SGX to launch futures on Nikkei 225’s climate index

THE Singapore Exchange (SGX) will launch futures on a climate index made up of component stocks of Japan’s benchmark Nikkei 225 to “address rising investor appetite for climate-related products”, it said on Wednesday (Nov 30).

The Nikkei 225 Climate Change 1.5°C Target Index, created by Nikkei and US investment technology and advisory company Wilshire, complies with the index regulations of the European Union aimed at attaining the goals of the Paris climate accord. It is designed to halve the total greenhouse gas emissions of its parent Nikkei 225, by adjusting the number and weight of constituents, and also for emission levels to be further decreased by 7 per cent annually in the coming years.

In response to queries from The Business Times, an SGX spokesperson said that it is targeting to launch the climate futures in the first half of 2023.

“Derivatives contracts are typically employed for trading, hedging and risk management purposes. The index is a subset of the widely traded Nikkei 225 index, with the added benefit of its underlying assets complying with the EU Paris-Aligned Benchmark. These are features that market participants may want to leverage on,” added the spokesperson.

Michael Syn, head of equities at SGX Group, said that the exchange’s partnership with Nikkei puts it at the forefront of Japanese risk management solutions.

“Demand for climate investing continues to grow. The Nikkei 225 Climate Change 1.5°C Target Index futures will complement SGX’s existing suite of climate-related solutions, and enhance our comprehensive Nikkei offering to investors seeking exposure to Japan’s economy.”

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The launch of this new climate futures product comes after SGX announced in October that it will license the recently launched MSCI Climate Action Indexes for listed futures contracts.

With the licence, SGX said that it will work with market participants to develop climate-related products, including futures contracts, to help investors reduce their portfolio’s carbon footprint.

SGX currently has five other futures which have a focus on environmental, social and governance (ESG) factors. They are: Nikkei ESG-Reit index futures, FTSE Emerging Asia ESG index futures, FTSE Asia ex-Japan ESG index futures, FTSE Emerging Markets ESG index futures and FTSE Japan Blossom index futures.

Based on its October 2022 market statistics report, there were no trades for the FTSE Emerging Asia ESG index futures, FTSE Asia ex-Japan ESG index futures and FTSE Emerging Markets ESG index futures.

And while the FTSE Japan Blossom index futures saw a 100 per cent year-on-year increase in market volume in October this year compared to a year ago, there was a 60 per cent decrease in market volume for Nikkei ESG-Reit index futures over the same period.

When queried about the lack of trading among ESG-related futures, an SGX spokesperson said: “Sustainability-based products are nascent, but increasingly important to address climate and ESG-related investing needs. The demand for these contracts will build over time in line with asset gathering”.