This guidance was created to support investors to include derivatives and hedge fund holdings within their net zero commitments, targets, and strategies. It also provides guidelines to hedge fund managers on how to report on real economy impact of their holdings to better support net zero investment strategies.
Neither derivatives nor hedge fund holdings constitute an asset class. Derivatives are financial instruments that offer indirect exposure to an underlying asset class, a portion of the market, or a specific security. Hedge funds are vehicles that offer a variety of investment strategies across different asset classes.
Though indirect exposure to assets through derivatives may not directly contribute to greenhouse gas emissions, the guidance points out that it is tied to underlying assets, such as stocks or bonds, which do have associated emissions.
Disagreement persists among investors and hedge fund managers as to how to best account for the role that derivatives and shorts play in net zero investment strategies. Some suggest attributing emissions associated with derivatives and shorts based on economic exposure (i.e., using a net carbon metric), but our guidance explains 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.
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.
Read more in the Derivatives and Hedge Funds Guidance.