Green finance trends in 2019

By: Julie Becker, Head (LGX) & Member of Executive Committee (LuxSE), Luxembourg Green Exchange (LGX) & Luxembourg Stock Exchange (LuxSE) Feb 2019

1. The post-COP24 landscape

One of the key outcomes of the COP24 summit (the informal name for the 24th Conference of the Parties to the United Nations Framework Convention on Climate Change) is the agreement on a set of rules to implement Paris Agreement promises. This includes how governments will measure, report on and verify their emissions-cutting efforts. This puts in place a common framework as to how emissions are accounted for. It is a very important step as countries now speak the same language.

What was absent from talks is the key question of how countries will step up targets on cutting emissions. Current targets align us with a 3°C rise in global temperatures, however, the current political atmosphere is difficult for fostering further emissions cuts.

LuxSE’s outlookThere will be a growing emphasis on the financial sector and markets to lead the shift to a low carbon economy.

2. Out with the brown, in with the green

In 2019, investors will look to use indicators showing the impact achieved by green bond financing to make investment decisions. Although impact figures between issuers will remain difficult to compare, the increasing market practice of publishing methodological notes will make comparability easier.

Following the publication of the TCFD guidelines and the related first status report, organisations are increasingly aware of the risk environmental issues pose to their business. More players will make decisions based on the environmental, social or governance (ESG) risks they think an organisation is exposed to.

LuxSE’s outlookIssuers’ profiles are likely to become just as important as the projects financed through their green, social and sustainable bonds. Investors will not shift their focus overnight, but their demands for increased transparency will mark this transition period. We also expect some large investors to take on an 'activist' role and completely refuse to support 'brown' businesses.

3. Business models transition

Investors will also want to see a change in business models, as companies embrace the transition to a green economy. Every technology will eventually become obsolete or replaced by a better, more sustainable version. The same holds true for coal power generation or fossil fuel vehicles, so investors will pay attention to how organisations align (or not) their business strategies with the policy pathways drawn by the Paris Agreement, and regional or national commitments.

LuxSE’s outlook: Multilateral development banks (MDBs) will likely change their approach in the near future, to provide more technical assistance – especially in the growing social securities market – rather than just putting money on the table.

An increase in technical assistance and policy advice for knowledge creation and transfer is one of the priorities MDBs agreed on during the 2018 Global Infrastructure Forum. This will lead to improved decentralisation of expertise, crucial for the local development of future green projects.

4. In taxonomy we trust

The first results of the EU Commission’s Technical Expert Group on establishing an EU sustainability taxonomy will see the day in 2019. This will bridge the gap between current market practice and a wider reorientation of capital flows toward sustainable investment by providing a harmonised list of economic activities that can be considered 'environmentally sustainable'.

The EU Commission also announced that delegated acts in relation to MiFID II and IDD (the Insurance Directive) will come out in 2019. These rules will enhance the consideration of sustainability in suitability assessments, and lead to a greater emphasis on identifying 'what is sustainable' in the relevant actors’ portfolios.

LuxSE’s outlook: The attention to taxonomy will intensify at an international level, in parallel to the diversification of instruments.

5. From green to SDG: different shades of bonds 

In our 2018 outlook, we already predicted that green will go rainbow. Indeed, the market developments in the second half of last year proved us right. The world’s first blue bond is, we believe, just the first step of a trend likely to grow in 2019.

The focus on SDG finance will increase in 2019, with growing volumes of sustainability bonds. This trend will probably affect the issuance of green bonds, although they will remain the main tool to develop sustainable finance.

LuxSE’s outlook: The market will further diversify into other labelled bonds, allowing investors to make more bespoke choices. The downside of this diversification is the increase in complexity. For a market used, so far, with three main categories – 'green', 'social' and 'sustainability' – the new marketing jargon will make it harder to understand and compare financial products.

6. New kids on the block: green loans

LuxSE’s outlook: The rapidly increasing involvement of banks in the sustainable finance arena will bring more attention to green loans of size. Following the publication of the first Green Loan Principles in March 2018, we expect market participants and other trade bodies to continue to expand green lending, in particular those linked to energy efficient mortgages, as actors become more aware and capable of identifying their lending as green.