The Luxembourg Stock Exchange has become the first stock exchange in the world to introduce a platform that will trade exclusively in green bonds and other environment-focused financial instruments.
The Luxembourg Green Exchange (LGX), which went live this week, limits access to issuers that comply with tight eligibility criteria, including being self-labelled as green, disclosure that 100 per cent of proceeds will go towards green investments, and a commitment to provide both independent external review and ex-post reporting – a requirement a Luxembourg Stock Exchange statement said was unprecedented on the market.
Bans are also in force for fossil fuels, nuclear power, animal testing for cosmetics and other non-medical products, trade in CITES-listed species of wildlife, and medical testing on endangered species.
LuxSE chief executive Robert Scharfe said the LGX was aiming to set a new benchmark for the rapidly evolving green securities market.
“New issuance of green securities has taken off since COP21,” Mr Scharfe said. “There is a real desire for change. The green market has enormous potential but this needs to be matched by interest from investors.”
He said setting strict standards for green securities could create an environment where the market could prosper.
“The upcoming COP22 event will focus on preparations for the Paris Agreement to enter into force,” he said. “With LGX, a dedicated platform for both issuers and investors, we are granting the solution for financing green projects.”
Mr Scharfe said the requirement for ex-post reporting was “far from being the market standard”, but provided added assurance that investments were truly green.
“Such reassurance is what investors seek as they increasingly expect issuers to be crystal clear about the use of proceeds,” he said.
Mr Scharfe also said the exchange had been developed in line with best practices set out by the Climate Bonds Initiative, International Capital Market Association and World Wildlife Fund.
Climate Bonds Initiative chief executive Sean Kidney, addressing the 2016 Luxembourg Stock Exchange Day this week, welcomed the exchange, labelling it an “international step forward”.
More rapid growth needed
The platform is currently home to the 114 green bonds listed on LuxSE worth over US$45 billion (AU$58.5b).
Worldwide, green finance, while rapidly growing, is just a tiny fraction of the entire capital funding market.
“That’s because investors are sceptical, and understandably so, about how the proceeds for green projects are being allocated,” Mr Scharfe said. “It’s not enough to say ‘green is green’. Investors are becoming more sophisticated and are demanding more granular information.
“As the leading exchange for green bonds, LuxSE can play a vital role in shaping the future of green finance. In fact, we regard the development of this market as our duty.”
There has been US$51.4 billion (AU$66.8b) in green bond issuance this year, according to the Climate Bonds Initiative, with Bloomberg predicting it to reach US$72 billion (AU$93.6b) by the year’s end.