Despite political turbulence caused by doubt about the new US administration’s commitment to the Paris Agreement of 2015, the green bond market has managed to make strides forward in the last year, with issuance so far this year already almost half of 2016’s $81 billion, according to the Climate Bonds Initiative. Now, the broader category of socially responsible investment is set to get its own boost.
Less than a year after launching its Green Exchange (LGX) – the first ever trading platform for climate-friendly debt – in September 2016, the Luxembourg Stock Exchange is opening up a window on the LGX for sustainable and social projects.
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| Robert Scharfe, LGX |
The ‘S&S’ window will have the same features as the LGX. Issuers will be required to post additional disclosures on planned use of proceeds, provide an ex-ante external review and commit to regular post-issuance reporting. LuxSE provides all the documents free and uses the Ethereum blockchain-based platform to ensure transparency, CEO Robert Scharfe tells Euromoney.
Scharfe says there was a push from both investors and issuers to broaden the exchange’s offering. Indeed, some bankers have told Euromoney that they expect the social and sustainability bond market to eclipse green bonds. The new window, announced on May 15, will list bonds that qualify under the broad categories of affordable basic infrastructure, access to essential services, affordable housing, employment generation, food security and socioeconomic advancement and empowerment, according to LuxSE.
Visibility
While the exchange hasn’t done much to increase liquidity – many green bond investors are buy-and-hold – it’s helped to increase the visibility of the asset class. In a debt market, that is largely driven by marketing, that’s important.
“Exchanges really reflect the fact that a market is growing, rather than actively drive it,” says Sean Kidney, CEO and co-founder of the Climate Bonds Initiative. “But when an exchange comes out and markets as aggressively as LuxSE has, that makes headlines. And this is about marketing at the end of the day. Being seen to be doing something is half the battle.”
At launch, LGX hosted $45 billion worth of green bonds. Less than a year later, it has grown to $56.5 billion – not a very large increase, but important enough, considering LGX is only a part of the global market. To access LGX and its S&S window, issuers need to list a security first on one of LuxSE’s EU-regulated markets: Bourse de Luxembourg or the exchange-traded euro MTF market.
And the transparency that LGX offers reflects a growing trend in demand for both issuers and investors to report on the climate and/or social impact of their activities. France passed a law in February 2016 requiring a broad range of investors to report how their environmental, social and governance (ESG) strategies figure into their investments, as well as imposing the first mandatory carbon-reporting requirement for investors.
In April, the California state senate passed Senate bill 560, requiring the two largest pension funds in the US, CalPERS and CalSTRS, to report annually on how their investments align with the Paris Climate Agreement and California climate policy goals. The bill has yet to pass through several committees and state legislature votes before being signed into law, but LuxSE’s head of sustainable finance, Jane Wilkinson, says she expects more laws like this to come to. “It’s clear that ESG reporting requirements are the direction of travel,” she tells Euromoney.
Listings
So far, LuxSE’s S&S window lists 10 securities from five issuers, totalling $5.8 billion: Bank Nederlandse Gemeenten, which listed a social housing bond; Council of Europe Development Bank, which listed the first ‘social inclusive’ bond; Development Bank of Japan; Instituto de Crédito Oficial, which focuses on employment creation for small and-medium sized enterprises; and FMO, the Dutch development bank.
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The market for green bonds has made big strides in the last year. After the launch of LGX, China – which boasts the world’s largest green bond market – partnered up with LuxSE to launch three green bond indices in March that aims to help internationalize China’s green bonds market. The indices are published simultaneously by LuxSE and Shenzhen Stock Exchange. The CUFE CNI Green Bond Index Series features a high-grade green bond index, high-grade unlabelled green bond index and a high-grade labelled green bond index.
Issuance of green bonds jumped in January, at $11.2 billion equivalent, before slumping to an average of less than $5 billion a month in the following four months. Nonetheless, the Climate Bonds Initiative is projecting $150 billion in deals this year – though it’s projections have been optimistic. Last year, $81 billion in green bonds were issued, though CBI had projected $100 billion.
Scharfe hopes the momentum will carry over to the $23 trillion SRI market. Wilkinson says more products may be on the way. “We are working with market participants on the potential for ETFs, green funds and even securitization,” she says.
