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ISDA Assesses Regulatory Considerations for Sustainability-Linked Derivatives

ISDA assessed how existing derivatives regulatory regimes would apply to sustainability-linked derivatives.

In a newly released paper titled "Regulatory Considerations for Sustainability-linked Derivatives", ISDA outlined factors for determining (i) whether SLDs would be considered swaps under U.S. regulations, (ii) whether SLDs would be considered OTC derivatives under EU or UK regulations, (iii) the impact that sustainability-linked cash flows may have on derivatives otherwise exempt or excluded from certain regulations and (iv) compliance issues based on how SLDs are classified.

ISDA evaluated how those determinations would impact (i) risk management and documentation requirements, (ii) reporting, (iii) disclosures, (iv) benchmark considerations, (v) bankruptcy/recovery and resolution and (vi) prudential requirements.

Separately, ISDA considered the legal implications of voluntary carbon credits, emphasizing that "[a] robust voluntary carbon market must be grounded in a strong legal foundation." In a white paper, ISDA offered recommendations on how regulators can provide greater legal certainty regarding voluntary carbon credits and how the derivatives markets can facilitate raising capital for green investments while mitigating risks.

Commentary

 

As ESG products and investing gain popularity, regulators struggle with how to assess and monitor financial products. SLDs have an additional hurdle to overcome, such as how they should be classified under U.S., EU, and UK regulations. Currently, ESG disclosure requirements are most extensive in the EU, where regulatory reforms relating to sustainable financing already exist, and second-most extensive in the UK, where the focus has been primarily on preventing greenwashing. 

Primary Sources

  1. ISDA Press Release: Regulatory Considerations for Sustainability-Linked Derivatives

  2. ISDA Press Release: Legal Implications of Voluntary Carbon Credits

  3. ISDA White Paper: Regulatory Considerations for Sustainability-Linked Derivatives

  4. ISDA White Paper: Legal Implications of Voluntary Carbon Credits

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XI, Number 336
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About this Author

Rachel Chiger Finance Attorney Cadawalader Law Firm
Associate

Rachel Chiger is an associate in the Financial Services Group.

Rachel received her J.D. from the University of Pennsylvania Law School, where she was an Executive Editor of the Journal of International Law and Morris Fellow Mentor. While attending Penn Law, Rachel received a Wharton Certificate in Management from the Wharton School at the University of Pennsylvania. She graduated magna cum laude from Queens College, where she received a B.A. in Political Science. Rachel was in a Business and Liberal Arts Honors Program and also studied Art History.

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