ISDA Offers Guidance on Sustainability Derivatives

In a discussion paper, ISDA reviewed "issues market participants may need to consider from a commercial, operational, regulatory, and legal perspective when transacting in sustainability linked derivatives ("SLDs")".

ISDA defined SLDs as "highly customizable transactions that use key performance indicators ("KPIs") to set sustainability targets." The rate paid may vary based on whether one or both of the trade participants achieves a KPI with respect to an environmental, social and governance ("ESG") target.

In the paper, ISDA explores the "trade lifecycle roadmap" of an environmental SLD transaction dividing it into four stages: (i) pre-trade, "including structuring, negotiation, pricing and documentation"; (ii) trade execution; (iii) post-trade, "including validation, trade capture, trade settlement, trade maintenance, collateral management, reporting and monitoring"; and (iv) trade termination "either at the contract maturity or as a result of an early termination, assignment or novation."

Further, ISDA addresses (i) the application of swaps regulations, including trade reporting and margin, risk mitigation and disclosure requirements, (ii) complying with ESG-specific regulations, (iii) disclosure and documentation and (iv) other operational and capital related risks.