As the world’s attention turns to Glasgow for COP26 this month, I wanted to explore the critical role that finance plays in sustainability and the climate crisis, and more importantly, the role that market makers play. Sustainable Finance is an essential enabler to work towards a more sustainable and climate-resilient world. It’s a critical part of unlocking the investment capital that is needed to support the green transition and protect our planet’s future.

The role of market makers currently can most easily be seen in regard to supporting ESG products which play a vital role in the green transition. ESG financial products incorporate the environmental, social and governance principles that make sure that a product is sustainable. This will be supported by, for instance, the EU taxonomy regulation which will give clear standards for what is considered green.

These ESG products are critical to society, investors and for the green transition towards sustainable capital markets. Developing ESG products also encourages transparency and consistency in reporting, while also raising awareness and building the expertise of investors. These products have environmental and/or social benefits that impact bigger goals set by COP 26 and help get to net zero in 2050.

So what role do market makers play in this? Market makers can help facilitate the shift towards sustainable investments by providing liquidity in ESG products, making them more attractive to invest in. They do this by making competitive pricing (tight bid-ask spread) and also through providing deep pools of liquidity, this helps minimise the cost of investing in ESG products, which in turn helps investors reorient their capital to sustainable investments.

ESG products are still fairly new to the market, but demand for them is growing, and with more and more investors who are conscious of the environmental impact of their investment strategies. As an industry, market makers play a crucial role in this transition. Market makers have the ability to support investors with the migration towards green investments, firstly, by making sure that investors can sell their ‘brown’ products while facilitating a smooth transition towards green products. And secondly, by giving trust in a product. When it comes to new financial products, investors want to be sure that there is always a market for that product. By providing continuous liquidity, market makers make sure that there is always someone present in the market, even in volatile circumstances.

 

Our members are already putting their commitment to our sustainable finance principles into action, taking active roles in ESG products. With market makers committed to trading these products, it gives investors the confidence that they need to include ESG products into their portfolios and investment strategies. I believe that ESG products are just scratching the surface in terms of how finance will help accelerate the green transition. Interest and confidence in these products will only continue to grow in the months and years to come, and I hope that this will lead to even more innovation in terms of new products in the future.