On 27 September 2016, the newly introduced Luxembourg Green Exchange went live with its unique platform (the “LGX”) with 114 listed green bonds in 19 different currencies, 25 international issuers and a total amount raised of up to $45bn and that has itself been launched by the Luxembourg Stock Exchange (the “LuxSE”). This overview introduces the main aspects of the world’s first platform having listed green financial instruments based on the related frequently asked questions of the LuxSE.
1 Background
In December 2015, 195 countries adopted during the Paris climate conference (the “COP21”) the first universal, legally binding global climate deal (the “Paris Agreement”) setting out a global action plan in order to put the world on track to avoid dangerous climate change by limiting global warming to well below 2°C. This Paris Agreement will enter into force in 2020. In the year 2007 the first green bonds have been listed on the LuxSE. The LGX is a platform that brings together issuers of and investors in green financial instruments, where the issuers can market these and publish how the proceeds will be used and the investors can be sure to have access to securities that are proven to be 100% green.
2 Main aspects on the LGX
The difference between the LGX and other exchanges who offer the listing of green securities is the fact that the industry best practices1 for green securities have been settled as mandatory requirement. Moreover, the LGX obliges its issuers to apply ex-post reporting once a security has been issued. The advantages for issuers on the LGX may be seen in the fulfillment of its reporting obligations in accordance with the best practices which are recognized within an international frame. Issuers can publicly demonstrate their commitments to climate change and its consequences, while investors enjoy an unrestricted access to the available information on the listed securities and greater transparency. Although the interest in green financial instruments grows, there exists the fear of the growing risk of greenwashing. However, the strict rules and green principles of the LGX ensure that issuers as well as investors may access information with regard to the use of proceeds of the securities and therefore, enhance the transparency on the overall scope of the ongoing projects of the issuers.
3 Entry requirements
It is also important to stress how interested issuers may join the LGX. As the LGX is not a new market, but a platform for financial instruments, in a first step the securities of the issuers must be listed on the official list of the LuxSE and admitted to trading on its regulated market or its Euro MTF market. Once listed, the issuer has to:
- self-label its securities as “green” by exploring the intended green nature of the security and choosing the relevant box in the LuxSE’s application form;
- disclose the use of the proceeds by confirming that the proceeds will be completely used to (re-)finance green projects pursuant to the GBP and CBI;
- provide ex-ante external review in the form of consultant reviews, verifications, certifications or rating reports, second opinions; and
- commit to regular ex-post reporting for the entire time of the existence of the security2 , while the LuxSE recommends to fulfill such ex-post reporting once a year until the project has been completed.
The LuxSE has published a non-exhaustive list of project categories which may be excluded from the entry into the LGX:
- Nuclear power production;
- Trade in the Convention on International Trade in Endangered Species of Wild Fauna and Flora;
- Animal testing for cosmetic and other non-medical products;
- Medical testing on endangered species;
- Fossil fuels (specifically oil, gas and coal), including “clean coal”.
In order to examine whether the applying issuer meets the entry requirements, the LuxSE’s Green Team verifies the use of proceeds and ex-ante reviews against the entry requirements. Such team is also responsible for the existence of disclosure and transparency of a security check, but does not define the underlying investments’ quality. In any cases, where the team has any doubt over the eligibility, the Green Advisory Board will review such application and make the final decision.
It is important to know that even if a security cannot qualify for the access to the LGX, it still can be listed on the official list of the LuxSE and admitted to trading on its two markets.
4 Further steps
After verification of the application and the admission to the LGX, the security will be displayed on the LGX. Although the LGX has no standards or rules on the documentation for expost reporting, the LuxSE reserves its right to withdraw a security in case it does not comply with the LGX requirements and/or following the Green Advisory Board’s recommendations. The LuxSE’s annual review will ensure that the issuer complies with its commitments to disclosure and transparency. The entry into the LGX does not implicate any additional fees, while all issuers have to bear the costs of any additional reporting obligations.
1 ICMA’s Green Bond Principles (the “GBP”) and the Climate Bonds Initiative’s (the “CBI”) are recognised as industry best practices by the LGX
2 Please note that the ex-post reporting begins not later than 12 months after the green security has been issued and can be submitted in forms such as the use of proceeds, audit report, sustainability/ESG report, annual report, interim impact report.
