Green Exchange Launches in Luxembourg

Publication date: 10/2016

Ahead of the Cop22 summit in Morocco, Luxembourg Green Exchange aims to create an environmental trend in the market.

Roughly a month before the Cop22 climate change summit in Morocco, the world's first green exchange debuted in Luxembourg and is aiming to host more than 114 green bonds, with a total value of $45 billion. The Luxembourg Stock Exchange was the first exchange to include a green bond, issued by the European Investment Bank, in 2007.

Chiara Caprioli, business development manager and member of the "green team" at LGX, tells WatersTechnology that the exchange was built with a specific goal. "We saw the need to structure the market to make it even more transparent so both issuers and investors know that they are entering a green platform and everything is guaranteed to be 100 percent green," says Caprioli.

The official launch was the result of two years of intense preparations by the green team, which was in charge of creating the exchange. These preparations included attendeding working groups of International Capital Markets Association (ICMA) as observers. "We have been working with the Sustainable Stock Exchanges group, which is an entity of the United Nations," says Caprioli. "We had working groups with both the World and the European Federation of Exchanges on sustainability and green bonds."

Their contacts and working relations with all these entities reflect LGX's goal of making Luxembourg dedicated to climate finance. "We are very much aware that we've taken a risk in putting this together but it's a bold positioning that we want to push forward," Caprioli says.

Strict Criteria

Aspiring issuers must abide by a set of rules to enter the LGX. "We're making eligibility criteria strict because we want to encourage the investors to trust our platform," says Caprioli. Issuers musy provide self-labelling insurance and ensure that a security is green. Caprioli says the issuers need to submit an application form, in which they confirm the bond is issued for environmental purposes. What makes a bond green is that it finances 100 percent green projects, as defined by global standards, such as the International Capital Market Association's Green Bond Principles (ICMA GBP) and the Climate Bond Initiative.

"So far we have been scrutinizing all of our green bonds," says Caprioli. "Most of them are compliant with our criteria. Those that are not—although they're called green bonds—cannot be on our platform." Transition The first two months will be a transitional period in which green bond issuers will have the opportunity to further support their securities and make sure they are aware of what they could do to meet the standards.

Participants have to submit an external review from a consultant or other relevant third party that verifies the internal framework of the issuer and the environmental sustainability of the underlying assets. The most groundbreaking rule, however, is the ex-post reporting, which LGX regards as the most significant.

Issuers will have to submit an annual report explaining how the product achieved the desired results. "It is probably the most difficult criterion to comply with," says Caprioli. "It is basically a report on the way the funds have been used. We want then to report the expected or the fulfilled environmental benefits of their bond."

Ex-post reporting measures how the funds have dispersed within the year and if they have become a benchmark compared to their stated promises. A security will be automatically disqualified from LGX if it falls into certain categories, such as nuclear production, animal testing for non-medical products, medical testing on endangered species, and fossil fuel.

Growing Market

The green bonds are divided into two categories. Right now, roughly 70 percent of the bonds are issued by institutions, such as the Multilateral Development Bank, the European Investment Bank, the World Bank and the Nordic Investment bank. "The other 30 percent are corporates mainly from the energy sector," says Caprioli. "We have, for example, Hera and Energia Eolica. But we see increasing diversification in the private players who enter the green exchange."

Earlier this year, LuxSE welcomed the Bank of China, which issued the biggest green bond so far, with a value of approximately $3 billion. "We hope to attract more Chinese and Indian issuers in the coming months," Caprioli says.