16 February 2022
Through its Green Economy Mark and Sustainable Bond Market, the London Stock Exchange has already been playing a key role in channelling capital to the green economy. It is now looking to extend that to the voluntary carbon market.
The London Stock Exchange is pivoting squarely towards the green economy. Its Green Economy Mark, launched in 2019, helps investors identify companies that make the majority of their revenues in green sectors. Its Sustainable Bond Market has helped issuers raise more than $140 billion in debt capital. And it is now planning an innovative initiative to direct funding to the voluntary carbon markets.
"Stock exchanges exist to bring together those who have capital with those who need capital in service of an objective," said Julia Hoggett, CEO of London Stock Exchange plc.
"Over time, those objectives naturally change, companies change, the nature of their businesses change, and what generates growth changes.
"There is a fundamental role for the City in ESG and in supporting a just transition to net zero ... and we have a great opportunity as the London Stock Exchange Group to take a full-court press to the problem."
Speaking at the end of last year to the Climate Biz podcast, Hoggett, who took the helm at the exchange early last year, set out three roles that the London Stock Exchange Group in general, and the London Stock Exchange in particular, have in working to support the transition.
The first is in supporting better ESG and climate disclosure for investors. Last October, the London Stock Exchange became the first bourse to issue climate reporting guidance based on the UN Sustainable Stock Exchanges' Model Guidance on Climate Disclosure, which is aligned with the Task Force for Climate Related Financial Disclosures (TCFD) recommendations.
Companies within LSEG offer a range of ESG data products and green finance indexes to help investors identify green investment opportunities. FTSE Russell's FTSE4Good Index, which recently celebrated its 20th anniversary, is one of the oldest ESG equity indexes. More recently, the company launched the FTSE TPI Climate Transition Index series. It uses climate data from the Transition Pathway Initiative (TPI) to account for risks and opportunities from the transition to a low-carbon economy.
Last November, LSEG and TPI announced a plan to establish the TPI Global Climate Transition Centre at the London School of Economics to dramatically increase the universe of stocks assessed by the TPI from 400 to 10,000 and expand coverage from global equities into other asset classes such as fixed income.
The second is helping to direct financing to the green economy. Hoggett noted that, if the green economy was classified as a sector in its own right, it would be the fourth largest in terms of capital raising in the last three years. Since the London Stock Exchange launched its Green Economy Mark, which recognises London-listed companies which generate more than half their revenues from green environmental products and services, it has been provided to 117 companies with a combined market capitalisation of £157 billion ($213 billion).
In fixed income, the London Stock Exchange's Sustainable Bond Market helped issuers raise more than £52 billion in 2021, with the total number of bonds listed on the platform rising to 342.
"We saw more than three times the amount of capital raised on the Sustainable Bond Market compared with 2020," says Shrey Kohli, head of debt capital markets and funds at LSEG.
Landmark transactions last year included the listing of the UK's first Green Gilts, which raised £10 billion for the UK Treasury, and the issuance by the Bank of China of the first-ever sustainability re-linked bond, the coupon payments of which are linked to the ESG performance of a portfolio of underlying sustainability-linked loans (see Table).
The third role, Hoggett said, is helping the rest of the economy move towards net zero. "The only way we get to net zero and stay there is if the entirety of the economy moves on a global basis ... we need to make a much more radical shift to what I describe as ESG as BAU [business as usual]," she said.
Hoggett's vision is, ultimately, for its ESG-orientated activities to effectively be absorbed within its wider businesses, as ESG and the net-zero transition are embedded within the global economy and financial system.
"Important as the disciplines are that we've created around the Green Economy Mark and the Sustainable Bond Market, we need to build a platform and a roadmap to deconstruct the very segmentation that we've created. We need to embed that analysis of climate impacts into every asset, and embed those disciplines into every investment decision, so that we're really thinking about a full-economy transition," she said.
As part of that effort, last year the London Stock Exchange began listing a new category of sustainable finance instrument, the climate transition bond, on a specifically designed segment of the Sustainable Bond Market. Those bonds, which are aligned with the International Capital Markets Association's Climate Transition Handbook, can be used by companies in carbon- intensive sectors to help fund credible net-zero transition strategies.
|Recent landmark transactions on the Sustainable Bond Market|
|Saudi National Bank Sukuk Limited||19/01/2022||$750m 5-year Sustainability Sukuk||First benchmark corporate sustainability sukuk from a Gulf Council issuer|
|Bank of China Limited, London Branch||03/11/2021||$300m 3-year Sustainability Re-Linked bond||First structure that directly funds a portfolio of sustainability-linked loans with a link between the performance and payout of the underlying SLLs and the bond|
|Private Joint Stock Company National Power Company Ukrenergo||10/11/2021||$825m 5-year Green Sustainability Linked bond||First sustainable security from Ukraine|
|Republic of Korea||19/10/2021||€700m 5-year||First sovereign green or climate bond in euros from Asia|
|United Kingdom||20/9/2021||£10b 12-year||Largest sovereign green bond and largest order book at the time of issuance|
|Republic of Benin||23/7/2021||€500m 13.5-year||First sovereign green bond in international markets from Africa|
|Republic of Uzbekistan||21/7/2021||UZS2.5t 3-year||First sovereign green bond from Emerging Europe and Central Asia. First Green bond in Uzbekistan Soum|
|Pakistan Water and Power Development Authority||07/6/2021||$500m 10-year||First green bond from Pakistan|
|Ecobank Transnational Incorporated||18/6/2021||$350m 10NC5 Tier 2||First sustaibability T2 from Africa (ex-South Africa)|
"We now have the building blocks within the Sustainable Bond Market to cater to the full range of innovations within sustainable debt financing," says Kohli. "We have labels for pure- play bonds, a climate-transition segment and a sustainability- linked bond segment. Together with our offering in the equity capital markets, we can enable a coherent sustainable finance strategy across the funding curve."
This focus on supporting the net-zero transition also involves the exchange stepping into a new arena – the voluntary carbon market. At the COP26 climate talks last November, amid a flurry of initiatives from LSEG and its partners, the exchange announced plans for a "Voluntary Carbon Markets Solution" that will help channel finance towards projects that help mitigate climate change.
The voluntary carbon market is set to become a much more important part of the net-zero ecosystem because, as Hoggett observed, it is becoming much less voluntary. The market has "got the wrong name", she said. Given that companies are increasingly pledging to become net-zero emitters, they are effectively committing to some sort of carbon offsetting due to the challenges many large companies face to entirely decarbonise in the near term given the nascent nature of some technologies.
Sustainable Bond Market Issuance since 2015
Sustainable Bond Market breakdown*
"The idea that this is voluntary, once they've made that commitment to their shareholders, is a misnomer," she said. This imperative will create growing demand for carbon credits and for financing for the projects that create them, which is where the London Stock Exchange solution comes in, Hoggett said. Rather than providing a market for carbon credits, the exchange plans to set up a fund market, where the listed funds can either pay dividends to their investors in cash, or in specie – in this case, in carbon credits.
Crucially, listing funds rather than credits brings the investments within the UK's existing regulatory regime.
"Because these will be listed funds, the disclosure standards fall within the scope of the Market Abuse regime, the transparency regime, the listing rules and everything else that we have in the UK," she said. "We don't need to wait for the regulator to bring voluntary carbon credits into the scope of the Market Abuse regime, because this basically brings them in immediately."
In addition, investing in funds will enable companies to access a diversified forward supply of carbon credits, and from projects in regions, sectors or technologies that are particularly relevant to them, she adds.
Putting the voluntary carbon market on to a transparent, high-profile marketplace will help to tackle some of the issues that it has faced regarding its credibility, Hoggett said. "I think we can address some of the brickbats around trust that the voluntary carbon markets have faced, because these are often quite small, bespoke OTC [over-the-counter] activities," she said. "We can address these because we're using the disciplines of the public markets.
"I hope that, by coming up with this solution, we're able to help transform the way the voluntary carbon markets work, and the amount of trust that is embedded in them as well."
LSEG's work on the voluntary carbon markets represents an important part of a holistic sustainable finance offering that links the exchange's customers with the emerging regulatory and policy landscape, explains Claire Dorrian, LSEG's head of sustainable finance, capital markets.
With the government announcing that transition plans will ultimately become mandatory and with more companies committing to science- based net-zero strategies, investors will expect them to explain how they will deliver on those objectives.
"Seventy-five per cent of the FTSE 100 by market cap have committed to the Race to Zero," she notes, observing that many of them are likely to look to offset part of their emissions as well as raise finance to help them decarbonise their businesses.
"There's a big mobilisation of resources that companies are looking at as they build out their transition plans ... We are at a critical juncture."
For more information, see www.londonstockexchange.com