IIGCC Releases Derivatives, Hedge Funds Guidance

The Institutional Investors Group on Climate Change (IIGCC) has published guidance to support investors in their inclusion of derivatives and hedge fund holdings within net zero commitments, targets, and strategies. The guidance also provides advice to hedge fund managers on how to report on the real-economy impact of their holdings, with goals to better support net zero investment strategies. Though indirect exposure to assets through derivatives may not directly contribute to greenhouse gas emissions, it is tied to underlying assets such as stocks and bonds, which do have associated emissions, the guidance points out. Disagreement persists among investors and hedge fund managers on how best to account for the role that derivatives and shorts play in net zero investment strategies, with some suggesting attribution of emissions based on economic exposure without using a net carbon metric. However, the IIGCC contends that to achieve maximum real-economy emissions reductions, economic exposure should not be conflated with net zero alignment. “While a net-carbon metric shows the exposure to carbon risk, it is less useful for tracking real-economy emissions and decarbonisation,” it said in a statement. “When investing in derivatives and hedge funds, the guidance encourages investors to consider, within their mandate, all channels of influence to maximise positive real-world impact and to report on their use.” The guidance has been welcomed by members. “The IIGCC guidance makes clear both to the potential for derivatives and hedge funds to be a force for good, as well as the potential for greenwashing if metrics are misused,” said Keith Guthrie, UK Head of Sustainability at Cardano. “Applying such principles should help guide asset owners when assessing investment managers’ alignments with their beliefs.”

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