05 January 2018
The Luxembourg Stock Exchange (LuxSE) is the leading exchange for green bond listings. Jane Wilkinson, Head of Sustainable Finance, examines the evolution of impact reporting
Environmental Finance (EF): Should all green bonds report on their impact?
Jane Wilkinson (JW): Fundamentally, yes. Particularly in the light of the increased requests from asset owners and asset managers to provide information about the impact of their portfolios and to give statistics on their environmental performance.
EF: Are most green bonds currently issuing impact reports?
JW: All of the green bonds on our Green Exchange (LGX), and most listed green bonds, are issuing some kind of post-issuance reporting. Issuers differ greatly in the type of reporting they provide and their quality. Some are doing use-of-proceeds reporting, others, provide impact statistics. For the moment, there is no general market practice in impact reporting.
EF: Do you think we need standardised impact reporting?
JW: We do need to get to some kind of standardisation. There has to be a convergence of what issuers are required to report on and are actually reporting on. One of the reasons for requesting impact reporting is to be able to report on a consolidated basis of a portfolio, for investors to be able to compare different bonds. Harmonisation is needed so that 'normal' market participants, who are not experts, can actually look at two green bonds and assess which one is most suited to them, based on whichever impact indicators they feel are most relevant. For the moment this is not possible.
EF: How serious is it if an issuer fails to meet a pledge to report on impact?
JW: If an issuer does not report then they get taken off the Green Exchange. For the moment all LGX issuers are compliant with their reporting commitments, albeit some are late, and it is often the bigger ones, the ones that have unwieldy, highly bureaucratic organisations. However, I am not aware of any cases in the wider market where an issuer has not reported despite having committed to do so.
EF: What should an impact report look like?
JW: There are a few things that I would like to see in an impact report. The most important question is how has the money been spent? I would expect to see detailed project descriptions. For some green bonds, there are hundreds of projects sitting behind the bond which are financed. In such a case, I would want to see consolidated data on the nature of the projects. For example how much money has been allocated to those projects and when that money has been disbursed. Issuers also need to make sure they are clear about what has not been allocated yet. It needs to be transparent.
With impact reporting, it is a bit more complicated. Issuers are using different methodologies hence the way in which they are making their calculations varies. An impact report which is easy to read should have some five KPIs, which are numerated in terms of, say, CO2 savings per €1,000 or €100,000. Such an approach will help investors make more precise comparisons of projects.
EF: How similar are existing impact reports in the market?
JW: There is a huge variety of impact reports. Corporates reporting through their sustainability report, whereas financial institutions tend to have specific green bond reports or newsletters. The approach of financial institutions makes sense: it's easier for a normal reader to understand when the impact reporting is separated from a bank's regular sustainability reporting. There is a lot of diversity in the way that companies report, but that is not necessarily a bad thing.
EF: How long should an impact report be?
JW: The length is secondary. What needs to be clear in a report is how the money is being spent, how much has not been spent yet, what is the impact per monetary unit of the key indicators, and how the statistics and indicators have been calculated. Green bond issuers reporting on certain projects where the issuer is only financing, 20% of a project along with other co-investors, are reporting 100% of the impact of the project, but that is clearly not the impact that they are contributing to. That's why understanding the methodology behind the numbers is so important.
In financial reporting, you have an accounting policy note that explains how you have calculated your figures. The same kind of note should exist for impact reporting, explaining the methodology that they have used, how they came up with the 'waste water cleaned' KPI, as well as how they treat projects, and how they take their share of the global financing based on the money that they disburse over the life of the project. This kind of methodology note is not always well explained in reports.
Official list Structure
|Green Bonds||Social Bonds||Sustainable Bonds||LGX|
|€ -Amount issued||62,91Bn||8,56Bn||1,19Bn||72,65Bn|
|$ -Amount issued||74,69Bn||10,16Bn||1,41Bn||86,25Bn|
|Figures about securities listed on Luxembourg Green Exchange as of end of November 2017|
EF: For how long should an issuer report on impact? For the life of the bond?
JW: If we are talking about impact, then yes, there should be information on the impact for the life of the bond. The information may be identical every year, however, if, as we hope, the green bond market becomes more liquid, an annual reporting will be required in order to meet investor expectations.
Whilst we have a generally buy-and-hold market today, it matters less if there is only one impact report which reports on the green bond once covering the life time of the bond. However, if a bond is traded and somebody new becomes the shareholder, then that shareholder is going to expect this year's reporting. As the market becomes more liquid, annual reporting should become the norm.
EF: How is impact reporting evolving?
JW: It is definitely a hot topic. There is a real push to have impact reported at many different levels. The pressure/interest comes from asset owners, asset managers, issuers – everybody in the market is supposed to be starting to report on some kind of impact.
Various associations are already working on developing standard frameworks for calculating impact. For example, ICMA has already introduced guidelines on how to report on the impact of water and wastewater projects. The challenge is still to ensure that we move towards standardisation and global frameworks which are generally accepted.
EF: What can/should stock exchanges do to help?
JW: A number of things. The first one is, to have a separate green and/or social bond listing segment that highlights bonds which meet the eligibility criteria or the definition of a green bond. We do have a role in encouraging transparency and making sure issuers are publishing all the information and documentation related to these bonds, as well as making these impact reports available.
Another role, which we at the Luxembourg Green Exchange will soon start assuming is engaging with issuers. It is quite an important step. This will let us take on an advisory role and discuss with an issuer what his green bond reporting includes and what it could include to align with the market's best practices. We hope to be able to have an open discussion on what we see others doing and what we think might be useful for other issuers to disclose.
If people know what others are reporting on, it might encourage them to add such elements to their own reporting. This will help to standardise the market, establish a common basis, and build what is considered to be best practice. We will start our engagement programme next year.
Luxembourg Green Exchange: A truly green platform
Demand for green finance has surged following the COP21 climate agreement in Paris, as efforts to tackle climate change become a global priority for policymakers and investors.
To help facilitate the development of green finance, the Luxembourg Stock Exchange, in 2016, launched the Luxembourg Green Exchange (LGX), a dedicated platform for green, social and sustainable securities.
LGX aims to provide issuers and investors with an environment for securities that are truly green, social or sustainable. Entry is restricted to issuers that provide full disclosure and fulfil their reporting obligations.
As of the end of November, there were more than €72 billion of green, social sustainable bonds on LGX (see chart).