On September 29, 2016, Luxembourg Stock Exchange (LuxSE) introduced the world’s first exchange that will trade nothing but green securities, the Luxembourg Green Exchange (LGX). LGX intends to act as a gatekeeper for green bonds and other environmentally focused financial instruments by bringing them together with investors looking for diversification and ecologically sensitive placements.
What is a Green Bond?
Green bonds are debt instruments that have been issued to fund projects that have positive environmental or climate benefits. Proceeds from these bonds are typically earmarked for green projects but are backed by the issuer’s entire balance sheet.
Background of the Launch of LGX
Following the successful conclusion of the 2015 Paris Climate Conference (COP 21), governments around the world committed to real change. Mr. Robert Scharfe, the CEO of LuxSE, commented on the launch of LGX that ‘New issuance of green securities has taken off since COP 21. There is a real desire for change’. The comment is echoed by the estimation made by the International Energy Agency that USD 1 trillion a year will need to be spent between now and 2050 to fund low-emission projects. This presents a tremendous opportunity for growth in the green capital market.
1. Long history of listing green bonds
As an internationally recognized label in capital markets, LuxSE has been the leading exchange for bond listing during the past 50 years. The first green bonds ever issued by the European Investment Bank were listed in LuxSE in 2007. To date, there are 114 green bonds issued by 25 international issuers in 19 different currencies with a total of USD 45 billion listed in LuxSE, making it home to half of the world’s listed green bonds.
2. High Standards
It is true that any issuer can apply to join LGX, be it an issuer on the regulated market or Euro-MTF. In order for green investments to thrive, LGX applies strict admissibility criteria to form a solid and transparent market framework that ensures issuers are dedicated to green investments and that ‘the securities on LGX are genuinely green’, as noted by Mr. Robert Scharfe. The mandatory high standards of LGX are in line with those of the best industries developed by the Climate Bonds Initiative, the International Capital Market Association, and the World Wildlife Fund.
First, LGX requires green securities to self-label as green or equivalent. This means that the issuer has to clearly state, during the application process, the intended green nature of the security. The following are excluded from access to LGX: nuclear power production, trade in endangered species of wild fauna and flora, animal testing for cosmetics and other non-medical products, medical testing on endangered species, and fossil fuels.
Once a green-eligible security is listed on one of the markets of LuxSE and has been self-labeled as green, an issuer must disclose additional information about the planned use of proceeds, provide an ex-ante external review, and commit to regular ex-post reporting:
- Disclose use of proceeds: issuers must also provide a clear disclosure that proceeds are exclusively used for financing or refinancing projects that are 100% green, in line with the Green Bond Principles eligibility taxonomy and Climate Bonds Standards or an equivalent.
- Ex-ante external review: An independent assessment is carried out concerning use of proceeds, selection/assessment process, and management of proceeds.
- Regular ex-post reporting: Regular ex-post reporting will be required one year after listing a Green Bond, for example, use of proceeds or audit report, sustainability report, annual report, or interim impact report.
LuxSE will not charge any additional fees for joining LGX . Furthermore, LGX is open not only to new green securities but also to existing securities which can be easily and quickly listed on LGX if they meet the high standards set forth above.
The initiative of the LuxSE will certainly be welcomed by the green bond market, which is currently surrounded by a sense of excitement and readiness to invest in carbon-resilient infrastructure. Thus, LGX has the potential to play the role of trailblazer for the private sector to access a market initially led by the multilateral development banks and international financial institutions.
Authors: Michel Bulach (Partner), Haoyang Yan (Associate), Charles Krier.
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Contact Michel Bulach, Partner, for any further information.