Last year, we sat down with Julie Becker, Member of Luxembourg Stock Exchange's Executive Committee, to discuss the evolution of green bonds. In this article, we look back at some highlights from that conversation.
Q: The green, social and sustainability bonds market– how did it all start and what has been the result?
A: Green bonds were created to fund projects with a positive environmental impact. It all started back in 2007 when the EIB listed its first Climate Awareness Bond at the Luxembourg Stock Exchange. Fast forward 10 years and we see that green bonds have gained considerable traction: two-thirds of green bond issuers in 2017 were new to the market, coming to it with their first green bond. That is huge growth for one specific asset class compared to other instruments, which demonstrates that green bonds are really taking off.
When it comes to social and sustainability bonds, the market is still in its infancy and best practices are not as developed as they are for green bonds. So far, multilateral development banks are leading the way and defining the criteria through implementation. At LGX, we are trying to align with this evolution of the market and support best practice issuers such as the World Bank and the IFC by giving them enhanced visibility.
Q: What are the next steps to mainstream green bonds and green finance, in general?
A: The time has come for policymakers to push forward with the standardisation of green finance practices in order to establish comparable markets for green financial assets across borders and impede greenwashing.
Some of them are, especially in the European Union, where the European Commission (EC) is stepping up its game and planning to translate into legislation the kind of standards and conditions we at LGX, have been using for almost three years now.
In May 2018, the EC put forward four legislative initiatives, which aim to create a trustworthy environment, where issuers follow the highest standards and investors rely on the information they receive. These initiatives are a great first step in building a solid framework for the development of sustainable finance in the EU.
Q: How will the European regulators’ actions change the status-quo?
A: What is particularly encouraging is the priority given to taxonomy – an EU classification system of sustainable economic activities.
The EC put forward a framework to set out uniform criteria to determine the environmental sustainability of the economic activity. The proposal does not establish a label for sustainable financial products but sets the ground for elements to be considered when setting up labels at the national or EU level in the future.
This proposal is instrumental in providing investors with clarity and helping them make informed investment decisions. It will also serve as a basis for future standards and labels for sustainable financial products.
A well-calibrated, balanced and comprehensive taxonomy will enhance market participants’ trust and therefore, their appetite for mobilising capital towards sustainable projects and investments. This means that the taxonomy should also be flexible, to adapt to the evolution of the market, as well as of social and sustainable challenges.
Q: What is your advice to market players?
A: As European policies start taking shape, sustainability will become part of everyday business in the financial sector. If you were already working on embedding sustainable finance into your business model, then you’re one step ahead. If not, you’d better hurry-up – the the time to act is now!