Demand for green bonds is outstripping supply, says Laetitia Hamon, head of sustainable finance at the Luxembourg Stock Exchange. That is why education is essential.
What was the turning point that brought the creation of the Luxembourg Green Exchange?
LGX was created in 2016 to be a market player as a response to the global climate goals that were defined during the Paris Agreement at COP21. That was the same year the United Nations adopted the sustainable development goals report. We created LGX in just nine months to shift capital allocation to projects and to entities that needed to transition to low carbon and inclusive economies. It’s been quite an adventure over the last five years. But we’ve moved from pioneering to a leading position in sustainable finance.
What made the LGX so remarkable?
It was the first exchange of its kind giving more visibility to green bonds then social bonds and sustainable bonds. The reason it was so remarkable was because of the eligibility criteria at the time. They were more stringent than market practice. Especially in relation to post-issuance reporting. That was not market practice; it was just best practice. We decided to make post-issuance reporting mandatory from the start. It was a bold move and we weren’t sure whether it would work. But people welcomed it and it created the success of LGX.
To what extent has European policy impacted the LGX?
The policies that had an impact on LGX and sustainable finance in general are regulations like EU taxonomy, the sustainable finance disclosure regulation, and the EU green bond standard regulation. All these regulations had a very concrete impact on the financial instruments that we list or display on the green exchange. I see in Luxembourg and also abroad, banks, insurers and investors realised it was not just a nice to have, it was a regulation and they had to do things within tight deadlines.
What was the impact of these regulations on the industry?
The EU taxonomy gave a definition for what can be considered as a sustainable activity. That was absolutely crucial in all of our discussions. And since there is the EU taxonomy to define that, it was crucial to align instruments to it. Then, the sustainable finance disclosure regulation was also very important because those instruments have to be transparent and disclose why they were claiming to be ESG or green or sustainable.
What role has LGX played in relation to regulations?
Our role here was crucial in that we had to explain what the taxonomy was, how you can align it to the taxonomy. We needed to give more visibility to the instruments. Also to explain to investors how they can issue green, social and sustainable bonds. We followed those regulations very closely.
“It was a bold move and we weren’t sure whether it would work. But people welcomed it and it created the success of LGX.”
Laetitia Hamon, Head of sustainable finance at the Luxembourg Stock Exchange
Today there are some 1265 listed securities on the LGX totalling €653.35 b. What are the barriers to further expanding this list of securities?
The first barrier we saw was education. Sustainable finance sounds like an easy word but behind it there are a lot of definitions, instruments, and regulations, and not everyone is aligned in terms of knowledge. We needed to address the education gap and that’s why we created the Academy in May 2020. We train financial market players across the world to try to educate and explain what those instruments are. We even have the pleasure of seeing some issuers that we trained issuing green bonds afterwards because they understand what this is.
What was the driving force behind the creation of the LGX DataHub in September 2020?
A decade ago, being a green bond was enough. Now you have to demonstrate that you have a positive environmental impact if you’re a green bond. So, you need that data as an investor to be sure you invest in the right instruments or select the right instruments in which you want to invest. The data gap was a real barrier that’s why we created the DataHub.
How does the DataHub work?
It’s a centralised database where we collect information on the bonds, not only on LGX, but listed anywhere in the world. We collect a lot of information before they are issued, what kind of project they want to finance, renewable energy, have they been verified, but also post-issuance information. All that data is centralised in the DataHub and we give access to investors. They can decide on their investments, use it for their reporting or compliance purposes.
What is needed for more green bonds to be established?
The issue is not that there is not enough supply for the demand because issuers don’t know how to issue these products. Some large corporations have experience, most of the time in the energy sector. They might know how to issue green bonds and finance basic and easy projects like renewable energy. Others would like to do it, but they don’t know how to do it or they don’t know how to identify a pool of projects that would be investable. Now most of the European issuers or corporations know how to do it. We’re working a lot with emerging markets, issuers who would like to do it as well. but they don’t have much experience of the capital markets and don’t know how to do it either. That’s why with LGX we’re training local issuers on how to issue green bonds from the beginning.
How long before green bonds become commonplace?
Europe is very much rolled out. Southeast Asia is booming a lot and they’re trying to do things. But it’s going to be 5-10 years for every region to know how to do it and to do it in a more regular manner.
What proportion of green bonds cover energy transition?
The majority of the green bonds finance renewable energy or energy efficiency projects. On the DataHub, we have 5,600 instruments, not all displayed on LGX. Of the 5,600 bonds we see 3,920 bonds finance renewable energy projects, and 2,250 that finance energy efficiency.
What other efforts is LuxSE making in relation to sustainability?
We signed GFANZ, Glasgow Financial Alliance for Net Zero, in November 2021 during COP 26. And this year we aim to have an action plan to have our own decarbonisation path as an exchange. There are many different things we’re looking at: we’re trying to map the issuers on the stock exchange. This means looking at the profile of our issuers on the Lux Stock exchange, and LGX, trying to understand which are in fossil fuel, gas.., which have clear and ambitious transition plans and which don’t and which contribute positively or negatively to the sustainable development goals. We buy data for that and, at the moment, we’re analysing information. We want to engage with issuers and have our own transition plan to be a sustainable stock exchange.
You are also working on a project involving compliance. Can you tell us more?
As part of the AML, know-your-customer, work that we are doing when we accept issuers, we have a project to integrate an ESG component. When we onboard issuers we have to look at their ESG reputation risk. We’re in the process of developing all that and, if there are new instruments on the market, we will add them to the LGX. We also want to take the lessons learned on LGX to the Luxembourg Stock Exchange and move that forward. so, the entire company and group moves ahead in terms of sustainable finance.
What else is LuxSE working on?
We signed a MoU with Cape Verde stock exchange recently. We have a project where we will help them with sustainable financing in various aspects.
This article was first published in the Silicon Luxembourg magazine. Read the full digital version of the magazine on our website, here. You can also choose to receive a hard copy at the office or at home. Subscribe now.
