Data Spotlight - ESG futures gaining traction

The universe of ESG futures and options is rapidly expanding, with close to three dozen now available on nine exchanges around the world.

Trading volume is still relatively low compared to conventional equity index contracts, but is rising rapidly. December set a record of 437,000 in contracts traded, eclipsing the previous high of 364,000 set in March 2020. Trading activity also is becoming more diverse across more contracts, more exchanges and more regions.

ESG futures and options are designed to meet investor interest in certain environmental, social and governance standards. Most ESG futures and options are based on well-known equity index benchmarks, with certain companies removed or added based on their ESG scores. Some of the contracts have a slightly different focus, consisting only of companies that meet or exceed an ESG standard.

ESG investing has become a major trend in the asset management world. State Street estimates that $170 billion was invested in ESG mutual funds and exchange-traded funds as of May 2020, and predicts that figure will double over the next three years. In response to this growth, the exchanges are rolling out ESG futures and options to provide asset managers with a way to manage their exposures to the underlying ESG indices. Like conventional equity index futures and options, these contracts provide an efficient way to invest in a basket of companies in a single transaction.

Nine exchanges have joined this trend ― two in Asia, four in North America, and three in Europe. As of mid-February, 34 contracts had been listed on these exchanges. Only 21 are actively traded, however, and most of the volume is concentrated in the top two exchanges, both of which are in Europe. 

As the chart shows, the overall level of trading has accelerated rapidly over the last two years. Trading tends to peak once per quarter as investors roll their positions out of expiring contracts and into the next listed month.

Eurex is currently the leader in this emerging sector, with a higher level of trading activity and a wider range of contracts than the other exchanges. It currently lists 16 contracts, including four options products. The most popular contract is the Stoxx Europe 600 ESG-X futures, which is based on a version of the Stoxx Europe 600 index that has been screened by ESG criteria. More than 1.14 million of these contracts traded on Eurex in 2020 and year-end open interest stood at nearly 52,000 contracts.

The second most popular contract at Eurex is the ESG-screened version of the MSCI Emerging Markets Index, a benchmark used by many funds to track equity markets in countries like China, South Korea, India and Brazil. Volume was 54,000 contracts in 2020, with 16,000 in open interest at year-end.

Nasdaq Nordic lists only one contract, but it has been very successful, with more than 1 million traded in 2020. Nasdaq's OMXS30 ESG futures began trading in 2018, well ahead of the other contracts in this sector, and it was quickly taken up by pension funds and other institutional investors in Scandinavia that were early advocates of sustainable investing. 

CME Group and ICE Futures US joined the trend in 2019, but the amount of trading in the US has been relatively small. In 2020, volume in CME's ESG version of its E-mini S&P 500 futures was slightly over 136,000 contracts, and open interest at year-end was 5,800. ICE lists 11 contracts, all based on indices developed by MSCI. The most actively traded one is the mini MSCI Emerging Markets ESG Leaders Index, which tracks 448 companies in emerging market countries with high ESG scores. Trading volume in this contract amounted to 36,000 contracts in 2020, with year-end open interest at 4,600 contracts.

The Taiwan Futures Exchange introduced its first ESG contract in June, but it has quickly gained traction. Total volume in its ESG index future reached a cumulative total of 99,000 contracts in just seven months, making it the fourth most actively traded ESG future in the world in 2020. The contract is based on the FTSE4Good TIP Taiwan Index, which originally was developed to support investments by public pension funds and now is used as a benchmark for several ESG funds.

ESG Futures and Options
Contracts listed and actively traded as of December 2020

FIA's Data Spotlight series are based on data collected by FIA from exchanges, clearinghouses and government agencies and published through its website. For more information about FIA's data services, contact data@fia.org.