While equities and fixed income investors have long had options for sustainable investment considerations, measuring environmental footprint is a novel concept for commodities as an asset class. Incorporating environmental metrics into commodity indices and commodity-linked derivatives is complex, but new research outlining methodologies into how environmental metrics can be reflected could open up new avenues for investors.
Carbon Accounting for Commodity Derivatives is a report led by Dr. Anastasiya Ostrovnaya from the Centre for Climate Finance & Investment, via Imperial Consultants and commissioned by J.P. Morgan and S&P Dow Jones Indices. The report explores the question of measuring environmental footprint in commodity derivatives. Through a deep analysis of the market structure of listed commodity futures, the authors establish the important role of derivatives in corporates’ hedging and financing.
This report follows a joint paper published in 2023 by J.P. Morgan and S&P Dow Jones Indices, which explored the role commodity derivatives can play in sustainable investing. Notably, it articulated two possible ways to include transparent climate and wider environmental metrics into rules-based commodities indices while maintaining inflation sensitivity and diversification benefits.
The report argues that commodity futures constitute an important link in the financing chain of commodity producers, by helping to reduce producers’ cost of capital and therefore produce the commodity. However, many questions remain open. Among them is how much emissions associated with extraction, processing, or use of a unit of a commodity can be attributed to the financial institutions on the back of a derivatives position. This report is timely as financial firms face the challenge of aligning their commodity portfolios to sustainability strategies, while supporting energy security.
Together, these two papers fill critical knowledge gaps for investors, and could help them better understand the environmental footprint of their commodities positions, and the role they could play in the climate transition, thus opening up new avenues for investment.