Hedging Responsibly: How Clear Street Supports Sustainability Efforts

Clear Street is modernising the brokerage ecosystem. Founded in 2018, Clear Street is a diversified financial services firm, that’s replacing the legacy infrastructure used across capital markets. The firm started from scratch by building a completely cloud-native clearing and custody system that’s designed for today’s complex, global markets.   

Clear Street's proprietary platform enhances market efficiency by reducing risk, redundancy, and costs for clients. 

The goal is to create a single platform for every asset class, in every country, in every currency. We are a tech-first firm where efficiency is key, so we apply this to the way we impact the environment.   

For example, we minimise paper usage across our 11 office locations and also clear products, including carbon credit futures, on various exchanges as outlined below. 

Carbon markets are a specialised financial market that allow purchasers to emit a specific amount of carbon dioxide or other greenhouse gases. As greenhouse  gases can impact global warming, many governments implement cap-and-trade programs to cap emissions. According to research from Morgan Stanley "the voluntary carbon-offsets market is expected to grow to about $100 billion in 2030 and around $250 billion by 2050". 

Let’s now turn to the exchanges that trade commodities in the US and around the world. Here are a couple of examples. Clear Street is a member of these exchanges and clears various products on them. 

CME ClearPort: Part of the Chicago Mercantile Exchange, ClearPort serves as a clearing house for several agricultural futures, including soybean, corn and live cattle. Clearing more than 300,000 contracts daily, CME ClearPort also brings together more than 17,000 registered users around the world, including commercial, banking and hedge-fund firms to futures commission merchants (FCMs) and clearing firms. 

ICE Futures Europe: This exchange, based in London, provides more than five million futures and options contracts for crude oil, interest rates, equity derivatives, natural gas, power, coal, emissions and soft commodities. ICE offers 11 carbon credit futures, each covering a fixed period of five years, from January to December, from 2016 to 2030. 

Carbon tokens and credits are also traded through the European Union. In 2022, the Intercontinental Exchange announced the launch of 10 new Nature-Based Solutions Carbon Credit futures contracts and provided a carbon-credit futures contract portfolio that allows market participants to buy, sell and hedge carbon credits from 2016 out to 2030.  

Gordon Bennett, Managing Director of Utility Markets at ICE, had this to say about the credits: "The structure for the new carbon-credit vintages was developed through extensive discussions with a wide community covering corporate buyers, developers, trading houses and financials."  

"We believe that the new carbon-credit futures satisfy the key demands of the market," he continued. 

"They allow single-vintages to be traded with the added liquidity benefits from having each futures contract deliver a fixed five-year vintage bucket; they provide a forward curve out to 2030; and customers can extend carry trades for multiple years while trading vintage spreads without the basis risk from the cost of carry."  

There is an abundant market for futures commodities.  The European Union’s Sustainable Finance Disclosure Regulation (SDFR), the world’s biggest ESG investing rulebook, is expanding this further.  

A recent Goldman Sachs analysis (August) found that fund managers are generally more exposed to oil, gas and mining stocks in ESG-registered portfolios than they were in 2023. 

Bloomberg reported: "Goldman’s research looked at funds registered under the European Union’s Sustainable Finance Disclosure Regulation. SFDR has two sustainable fund categories: Article 8 (the broadest) and Article 9 (the strictest)." 

"Among Article 8 funds, a category that Bloomberg Intelligence estimates covers more than $7 trillion of assets, 51 percent now hold at least one oil and gas company, up from 47 percent a year ago." 

"When it comes to metals and mining, 46 percent of Article 8 funds hold at least one company in the industry, while the equivalent figure for Article 9 managers is 32 percent," Bloomberg continued.  

"Though ESG funds continue to be overall underweight commodities, analysts at Goldman Sachs claim to see 'more willingness to own metals and mining companies'. They also say that ESG fund ownership of oil and gas stocks has 'increased slightly'. Changes in the ESG regulatory backdrop in Europe 'will spark the advent of improved mainstreaming of transition/improver funds as credible sustainability strategies, which could drive flows towards companies traditionally excluded,'" the Goldman analysts added (reported by Bloomberg). 

As markets mature, liquidity is expected to grow significantly and increase the popularity of these contracts. Clear Street will remain at the forefront of the clearing and custody process for these products, leveraging our cloud-native technology that's tailored for today’s complex global market.