The Luxembourg Green Exchange will enable climate finance to evolve
Global efforts to combat climate change are gathering momentum, says Robert Scharfe, CEO, Luxembourg Stock Exchange.
The COP21 Paris Agreement reached in 2015 marked a major breakthrough when more than 180 countries, accounting for 88% of global emissions, committed to keeping global warming well below 2ºC. The upcoming COP22 event in Marrakech (7-18 November 2016) will focus on preparations for the Paris Agreement to enter into force.
This presents an enormous opportunity for the green bond market, which is an essential driver of investment in green technology and infrastructure. Green bond issuance for 2016 has already hit a record high of US$58.7 billion, according to the Climate Bonds Initiative, an industry body. This number looks set to grow further in the years to come. The International Energy Agency estimates that US$1 trillion a year will need to be spent between now and 2050 to fund low-emission projects.
However, the green bond market is still in its infancy and faces a number of challenges. There is a lack of harmonisation across the industry. For example, bonds that are labelled ‘green’ in Asia have different requirements than those issued in Europe. There is also the problem of green washing – labelled green securities that are not truly green.
The Luxembourg Stock Exchange (LuxSE) has been actively involved in the development of the green securities market. In 2007 we listed the first ever green bond, the European Investment Bank’s ‘Climate Awareness bond’. Since then we’ve experienced significant growth, and today lead the market for green bonds in terms of volume of listed green securities. Yet in order for the green market to thrive, we need common standards, and greater transparency.
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The first truly green platform
In order to accelerate the development of this market, in September 2016 we launched the Luxembourg Green Exchange (LGX), a new platform dedicated exclusively to green securities.
LGX helps issuers market their green securities by generating awareness about their green projects. It also caters to environmentally-focused investors by providing access to a comprehensive list of securities that are truly green. All securities listed on LGX are recognised globally as being 100% green.
LuxSE is taking a bold step with LGX as it is the first exchange in the world to translate best practices on green securities into a mandatory requirement. By best practices we mean the ICMA Green Bond Principles (GBP) and the Climate Bond Initiative (CBI) standards, but we may also recognise other international standards.
To join LGX, an issuer will need to declare their security as ‘green’ and provide an external review before being displayed on the platform. An external review must also be conducted by an independent third-party expert and will be assessed against the use of proceeds from the security, selection process, as well as the management of proceeds before being displayed on the platform.
Raising the bar for green securities
LGX is also the first platform to make regular post-listing reporting mandatory. Until now ex-post reporting has been encouraged, but not made a mandatory requirement for issuers. This is largely because ex-post reporting needs to be conducted by a qualified expert which can carry an additional cost. However, the market has since evolved and investors are applying greater scrutiny on the use of proceeds from a security.
Post-listing reporting will usually commence 12 months after the green security has been issued and can take many different forms, such as a use of proceed or audit report, sustainability/ESG report or regular newsletters informing the public about project fund allocation.
By raising the bar on entry requirements and demanding regular post-listing reporting, we can ensure that issuers provide investors with full transparency on their green securities. Only then can green finance truly fulfil its potential, and make a real difference in the effort to reduce global emissions in the years to come.