The Luxembourg Stock Exchange (LuxSE) has become the first stock exchange in the world to introduce a platform for green financial instruments. The new platform, branded Luxembourg Green Exchange (LGX), went live yesterday, and is limited to issuers who comply with stringent eligibility criteria.
The platform is aimed at setting a new benchmark for the rapidly evolving green securities market and will seek to include environmentally-focused exchange-traded funds (ETFs) and dedicated sustainability funds as well as expand the listing of structured index-linked green bonds, according to Robert Scharfe (pictured), CEO of LuxSE. "New issuance of green securities has taken off since COP21," said Scharfe. "The green market has enormous potential but this needs to be matched by interest from investors."
According to Scharfe, the new platform is aimed at green financial instruments but is looking beyond just bonds. "Green products have several points in common such as having to comply with strict regulatory requirements and disclosures, and we see this segment as a space were new ideas are coming up around climate finance and investment products," said Scharfe. "We want to create an environment where issuers and investors can find all existing green products but also ideas that are being developed. There is significant scope to increase the listing of green structured products targeted at retail investors because these products can offer a bit of leverage but with a green element which is resonating with what retail investors want."
By setting strict standards for green securities, LGX wants to create an environment where the market can prosper, said Scharfe, adding that the upcoming COP22 event will focus on preparations for the Paris Agreement to enter into force and that a dedicated platform for both issuers and investors, will provide "the solution for financing green projects".
According to Scharfe, there are two aspects relating to the new platform. On one hand, there's no lack of demand but a lack of offer. On the other, issuers see this segment as an expensive segment to operate in because the need of certification, disclosures, and the costs involved. "However, one of the goals of the new platform is to create a dedicated space were issuers and consumers can access all the information available around companies and products," said Scharfe. "We also want to address the uncertainty around this segment and provide a single platform were investors can get answers to their questions and issuers can see the benefits of operating in a green bond market."
LGX marks the first time that a stock exchange requires green securities to adhere to strict eligibility criteria, including self-labelling as green or equivalent (e.g. climate-aligned); a clear disclosure that the proceeds are exclusively used for financing or refinancing projects that are 100% green, according to the Green Bond Principles (GBP) or Climate Bond Initiative (CBI) eligibility taxonomy as well as ex-ante review and ex-post reporting through which issuers must prove their commitment to the green economy.
"An issuer who does not meet LGX eligibility criteria can still list on our markets, but the 'bar is higher' for entry to LGX," said Scharfe. "Having said that, we encourage issuers to go further than the minimum requirements and really leverage this platform to create new standards on the quality of communication with investors so that the information provided is meaningful to the end investor."
This information will be freely available to investors as the aim is also to provide investors with all the information needed to make an informed investment decision, according to Scharfe. "We want to simplify the process for both issuers and investors, and provide a place comprising products with 'different shades of green' and allow investors to choose what matches their internal policies, based on the mandatory level of disclosure for issuers," said Scharfe.
Access to LGX is banned for securities on the excluded categories such as nuclear power production; trade in Convention on International Trade in Endangered Species (CITES); animal testing for cosmetics and other non-medical products; medical testing on endangered species; and fossil fuels.
LGX has been developed in line with best practices set out by Climate Bonds Initiative, International Capital Market Association (ICMA) and World Wildlife Fund (WWF) to address scepticism from investors about how the proceeds for green projects are being allocated, according to Scharfe.
"It's not enough to say 'green is green', said Scharfe. "Investors are becoming more sophisticated and are demanding more granular information. Equally, issuers must be convinced of the benefits a truly green bond market can provide. In particular, the visibility for their securities and trust gained among investors."
Scharfe said LuxSE can play a vital role in shaping the future of green finance, become the main centre for sustainable finance in Europe, and the leading exchange for green bonds. "In fact, we regard the development of this market as our duty," said Scharfe. "Users of international capital markets look to us to provide the best generally available information to investors. With respect to the green bond market, we are committing the same efforts to promote improved visibility by providing greater transparency and more trust."
The scope of the platform is not be limited to green bonds and the exchange has already listed today a number of social impact bonds which fall in the category of ethical and sustainable investments. "Sustainable investments are going to become mainstream and we are not going to limit the offer to just a few products with a specific profile," said Scharfe. "We are in talks with a number of institutional investors and they have all confirmed that they are progressively shifting some of their conventional investments to the sustainable domain and this includes green, social, ethical, ESG. The underlying spirit is to have a place where we can provide the full story to issuers and investors for them to judge what is suitable for them and what not."
The International Energy Agency estimates that the world needs $1 trillion a year until 2050 to finance a low-emissions transition, pointed Scharfe. "In order to raise that capital you need more than just one exchange to get involved with these initiatives," he said. "We hope this move will trigger a reaction so that we get more exchanges, issuers and investors involved, and more importantly governments and supranational entities. We need more projects and investable assets to fund these projects. We are not concerned about competition. On the contrary we hope this launch generates more interest in this segment because this is an area that will affect us all and action is required."
LGX gathers issuers that dedicate 100% of the raised funding to green investments, and since yesterday became home to the majority of the 114 green bonds listed on LuxSE, worth over $45bn.
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