Rise of ethical swaps brings hedging questions

Banks ponder how to offset risks of ESG derivatives – or whether hedging is even desirable

Demand for ethical investments has led to growth in bonds and funds with a clear conscience. In turn, banks have begun building their own line in environmental, social and governance-related (ESG) financial products.

But swaps and derivatives linked to ESG criteria have an unusual risk profile, and financial institutions and their clients are only beginning to understand how to manage these risks.

It’s not something they can avoid. ESG products are becoming a fixture of the financial edifice