World’s first green bonds exchange opens in Luxembourg

Marketplace for backing eco-friendly projects sets strict eligibility rules to assure investors of green integrity

A stock exchange dedicated purely to trading in securities for green ventures has opened in the thriving European financial centre of Luxembourg.

Launched on 27 September, the Luxembourg Green Exchange (LGX) is a world first that aims to give the global investment community the confidence that the financial products on offer have a true environmental focus.

To that end, LGX has set out a stringent set of eligibility requirements:

1. When applying to put securities on sale, issuers must clearly state the precise green nature of those instruments;
2. They must also make a full disclosure of documents showing that the proceeds will be used exclusively for financing, or refinancing, projects that are 100% green; and
3. They must further commit to a process of ex-post reporting and regular, independent and external reviews to maintain the green integrity of their securities: a requirement unprecedented in the history of the green bonds market.

Robert Scharfe, CEO of the primary Luxembourg Stock Exchange (LuxSE), which is housing LGX, explained that new issuance of green securities has taken off since the 2015 United Nations Conference on Climate Change – also known as COP21.

“There is a real desire for change,” he said. “The green market has enormous potential – but this needs to be matched by interest from investors.

“By setting strict standards for green securities, LGX aims to create an environment where the market can prosper.”

Scharfe noted that the forthcoming COP22 event will build on the 2015 talks by focusing on multilateral preparations for the entry into force of the Paris Agreement.

With LGX now established as a specialist platform for issuers and investors alike, he said, Luxembourg has provided a solution for financing green projects that falls in line with the agreement’s stipulations.

Turning to that crucial, third point of the eligibility criteria, Scharfe pointed out: “Ex-post reporting is far from being the market standard. The bold decision to introduce it as an entry requirement stems from our ambition to be able to guarantee that securities on LGX are genuinely green.

“Such reassurance is what investors seek as they increasingly expect issuers to be crystal clear about the use of proceeds.”

Access to LGX is banned for securities on the excluded categories list, comprising – but not limited to – the following industries and activities:

• nuclear power production;
• sales of flora and fauna covered by the 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.

Scharfe quoted International Energy Agency estimates that the world needs $1 trillion a year until 2050 to finance its transition to a low-emissions standard. But while the market for green finance is growing quickly, it represents “an almost invisible fraction” of overall capital-market funding.

“That’s because investors are sceptical – and understandably so – about how the proceeds for green projects are being allocated,” he stressed.

On that basis, he added: “It’s not enough to say ‘green is green’. 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.”

LGX has been devised in line with best practices set out by the Climate Bonds Initiative, the International Capital Market Association and the World Wildlife Fund.

Find out more about the initiative from this official YouTube video.