Stock Exchanges can set the next stage of green bonds growth: New paper from Climate Bonds and Luxembourg Green Exchange.
National exchanges are uniquely placed to support the next phase of green finance expansion, green bond growth, market standards and harmonisation.
What’s it all about
The Climate Bonds Initiative in collaboration with Luxembourg Green Exchange (LGX) launched “The role of exchanges in accelerating the growth of the green bond market,” outlining steps for national stock exchanges to boost green finance.
A number of stock exchanges were consulted during the preparation of the paper including the London Stock Exchange (LSEG), Nigerian Stock Exchange (NSE) & Borsa Italiana (BI).
Backdrop to the discussion paper
The growth of the global green market has been tumultuous, with 2016 setting a new record for issuance at USD 81bn.
2016 and early also 2017 saw many governments begin development of their country climate plans for achieving COP21 NDC targets.
Ingredients to meet these targets include increased green infrastructure investment, more sovereign green issuance, and the development of green bond markets to improve market liquidity, integrity and investor access to green finance opportunities.
Exchanges are now a critical ingredient to scaling up of the green bond market to support growth beyond the USD100bn to USD 150bn range forecast for this year.
With the right settings in place Climate Bonds believes USD 1tn in green bonds by 2020 is achievable.
Six major recommendations for exchanges:
- Developing green bond guidelines in order to pave the way for green bond issuances and listing.
- Promoting transparency and encouraging the development of common practices that increase investor confidence.
- Establishing green bond lists or segments that enable investors to easily discover and invest in assets addressing to climate change.
- Supporting green bond indices or ETFs and thus make it easier for investors to track the performance of green bonds and compare returns and volatility with other investments.
- Fostering market dialogue and collaboration among all market participants, including regulators, investors, issuers, rating agencies, international standard-setting bodies, certifiers and auditors.
- Fostering market education and assisting investors in understanding wider climate risks and opportunities.
Who’s saying what?
Jane Wilkinson, Head of Sustainable Finance, Luxembourg Stock Exchange:
“We decided to write the report together with CBI as we understand the vital role of stock exchanges in promoting sustainable finance.”
“Since the launch of the Luxembourg Green Exchange (LGX), a platform dedicated to green bonds, we have observed a growing interest of both investors and issuers: over the last seven months, the overall value of green bonds on our platform has grown by 30%, to 50.3billion EUR.”
“We encourage other stock exchanges to embrace the green market opportunity and join us in supporting the continued development of sustainable finance.”
Sean Kidney, CEO Climate Bonds:
“Green finance and green investment needs to shift up several gears in both scale and reach to support country climate plans and low carbon infrastructure development. “
“Stock exchanges occupy a pivotal position across national and international capital markets. This discussion paper reflects the increasing significant role they have to play in the acceleration of green investment and it canvasses various action steps for exchanges to adopt in developing green bond markets.”
“The lead undertaken in the last few years by exchanges like Luxembourg, London and the Sustainable Stock Exchange Initiative (SSE) now needs expansion.”
Green Bond Listing Leaders
A number of exchanges have established specialised green bond listings or dedicated segments enabling institutional investors to easily discover and invest in assets addressing climate change.
They also improve and encourage secondary market trading.
Lists or segments can also play a role in ensuring the environmental integrity of the market by exchanges requiring issuers to provide a second or third party review of the green credentials of the bond in order for it to be included in their lists.
Current Exchanges with a List or Segment
- Oslo Stock Exchange launched a Green Bond list in January 2015;
- Stockholm Stock Exchange launched a Sustainable Bonds list in June 2015;
- London Stock Exchange created its Green Bond list in July 2015;
- Mexico Stock Exchange in August 2016;
- Luxembourg Stock Exchange in September 2016;
- Borsa Italiana Green & Social Bonds list launched March 2017.
Why Green Bond Indices?
A green bond list guarantees adherence with certain green criteria but it does not track the financial performance of the included bonds or identify environmental risks embedded in the financial market.
Green Bond Indices could make it easier for investors to track the performance of green bonds, and compare returns and volatility with other investments.
- Solactive Green Bond Index Series launched on 12th March 2014
- S&P Dow Jones Green Bond Index launched on 31 July 2014
- Barclays & MSCI Green Bond Index launched on 13th November 2014
- Bank of America Merrill Lynch Green Bond Index launched on 30th October 2014
- ChinaBond China Green Bond Index Series launched on 15th April 2016
- ChinaBond China Climate-Aligned Bond Index launched on 2nd September 2016
- CUFE-CNI Green Bond Index Series launched on 20th March 2017
The last word
Engaging more exchanges in the green bond market is becoming integral to market development at the speed needed to confront climate change.
Progress in green finance and green investment must also be measured in part against the COP timetable.
At COP24 in 2018, Parties will collectively take stock of countries’ emissions reductions, and then update their NDCs or submit new ones for COP26 in 2020. A regular “Global Stocktake” will take place every five years starting in 2023.
Achieving the global target of $1trillion in green bonds by 2020 can help fund the climate plans needed to match these commitments.
This level of capital formation will require more exchanges to adopt some of the measures in this paper. More collaboration, support for market integrity measures, harmonisation of standards and active secondary markets in this critical period of green finance expansion flowing to 2020.
Working with exchanges to support nascent markets and wider harmonisation is now firmly on the Climate Bonds agenda.
With support from issuers and investors we see this as another avenue for climate action around green finance.
Download the discussion paper here,
‘Till next time,
Disclosure: LSEG and Luxembourg Stock Exchange are a Climate Bonds Partners. A full list of Partners can be found here.
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