Luxembourg Green Exchange (LGX) has launched a new segment dedicated to social and sustainable (S&S) projects to help investors making their decisions "in a more informed manner".
After a successful launch of the Luxembourg Green Exchange (LGX) in September last year, the Luxembourg Exchange (LuxSE) has launched a venue dedicated to social and sustainable bonds to respond to demand for such instruments.
According to Jane Wilkinson (pictured), head of sustainable finance at LuxSE, the global value of socially responsible investing (SRI) products and strategies amounts to more than US$23tr and such a major paradigm shift can no longer be ignored.
"This development comes as a natural evolution after the launch of the LGX although slightly earlier than anticipated," said Wilkinson. 'A number of CIOs and investors have approached us showing interest in other sustainable and social products which is why we decided to expand into this area."
The initial focus of the new segment will be on fixed income bonds listing but LuxSE is exploring expanding the platform to cover other types of instruments such as securities, structured notes as well as active and passive funds (ETFs).
"We want to keep a leading role in this segment of the market and we believe we are moving in the right direction," said Wilkinson, adding that the exchange expects to make a decision within the next six months although "it is very likely that we will provide another 'display window' to showcase new social and sustainable products".
The decision to open the new segment responds to the flexibility offered by sustainable bonds "allowing for a much broader range of projects than just green", and because they are likely to produce a larger market and can attract more corporates to issuing such instruments, said Wilkinson.
To be accepted to the S&S window of LGX, a similar process as for green bonds applies. Issuers must commit to disclosing detailed information relating to planned use of proceeds, provide an ex-ante external review, as well as a post-issuance report presented regularly throughout the lifespan of the security.
As with green bonds which aredriving significant activity and volumes allocated to responsible investing products as a whole are now at around €6tr, transparency will remain the focal point in mainstreaming this instrument.
"We expect the social and sustainable to be in the hundreds of billions but this is early days and we expect a transformation around green and social investing," said Wilkinson. "Most of the products on offer are being oversubscribed which suggests that there is an interest from investors, and that's a demonstration of the current demand in the market."
According to Wilkinson, having a venue where investors can look for the products they want to invest in will be key to develop this market and will be beneficial for all market participants. "From the issuers' perspective it enhances the instrument's visibility and recognition; eases communication with investors, and in particular, translates into reaching new ESG-focused investors," said Wilkinson. "On top of that, it adds real value for those making enhanced disclosure efforts via a free display of documents in the structured form of a security card."
Investors will be able to access unrestricted free information and will translate into lower costs of research, due diligence and comparison. Eligibility categories of social and sustainable projects include affordable basic infrastructure; access to essential services; affordable housing; employment generation including through the potential effect of SME financing and microfinance; food security and socioeconomic advancement and empowerment.
"Institutional investors initially focused on this segment because of reputational issues but now the business case for these investments has improved as suggested by statistical data on performance," said Wilkinson. "ESG investments are delivering returns to investors and demand continues to increase. We believe institutional investors will continue drive most of the activity and big tickets but the European Commission (EC) has set up a high level expert group on sustainable finance and it is expected that one of the recommendations is to accelerate the involvement of retail investors in this segment of the market."
There are 10 securities displayed in the S&S window of LGX issued by Bank Nederlandse Gemeenten (BNG), focusing on social housing; Council of Europe Development Bank, who recently listed the first social inclusive bond; Development Bank of Japan (DBJ); Instituto de Credito Oficial (ICO), the Spanish governmental organisation dedicated to employment creation among SMEs; and Nederlandse Financierings Maatschappij voor Ontwikkelingslanden (FMO). The combined value of these securities exceeds €5bn.
LuxSE's role, like in the case of green bonds, will be that of a caretaker of information through imposing additional disclosure as mandatory, imposing a form of an external review, and monitoring post-issuance reporting (consistency with ex-ante objectives and exhaustive information).
It is not just about avoiding green washing, but also about monitoring systemic risk, e.g. market bubbles, stranded assets, etc., that contribute to financial stability and longer term objectives, according to Robert Scharfe, chief executive at LuxSE.
"Green bonds may be experiencing a record year of issuance, but the social and sustainable bond market will soon be booming," said Schaffer. "The key attraction point of sustainable instruments is their ability to blend proceeds from environmental and social projects, therefore encouraging more issuers, including corporates, to tap into the market."
In 2016, the exchange launched the Luxembourg Green Exchange, a platform dedicated exclusively to green securities. More than 110 green bonds are displayed on the platform, with sales of almost EUR50bn, according to the exchange.
The number of structured products linked to sustainable and social indexes has rocketed over the last few years with 169 structured products worth just under US$1bn linked to this type of index, according to the SRP database. The vast majority of products are linked to the Finvex Sustainable & Efficient Europe 30 (FSEURE), which was launched in July 2011. Most recently, BNP Paribas Corporate and Institutional Banking has licensed the Solactive Sustainable Development Goals World Index - a new equity index which enables investors to gain exposure to companies which have been identified as making a significant contribution to the advancement of the United Nations' Sustainable Development Goals (SDGs).
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