07 November 2016
Environmental Finance: What role do stock exchanges have to play in the green bond market?
Lillian Georgopoulou: Exchanges have a key role to play. They are the middleman between issuer and investor, and at the very heart of capital markets, providing the bridge for the financing of growth domestically and, in our case, internationally.
At the London Stock Exchange Group, we are more than just a stock exchange – we do clearing, settlements, we have data providers, indices and technology. We operate with partners around the world, in developed and developing markets; hence, we see our role as a complementary partner, not just developing the green bond market here, but supporting local markets to grow.
A good example of that is, of course, the work we did with India, helping Indian corporates raise for the first time green financing offshore.
We also had the first green bond issued outside of China by the Agricultural Bank of China.
Not only do stock exchanges have to react to all these environmental and climate changes, we have a responsibility to bring together all the parties who use our markets. We can do so by understanding both issuers, who now include climate-aware companies and green bond issuers, and investors, who are increasingly more interested in responsible, low-carbon investments. By connecting them, we can mobilise green capital and channel it to eligible companies and issuers.
EF: How many green bonds are listed on the LSE now (mid October)?
LG: At the moment, we have 39 green bonds listed on our dedicated green bond segments, that have raised nearly $10 billion, and they are denominated in seven currencies, including a few world-firsts, both in terms of currency, but also in terms of products. For example, we saw the listing of the world's first Indian green masala bond - by National Thermal Power Corporation - in August, .
At the beginning of October, we welcomed Finland's first-ever green bond, by Municipality Finance.
And most recently we were delighted to become home to the International Finance Corporation's world's first-of-its-kind forestry bond, The IFC also issued a green masala bond, the first green bond denominated in Indian rupees, investing the proceeds through a back-to-back transaction in a domestic green bond that Yes Bank issued onshore.
We see a lot of exciting new transactions coming to our market.
LSEG: Global Sustainable Investment Centre
- LSE is ranked 8th globally of all exchanges on quality of sustainability disclosure, highest out of the largest stock exchanges.
- LSEG is proud to be a member of the UN Sustainable Stock Exchanges initiative, which brings together exchanges from around the world. We were the chair of the UN SSE Initiative's Model Guidance on Reporting ESG Information to Investors. And through our index company FTSE Russell we are part of the Principles for Responsible Investment.
- LSEG is also an Observer for ICMS's GBP and a partner of Climate Bonds Initiative
- In June 2015, LSEG launched dedicated green bond segments across its fixed income markets. No other global exchange has such a comprehensive offering for green bonds.
- There are 39 green bonds listed on LSE which have raised around $10 billion equivalent in 7 different currencies by 14 different issuers
EF: Of those 39 green bonds, how do they differ from the mainstream non-green bonds? Are there any special requirements?
LG: Yes, and this is actually something that we are very proud of. In June 2015, we were the first exchange globally to launch dedicated green bond segments for both wholesale and retail, offering a range of trading models.
We allow the admission of green bonds based on some specific criteria, which mainly relate to the issuer providing an external review document aligned with industry-wide accepted guidelines, such as the Green Bond Principles (GBPs), whether it is a third-party certification or a second opinion, or a green rating or a verification: something that verifies the green nature of the bond.
We also ask the issuer to confirm that the entity conducting that external review is independent from the issuer, to ensure there are no conflicts of interest. We thought that this additional certification of the green segment was vital to attract more investors who can then have confidence in the integrity of the bond and the green proceeds.
EF: How do the requirements work in practice? How did it apply to green bonds that were already listed on the exchange?
LG: For the green bonds already in existence, we got in touch with the issuers and asked them if they wanted the bond to be moved to those segments and asked, of course, for proof of certification.
That is what we did with the City of Gothenburg, which already had some bonds on issue, and when they did a new issue in June 2015, they were actually the first ones to celebrate the launch of those segments on a bell-ringing ceremony.
We did the same for Transport for London's green bond - they sent us their certification and it was moved into that segment.
If there are bonds that do not have a certification, we will just leave them in the normal trade reporting generic segments that they were already in.
EF: What does a separate green bond list actually mean, in practice?
LG: On our website specifically, we have a dedicated section, which we recently revamped, where investors or issuers can go to see the full list of green bonds, news updates, interesting articles, etc.
Like I said, the fact that the bond is in a green segment gives a extra credibility, and gives assurance to investors that this bond has been screened by us, that it has been externally reviewed.
EF: Do you think it is important that exchanges try to act as standard setters, to give some kind of assurance to investors that bonds meet a certain set of criteria?
LG: It is important for exchanges and other industry participants to leverage international best practices and promote them, like we do with the GBPs, Climate Bonds Initiative, etc.
However, there is a fine line here and there is always a danger of overregulating a market that is not already, let us say, fully grown or established. So you have to be careful not to overregulate and then inhibit the growth of that market further.
When we established those segments and introduced that criteria, we felt that that was quite a good start. But we are involved in industry discussions, we are members of International Capital Markets Association, we are partners of the Climate Bonds Initiative, we are members of the City of London's Green Finance Initiative, the Principles for Responsible Investment, and the UN Sustainable Stock Exchange Initiative.
We are involved in the industry discussions, so if there is a development, if there are new definitions or new European or globally adopted guidance, we will be the first to endorse it and support it. But for the time being, we feel comfortable with the level of disclosure that we require.
EF: Is there any kind of annual requirement to add any more documents, or is it just about the pre-issuance, external assessment?
LG: We do encourage our issuers to do annual impact reporting, and this is something that is widely done by the supranationals on LSE. But, again, we feel that making at this stage their reporting mandatory might inhibit issuers from coming to the market, because there is not even a universally accepted tool for measuring impact.
London and Green Financing
- London is the leading centre for international green and sustainable financing.
- Major climate-related investor initiatives based in the City: ICMA's Green Bond Principles, City of London's Green Finance Initiative (GFI), Climate Bonds Initiative, Climate Policy Initiative, Principles for Responsible Investment etc.
- Concentration of large dedicated green investors including insurance giant Aviva and the the BT Pension Scheme, UK's largest corporate pension fund.
- The UK Green Investment Bank (GIB) is the world's first investment bank with £3.8 billion government funding dedicated to greening the economy and investing in areas where there is a lack of support from private markets.
EF: Looking at the industry as a whole, are more stock exchanges asking for documents, and do you think that over time, the amount of documentation required will increase?
LG: Investors are asking for more transparency and access to information, so whether that will translate into more documentation required, or just simply companies publishing more data and being more transparent, I do not know. But in order to make green finance more mainstream, more information and more data is needed, and capital raising and disclosure go hand-in-hand.
As companies and investors increasingly focus on green finance, this need to access information will become central to the discussion.
There are two ways that companies can provide information in this area to support the growth of the market. The first one is regarding the operations of companies, and this is focused mainly on the activities of businesses and how companies are run. Essentially, there are environmental, social and governance considerations, and many companies already publish this data in their annual reports.
The second aspect, that is not yet as much developed, is that investors and the industry need better data on the greenness of the company's products and services. At LSE, we use another acronym for this, which is Low Carbon Economy. Basically, for the low-carbon economy to truly take shape, markets need better data and access to information.
However, the recently launched Taskforce on Climate-Related Financial Disclosure is a very good step in the right direction. On the whole, this is the kind of access to information that investors need for green finance to become more mainstream.
EF: Will the growth in data around company-level activities drive investors towards green bonds?
LG: Yes, although my comment was not just limited to green bonds, but green companies in general, whether those companies do bonds, equity, or even funds.
We are already seeing investors demand more information about the companies they invest in - even if that company has issued a green bond that has satisfied the GBPs, if the company faces risk of stranded assets, or in other parts of the ESG they are not performing that well, investors are watching, and they are increasingly getting more conscious of where they are putting their money in.
EF: Do green bonds trade less than their mainstream counterparts?
LG: Based on the feedback we hear from investors, purely due to the lack of supply, investors are reluctant to sell those bonds on the secondary market, hence those bonds trade very little. It is mainly buy and-hold investors, anyway, who buy these bonds.
As a result of that, price tightening on the secondary market has been observed
I believe that as the supply increases, we are going to see the secondary market trading picking up, as well.
On the primary market, the majority if not all the green bond issuances have been oversubscribed, and they have all priced at the tightest end of the range, if not a few basis points tighter versus the conventional bonds from the same issuer.
Issuers all make the same comments - that their bonds are oversubscribed, and also have attracted a lot of new investors that have never invested in their credit before. Look, for example, at the Axis Bank green bond. In June, they raised $500 million, and they said that 20% of the investors were new investors that have never invested in the Axis Bank credit or even an Indian credit before, so this is quite an interesting trend.
EF: Do you have a final comment on how stock exchanges will, in the future, underpin the market.
LG: Collaboration is necessary, and the issue requires attention at an international, political level. It is very important to acknowledge that emerging economies have a key role to play in this space - it's vital to bring them into this discussion. It should be a global effort.
At London Exchange, apart from launching the green bond segment, we have made education our top priority to and we have worked extensively with market participants, especially from emerging markets. We were the first exchange to do a flagship China green conference during October last year. We were the first exchange to do a green India conference in June this year, where we had about 15 Indian green or renewable energy companies coming to London to meet investors, bankers and other market participants.
We are also now the first exchange to do a Brazilian green-related conference, in partnership with the Climate Bonds Initiative, in December.
In some emerging economies, a few years ago, maybe they had not even heard about green bonds, and evidently the educational role and the role of facilitator and of linking investors and issuers is something that is also very important for an exchange.