ESG Derivatives at Eurex

Zubin Ramdarshan, Head of Equity & Index Product Design at Eurex, discusses the exchange’s new ESG derivatives contracts to be launched in November.

On 9 November, European derivatives exchange Eurex, will launch new futures and options derivatives contracts on the DAX 50 ESG and EURO STOXX 50 ESG indices. This comes after Eurex became the first exchange to offer derivatives contracts on ESG versions of the major STOXX European benchmarks in 2019.

Based on the STOXX Qontigo DAX 50 and Euro STOXX 50 indices, the new contracts apply ESG criteria developed by Sustanalytics using their Global Standards Screening methodology. These integrate ESG scores into the index leading to improved overall ESG profiles of Eurex’s leading blue chip index derivatives.

Zubin Ramdarshan, Head of Equity & Index Product Design at Eurex told ESG Investing, “Our ESG derivatives contracts have been developed for investor end users with ESG mandates. These are primarily asset managers receiving inflows and outflows making cash management easier if they can invest them into a product that satisfies their ESG mandate. There may also be some hedging use as ESG volumes increase and if prices become inflated or volatile”.

Eurex says that companies in the DAX 50 ESG Index must pass standardized ESG screens related to Sustainalytics’ Global Standards Screening, as well as not be involved in controversial weapons, tobacco production, thermal coal, nuclear power or military contracting. The base universe of the DAX 50 ESG Index is the HDAX universe which comprises the joint set of companies included in the DAX, MDAX and TecDAX. The EURO STOXX 50 ESG Index excludes companies that Sustainalytics considers to be non-compliant with Global Standards Screening. In addition to the exclusion screens, the ten per cent of companies with the lowest ESG scores are excluded and replaced by companies with a higher ESG score from the same Industry Classification Benchmark supersector.

Total trading volume in STOXX Europe 600 ESG-X futures and options since their launch in February 2019 has reached 1.5 million contracts with a value of EUR20 billion by mid October this year. Year to date, the total is 885,000 contracts with the vast majority of contracts traded being in ESG futures rather than options. Currently, outstanding contracts amount to almost 100,000, says Ramdarshan. “Demand for ESG derivatives is coming from big pension funds and asset managers in Asia, Europe and US. At the moment, it is very Europe-led with the Nordic region especially showing a lot of interest followed by France and Germany. Hedge funds are still embedded in deep liquid instruments and they remain less focused on ESG investing”.

The new contracts cover European markets where most of ESG activity has been so far, but the US remains a target for its products as Ramdarshan explains, “The US is slightly behind on ESG, there is no question about that. This is due to both lower public awareness and less demand from investors. For example, data shows that trading volumes in S&P500 ESG contracts on the CME and CBOE are behind the equivalent contracts on Eurex. They ought to have greater participation give the size of the market in the US, but it hasn’t materialised.”

“What is certain is that a generational shift to millennial investors is taking place where even in the US they do care about ESG and where they would like to put their savings and investments. If you look at the progress made in Europe on regulatory issues with regards to sustainable investing it is far ahead but that could change in the US and it could catch up”.