News & Analysis

Staying out of the red and into the... Green!

Andrew Saks, Wednesday, 21 April 2021

The amount of effort large corporations are expending these days in demonstrating to the world how enlightened they are by doubling down on how kind to the planet they are.

In Europe, including the United Kingdom which is home to the world’s largest and most important financial markets center, it is almost impossible to go about daily business without being apprehended by the green message of many firms, including large financial institutions.

ESG, an acronym for Environmental Social and Governance, is an increasingly important direction and point of focus in financial markets, and represents a huge PR-driven bandwagon that even the largest banks and investment funds aren't just jumping on, but are driving.

Last November, it became absolutely clear that users of deal contingent hedges may soon be able to link the derivatives to ethical targets, as banks consider launching trades with an environmental, social and governance (ESG) component.

“We should be doing them,” said Christopher Wall, global head of foreign exchange structuring at Deutsche Bank in November 2020. “We will do them. When there’s client demand for a solution then banks will step up to the plate, so I’m already firing emails about it.”

Indeed, as are many interbank FX dealers as their management work tirelessly to try to appease the increasingly soft policy makers in the Western world’s governments.

“There is no doubt that sustainable finance and environmental, social and governance (ESG) products are becoming increasingly important to policy-makers and financial market participants all around the world” heralded the International Swaps and Derivatives Association last month.

In September, ISDA hosted a virtual conference on ESG and derivatives, which highlighted the very important role the derivatives market has to play in the transition to a sustainable economy. Fascinating, isn't it.

Those who have managed not to fall asleep digesting the riveting ramblings across various forums on this subject may have noticed that today marks a move toward opportunities relating to green trading, and perhaps more specifically, green FX.

The mover and shaker here is Drax. No, not the baddie in the 1970s James Bond movie, but the bang-up-to-date renewable energy company which has gone all out for sustainability and technology.

The company, which employs 3,400 people in the UK and North America has today applied long-term ESG KPIs to short-term FX trades with Barclays and NatWest, both of which are among the largest Tier 1 FX interbank dealers in the world, Barclays via its long-established BARX single dealer platform, and NatWest via NatWest Markets, RBS' City of London-based investment banking division.

Drax, which signed two ESG-linked FX derivatives agreements with Barclays and NatWest Markets on April 19 covering their respective FX activity – including forwards, swaps and options, now finds itself not only innovating the energy market, but also market mover in FX.

What an interesting combination. A company whose remit is to disrupt and revolutionize the energy sector thus taking its part in contributing toward oil volatility is now set to bring its potential future strength to the currency market too.

Drax has a lot of purchasing power and ability to influence both the commodities and currency markets. In the summer of last year, the company announced that it had completed a three-year extension to the £125 million Environmental, Social and Governance (ESG) facility agreement entered into in July 2019, confirming that the contractual final maturity of the facility had been extended to 2025, further extending the profile of Drax’s existing facilities, which include maturities to 2029.

We have seen the unprecedented dip into negative equity of crude oil at around this time last year which finally demonstrated to the world that renewable energy, ESG trading and electric cars are making a huge impact on the markets.

Now, an ESG energy provider is approaching the FX options and swaps market at Tier 1 interbank dealer level.

Watch this space. Watch this green space.

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