive investors, referring to the strategy of holding a
portfolio of shares for a longer term period.54 Such a portfolio could simply be a benchmark
or an index, such as the S&P 500, which consists of a large group publicly traded companies.
A variety of different benchmarks are available, depending on the risk appetite of investors.
The last few years have seen an increase in benchmarks related to sustainability. To facilitate
further development of this market segment, the EU has published a report on Climate
Benchmarks, proposing standards for both benchmarks and ESG disclosure.55 The idea behind
introducing standards for benchmarks relating to climate change is to improve comparability
between such benchmarks and to increase transparency regarding the impact of the
investments. In particular, the EU has introduced two climate benchmark labels, building on
their existing general framework for benchmarks (the BMR): the EU Climate Transition
Benchmark and the EU Paris-Aligned Benchmark.56 The latter sets the higher standards, as the

52
Tom Wilson, “Shell warns hedge funds risk derailing energy transition” (Oct 28, 2021) Financial Times
https://www.ft.com/content/6570670d-715e-433b-95dc-674e3e496a24
53
Attracta Mooney and Tom Wilson, “Leading Shell investor rejects call for energy group to split” (Oct 29,
2021) Financial Times https://www.ft.com/content/51b6ddd3-cbbf-46ae-abdf-c1f5c1945e37 ; for stewardship
codes see for example: Financial Reporting Council, “The UK Stewardship Code 2020” (2020)
https://www.frc.org.uk/getattachment/5aae591d-d9d3-4cf4-814a-d14e156a1d87/Stewardship-Code_Dec-19-
Final-Corrected.pdf ; Eumedion, “Dutch Stweardship Code” (June 20, 2018)
https://www.eumedion.nl/en/public/knowledgenetwork/best-practices/2018-07-dutch-stewardship-code-
final-version.pdf
54
See, for example: Kenechukwu Anadu, Mathias S. Kruttli, Patrick E. McCabe and Emilio Osambela, “The Shift
From Active to Passive Investing: Potential Risks to Financial Stability? ” (May 15, 2020) Financial Analysts
Journal 76(4) p 23–29, 2020 http://dx.doi.org/10.2139/ssrn.3244467 ; Vladyslav Sushko and Grant Turner, “The
Implications of Passive Investing for Securities Markets” (March 11, 2018) BIS Quarterly Review
https://ssrn.com/abstract=3139242
55
European Commission, “Climate Benchmarks and Benchmarks’ ESG disclosures”
https://ec.europa.eu/info/sites/default/files/business_economy_euro/events/documents/finance-events-
190624-presentation-climate-benchmarks_en.pdf ; EU Technical Expert Group on Sustainable Finance,
“Financing a sustainable economy – report on benchmarks” (Dec 20, 2019)
https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/1920
20-sustainable-finance-teg-benchmarks-handbook_en_0.pdf
56
See: Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019
amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned
Benchmarks and sustainability-related disclosures for benchmarks https://eur-lex.europa.eu/legal-
content/EN/TXT/HTML/?uri=CELEX:32019R2089&from=EN ; and Commission Delegated Regulation (EU)
2020/1818 of 17 July 2020 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the
Council as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks
https://eur-lex.europa.eu/legal-
content/EN/TXT/HTML/?uri=CELEX:32020R1818&from=NL&utm_medium=email
15
name suggests, but both set high goals for greenhouse gas emissions. Furthermore, there are
specific disclosure requirements for these benchmarks: the benchmark providers must
disclose the underlying methodology of how ESG factors etc. are taken into consideration.

Financial advisors already recommend investing in these EU Climate Benchmarks for a variety
of reasons, including reducing policy or legal risk arising from legislative changes; technological
risks arising from advancements in transitioning to a low-carbon economy; and reputation risk
arising from name-and-shame incidents.57 From an issuer point-of-view, being in such a
benchmark is attractive: it generally means that your shares will be more liquid which in turn
attracts investors. It means they can easily buy or sell their shares which may reduce their risk
compared with an illiquid investment that they are forced to hold when they cannot sell. Being
in a climate-related benchmark specifically has the additional advantage of being flagged to
the market as a sustainable investment choice. The introduction of specific EU climate
benchmarks with clear criteria may well incentivize issuers to become more sustainable and
part of such an index, which in turn redirects capital and stimulates the transition towards a
more sustainable economy.

3.3. Information Standards for Debt and Equity Finance

As described in the paragraphs above, the introduction of sustainability-linked financial

products on both the debt and equity financing side thus appear to have the potential of
supporting sustainable projects. The main question becomes: what is needed to increase this
potential? Although the market for such products is starting to mature and to transform
capital markets, the implementation of green standards relied upon unfortunately diverges
between major financial hubs, mostly due to the different historical paths followed.58 The
difficulty lies, as the OECD notes, in that concepts such as ‘green’ are rather broad and generic,
and partially relate to or overlap with other terms such as ‘social responsible investing (SRI)’,

57
State Street Global Advisors, “EU Climate Benchmarks: A Guide” (March 2020)
https://www.ssga.com/content/dam/ssmp/library-content/pdfs/insights/eu-climate-benchmarks-a-guide.pdf
58
John Kong Shan Ho, ‘Regulating environmental, social, and governance disclosure by listed companies: a
comparison of major financial markets’ (2020) Journal of Comparative Law 15(1) pp 133-156.
16
 Ebbe Rogge, Sustainable Finance meets Financial Innovation

ESG investing, or sustainable investing.59 And whilst the general thrust of the concepts will be
clear, major areas of controversy or differing opinions no doubt remain: how to classify
nuclear power, or biomass and biofuel?60 Amongst this ambiguity sits the risk of
greenwashing, a term used for purposefully describing products or projects as (far) more
environmentally- or climate friendly than they really are. There can be a variety of drivers
behind greenwashing, including lower funding costs or improving corporate image.61 This
process is, however, extremely harmful to investor confidence in this market and thus to the
transition towards a more sustainable economy.

Fortunately, both government regulation and private regulation are providing some
improvement. Private regulation has been mostly linked to particular product classes and has
already been discussed briefly, such as the ICMA green bond principles. On the governmental
and regulatory side, the World Bank has developed a guide for regulators developing a green
taxonomy.62 As a starting point, it endorses the recommendations made by the Task Force on
Climate Related Disclosures, created by the Financial Stability Board.63 This report sets out
some general principles for disclosures to be effective as well as an overview of recommended
disclosures on governance, strategy, and risk management including disclosure on metrics
used. There is also the UN Environment Programme, which seeks to stimulate finance aligned
with the Paris objectives.64 There are regional and national initiatives as well. The European
Union has introduced the Taxonomy Regulation, setting out what is and is not regarded as
‘green’.65 The UK has announced similar standards to prevent greenwashing.66 Setting and

59
OECD, “Defining and measuring green investments: implications for institutional investors’ asset allocations”
(Aug 2012) OECD Working Papers on Finance, Insurance, and Private Pensions, no 24
https://www.oecd.org/environment/WP_24_Defining_and_Measuring_Green_Investments.pdf p 6.
60
Ibid p 38.
61
M. Dalmas and V. Burbano, “The Drivers Of Greenwashing” (2011) California Management Review.
62
World Bank Group, “Developing a national green taxonomy – a World Bank guide” (Jun 2020)
https://documents1.worldbank.org/curated/en/953011593410423487/pdf/Developing-a-National-Green-
Taxonomy-A-World-Bank-Guide.pdf
63
Financial Stability Board (FSB) Task Force on Climate-Related Financial Disclosures (TCFD), “Final Report –
Recommendations of the Task Force on Climate-related Financial Disclosures” (Jun 2017)
https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf
64
United Nations Environment Programme (UNEP), “Climate Finance” https://www.unep.org/explore-
topics/climate-action/what-we-do/climate-finance
65
Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the
establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088
https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32020R0852&from=EN
66
HM Treasury, “Chancellor sets new standards for environmental reporting to weed out greenwashing and
support transition to a greener financial system” (Oct 18, 2021)
17
enforcing such standards should aid in combatting greenwashing and preserving investors’
trust in products such as green bonds and climate benchmarks.

4. Sustainability-Linked Derivatives or ESG Derivatives

4.1. What are ESG Derivatives

Before dealing with Sustainability-linked, or ESG-, derivatives in particular, it is perhaps useful

to consider for a brief moment what exactly derivatives are and why they are used. As the
name suggests, derivatives are financial products that derive their value from some other
financial underlying. An example of this would be an equity option, which derives its value
from the underlying share price. Another example is an interest rate swap, where a stream of
floating interest rate payments may be swapped for a stream of fixed rated payments. The
former example could be used to hedge against unfavorable share price movements, the latter
against unfavorable interest rate movements. Herein lies the difference with the previously
discussed green bonds and climate benchmarks, as they were aimed at financing ESG related
projects or companies. Instead, ESG derivates are typically standard derivatives where part of
the cashflows will be linked to attaining a certain ESG objective.

Since 2019, there has been an increasing number of derivatives transactions concluded with
an ESG component.67 ISDA distinguishes between two categories: the first reduces the
payment obligation by one of the parties in case a certain sustainability target is met; the other
obliges one of the parties to compensate a climate action project in case a certain
sustainability target is not met. Hence ESG derivatives are also referred to as Sustainability
Linked Derivatives (SLDs) as payment streams in standard derivatives become linked to
sustainability targets.

https://www.gov.uk/government/news/chancellor-sets-new-standards-for-environmental-reporting-to-weed-
out-greenwashing-and-support-transition-to-a-greener-financial-system
67
International Swaps and Derivatives Association (ISDA), “Overview of ESG-related derivatives products and
transactions” (Jan 2021) ISDA Research Paper https://www.isda.org/a/qRpTE/Overview-of-ESG-related-
Derivatives-Products-and-Transactions.pdf ; see also Richard Blackburn, “ESG derivatives: a look at recent
developments” (Jul/Aug 2021) Butterworths Journal of International Banking and Financial Law 36(7) p 482-484
https://www.lexisnexis.co.uk/blog/docs/default-source/loan-ranger-
documents/jibfl_2021_vol36_issue07_jul_pp482-484.pdf
18
 Ebbe Rogge, Sustainable Finance meets Financial Innovation

One of the first SLDs concluded was an interest rate swap between ING, a Dutch lender, and
SBM Offshore, a supplier to the offshore energy industry, seeking to hedge its floating interest
exposure on a credit facility.68 The spread paid by SBM Offshore over the fixed rate on the
swap can increase and decrease depending on the company’s ESG performance as measured
by Sustainalytics. ING reports that since this transaction it has engaged 59 further transactions
containing such sustainability incentives, thereby stimulating sustainability performance with
its clients.69 Another example is the interest rate swap concluded between HSBC, a UK lender,
and Siemens Gamesa, a supplier of wind power solutions.70

Having discussed some examples above, the question remains to which extent SLDs will assist
in moving towards a sustainable economy.71 The answer most likely depends on the actual
structure of the transaction. In a transaction where the rate payable on a swap is immediately
linked to the ESG or climate performance of a counterparty, then there appears to be a real
incentive to become more sustainable. Another structure, where a donation is required
towards an environmental charity when targets are not met may appear to have a more
publicity or corporate image notion to it. An argument in favor of this approach is that the
higher rate, i.e. the penalty for not reaching climate objectives, is used to actually compensate
for the damage rather than going to the other counterparty’s bank balance. In either structure,
however, the costs are raised for the non-performing party, which should assist in contributing
to the sustainable objectives.

4.2. Defining, Measuring and Verifying Performance in ESG Derivatives

The key element in these ESG derivatives is the link with predefined sustainable performance.
In order for this to work properly, this performance must be well defined and objectively

68
ING, “Introducing the world’s first sustainability improvement derivative” (Aug 13, 2019)
https://www.ing.com/Newsroom/News/Introducing-the-worlds-first-sustainability-improvement-
derivative.htm
69
ibid
70
Energyworld.com (Reuters), “Siemens Gamesa in ESG-linked interest rate swap” (Mar 12, 2020)
https://energy.economictimes.indiatimes.com/news/renewable/siemens-gamesa-in-esg-linked-interest-rate-
swap/74587038
71
See also: Dean Naumowicz and Delyth Hughes, “The role of sustainability-linked derivatives in meeting global
ESG goals” (Oct 2021) Butterworths Journal of International Banking and Financial Law 36(9) p 628-630
https://www.lw.com/thoughtLeadership/The-Role-of-Sustainability-Linked-Derivatives-in-Meeting-Global-ESG-
Goals
19
measurable, otherwise there is too much (legal) uncertainty around the corresponding cash
flow payments.72 This means that performance may need specifying in terms of time period,
i.e. by when a target needs to be reached, and clearly measurable, for example a minimum
percentage in reduction of emissions. In the examples above, independent ESG rating
agencies such as Sustainalytics are used to determine ESG performance. This ensures that the
performance is measured objectively by a professional third party on which both parties to
the derivatives contract have agreed. In turn this reduces the potential for disagreement
between the parties. In short, the two key necessary conditions appear to be reliable
information combined with measurable targets, and independent verification thereof.

To measure performance against a certain target, whether done by a professional third party
or otherwise, requires the availability, standardization and comparability of relevant
information. Such non-financial information has already been discussed above within the
context of debt- and equity finance and the risk of greenwashing. The same holds true here:
such standards for non-financial information can assist in defining and measuring
performance targets. For the verification and assessment of non-financial information, a
comparison with financial information is useful: this could be analyzed, for example, to assess
the creditworthiness of a company and to assign a credit score or rating. This process is done
by credit rating agencies, which specialize in examining companies’ financial information and
translate this into a single rating.73 As regards the independent verification of non-financial
information, this can be done by the aforementioned ESG Rating Agencies. 74 Of course, the
role of such ESG Rating Agencies as well as their increasing importance are subject to debate,

72
International Swaps and Derivatives Association (ISDA), “Sustainability-linked derivatives: KPI guidelines”
(Sep 2021) ISDA Research Paper https://www.isda.org/a/xvTgE/Sustainability-linked-Derivatives-KPI-
Guidelines-Sept-2021.pdf
73
See for example: Robert J Rhee, “Why Credit Rating Agencies Exist” (2015) Economic Notes p. 161-175 ; W.A.
Boot, T.T. Milbourn & A. Schmeits, “Credit Ratings as Coordinated Mechanisms” (2016) Review of Financial
Studies 19 p. 81–118.
74
Ebbe Rogge and Lara Ohnesorge, “The Role of ESG Rating Agencies and Market Efficiency in Europe’s Climate
Policy” (2022) 28(2) Hastings Environmental Law Journal 113-147
https://repository.uclawsf.edu/cgi/viewcontent.cgi?article=1620&context=hastings_environmental_law_journ
al
20
 Ebbe Rogge, Sustainable Finance meets Financial Innovation

with some arguing government regulation required,75 whilst others argue they should be run
publicly altogether.76

5. Carbon Emission Allowances and Trading Schemes

The derivatives described in the previous section are all standard derivatives with some ESG
or sustainability element bolted on top. These derivatives are typically used as part of
financing the company and for hedging any associated interest or foreign exchange risks. It is
worth examining, however, another product which has been created specifically to reduce
greenhouse gas emissions: emission trading. Under the Kyoto Protocol, countries can divide
their allowed emissions into units which in turn can be traded either with other countries (in
case of spare units) or under an emission trading scheme within a region or domestically.77
The European Emission Trading Scheme (ETS) is an example of such a ‘cap-and-trade’
scheme.78 It sets a cap on the total amount of greenhouse gas emission, which will be lowered
each year in order to achieve an acceptable reduction by a certain target date. Within this
fixed amount of emissions, trading can take place in units representing rights to emit a certain
amount of greenhouse gasses. As there is a cap, the total amount of such units is fixed,
allowing for them to be traded at a market price. Companies which are subject to carbon
compliance programs can purchase and use these rights to comply with the legal limits placed
on their emission. Hence, in light of the main questions asked in this paper, these products
clearly place an increasing cost on the firms actually causing climate change, hopefully
stimulating them to reduce their greenhouse gas emissions. On the question of whether these
products can work even better, some authors point towards the verification or auditing of the
methodologies for calculating the actual carbon emissions and offsets, certainly on a
transnational scale.79

75
ibid.
76
Cristina M. Banahan, “The Bond Villains of Green Investment: Why an Unregulated Securities Market Needs
Government to Lay Down the Law” (2019) 43 Vermont Law Review p. 841
77
UNFCCC, “Emissions Trading” https://unfccc.int/process/the-kyoto-protocol/mechanisms/emissions-trading ;
United Nations, “Kyoto Protocol to the United Nations Framework Convention on Climate Change” (Dec 1997)
https://unfccc.int/sites/default/files/resource/docs/cop3/l07a01.pdf
78
European Commission, “EU Emissions Trading System (EU ETS)” https://ec.europa.eu/clima/eu-action/eu-
emissions-trading-system-eu-ets_en
79
Braden Smith, “Transnational Carbon-Trading Standards: Improving the Transparency and Coordination of
Post-Kyoto Carbon Trading Markets” (2012) 30 Pace Environmental Law Review 325
21
The difficulty for companies subject to compliance programs is that the price for a unit of
emissions allowances will fluctuate over time, resulting in uncertainty in costs. These market
movements, or volatility, can be hedged in ways similar to the hedging of volatility in interest
rates or foreign exchange rates. For example, using derivatives such as future contracts, one
can agree to purchase emission allowances at a predetermined price at an agreed date in the
future.80 In the European market, these are called EUA futures and are traded on am
exchange, such as ICE Endex and EEX. Another product traded on exchange are the options on
emission allowances, which gives the holder of the option the right, but not the obligation, to
buy (or sell) allowances at a predetermined price at an agreed date in the future. ESMA
recently published a preliminary analysis on the working of this market, which they described
as working as they expected: dealers offering liquidity to corporates looking to purchase or
sell allowances.81 In other words, a market is being created to facilitate those corporates who
cannot yet reach their emission targets and need to buy allowances as well as those looking
to sell. Whilst on exchange trading has the advantage of transparency and liquidity, it is of
course possible to tailor derivatives on allowances in accordance with the specific needs of
the purchaser. Such OTC derivatives may provide specific features and may be used to hedge
specific risks for a company.82

6. Conclusion

This paper has sought to provide an overview of some of the developments and innovations
in sustainable finance and examine whether they have the potential to contribute to the
transition towards a more sustainable economy. Whereas some of the historically developed
products with a link to the effects of climate change, such as catastrophe bonds, do little to
redirect capital flows towards green projects, the more recent innovations, such as Climate
Benchmarks, ESG derivatives, and Emission Trading, do have the potential to contribute. The

80
International Swaps and Derivatives Association (ISDA), “Role of Derivatives in Carbon Markets” (Sep 2021)
ISDA Research Paper https://www.isda.org/a/soigE/Role-of-Derivatives-in-Carbon-Markets.pdf
81
European Securities and Markets Authority (ESMA), “ESMA publishes its preliminary report on the EU carbon
market” (Nov 18, 2021) https://www.esma.europa.eu/press-news/esma-news/esma-publishes-its-preliminary-
report-eu-carbon-market
82
ISDA (n 77)
22
 Ebbe Rogge, Sustainable Finance meets Financial Innovation

point is that, whilst historically developed products may provide some insurance for the
effects and impact of climate change, they lack the direct link between the sustainable project
and its source and cost of funding. The more recently developed products, however, do
appear to contribute to some form of internalization of costs emanating from the contribution
to climate change. Various products increase funding costs when green objectives are not hit,
whilst others reduce funding costs when capital raised is spent on sustainable projects. What
they all appear to have in common is a need for transparent, reliable and comparable non-
financial information, measurable objectives, and some independent verification.

23