2016 Sustainable Finance Awards: International prize winner. Luxembourg Stock Exchange. Interview with Mr. Gregory Behin.（RIEF）
The Research Institute for Environmental Finance（RIEF） based in Tokyo has commended the Luxembourug Stock Exchange as first international prize winner of the Sustainable Finance Awards, due to their launching Green Exchange（LGX） in last year. RIEF has interviewed with Mr. Grégory Behin, Head of Strategy & Development in Luxembourg Stock Exchange. （Interviewer is Yoshihiro Fujii, Executive Director of RIEF）.
――Why does LuxSE decide to launch the new green stock exchange?
Behin: 10 years ago, in 2007, the first green bond was issued and listed on the Luxembourg stock exchange. This was an important first step before the Cop21 Paris Agreement moved the green bond market to a new level. 2016 was a record year for labelled green bonds and the Luxembourg Stock Exchange was at the heart of that movement. More than 50% of all green bonds listed globally are present on LuxSE making us the number one choice for the global leaders in green bond issuance. So we thought that we have to go further than just listing green bonds on our markets. Prior to the Luxembourg Green Exchange launch, we initiated extensive consultations with investors, issuers, intermediaries and participated in numerous industry-wide discussions with key stakeholders (CBI, ICMA and UNEP). As a result, we have a comprehensive understanding of what was happening in green bond market.
We realized what was happening in the market was not just a small initiative and a small trend which would fade in a few years or so. Exchanges play a crucial role in supporting and nurturing a sustainable growth of the green bond market. As a market leader we decided to step up and to move forward by creating a dedicated new platform that caters to environmentally conscious investors by providing full and unrestricted access to a list of securities that are 100% green and where issuers of green securities can market their instruments.
—So far other stock exchanges like London, Shanghai and Mexico have been seeking to give visibility to green bonds listed on their markets. Do you regard them as your competitors for expanding green exchange markets globally?
Behin: The International Energy Agency (IEA) has estimated that the world needs $1 trillion a year until 2050 to finance a transition to low emissions, so we see these initiatives as encouraging sign for the sustainable finance market. We have an open attitude to new markets and financial innovation and we are often at the forefront of new product developments in the global financial markets. Almost every time we launch a new initiative other stock exchanges would replicate what we have done. We don’t mind it at all, as it proves that we are on right track and we are supporting market developments. For example our dedicated green exchange is raising the bar for disclosure. So no, we don’t mind it at all, we are happy to be seen as a first mover and an innovator.
—–Have you met people from the Tokyo Stock exchange?
Behin: Yes, I did. We believe that stock exchanges provide an important support for sustainable finance development, so I absolutely wanted to learn more about their initiatives. From an ESG (Environmental, Social and Governance) perspective the Tokyo Stock Exchange explained that they are focusing on Governance initiatives for the moment. They are also closely following environmental finance developments and consider launching climate related initiatives in a second phase.
—– What is trading volume or numbers of listed green bonds since commencing of LGX?
Behin: We have now 109 green bonds displayed on LGX amounting to an aggregated value of more than USD 54 billion. Since the launch, the issue amount of green bonds displayed on the platform has risen by 30% which is a huge increase. LuxSE is not only the leader in green bond listing; we are also the number one stock exchange worldwide in listing international debt securities. From issuers’ standpoint, by being the global leader, we ensure optimum visibility and positioning for their securities to most effectively reach green investors, so regular green bonds issuers like EIB, World Bank, ADB and others have joined our green stock exchange seamlessly.
We also see issuers are a bit hesitant to join the green market. The launch of LGX is making the market more interesting for issuers, because it gives them more visibility in dedicated infrastructure and it triggers their interest in getting involved in the green bond market.
――What kind of green products have you listed on LGX, only green bonds ?
Behin: Yes, for the moment we only display green bonds. Although some green finance comes from the public sector and traditional bank loans, green bonds have become the dominant force in green finance. We therefore naturally started with this market in 2016. While we are convinced that green bonds will continue to thrive in 2017, we are going to expand LGX to go well beyond, i.e. other types of green financial instruments and also display different types of bonds, like social and sustainable bonds. There have been a lot of exciting developments in the bond market, from social and sustainable bonds to positive impact bonds. We are also looking at regional differences that exist in the green bond market. For example the Chinese green bonds guidelines differ from the one’s set by ICMA, and we analyse how we can overcome these differences and work together. Finally we are also looking at different types of financial instruments, for instance, ESG funds and ETF or index-linked structured products to be displayed on LGX in the near future. In short, our goal can be summarised in one sentence: shape the future of green finance while continuing to help increase transparency in capital markets.
—-On Chinese market, we think LGX’s criteria are quite strict, but theirs are in a sense quite loose and influenced by domestic factors. Their criteria on green bond allow proceeds to be invested in clean-coal projects (coal powered generation plants). Are you going to admit different type of green bond criteria to list them for a different kind of investors?
Behin: Prior to the launch we performed a high level market analysis and decided to introduce strict entry requirements. These criteria include that issuers must use proceeds exclusively for green projects, must submit an independent review and commit to ongoing reporting. Through transparency we want to guarantee that securities on LGX are genuinely green and we therefore won’t change these rules. Currently most international standards don’t consider clean-coal as green and we would therefore refuse to display on LGX a green bond investing in such a project. However the Chinese green bond market is developing fast and many recent Chinese green bonds issuances are compliant to both the Chinese green bond standards and CBI/ICMA standards.
— Have you contacted and communicated with Chinese authorities to manage of their green standards?
Behin: China’s central bank and two Chinese stock exchanges have issued green bond guidelines. We were not involved in the set-up of these guidelines, but we do collaborate with these key stakeholders to further promote sustainable finance. The Chinese capital market is opening up internationally and our partnerships can for instance facilitate access to China’s green bonds for investors in Europe. In the future Chinese green bond standards will be gradually converging with international ones.
—-You mean you expect they would change their standard to fit global one soon?
Behin: I wouldn’t be surprised to see some convergence in guidelines or standards in order for the Chinese sustainable finance to gain more momentum on the international capital markets.
—-On the Japanese market, what do you think are the challenges and growth opportunities for the Japanese green bond market green financial products. People say that in Japan, there are fewer incentives to issue green bonds due to passive measures by the government which emphasis more on restarting nuclear power plant than on renewable energy projects. Compared to Chinese green market, the Japanese government doesn’t look so keen to develop the renewable energy market domestically. I think nuclear power and renewable energy somewhat compete with each other against fossil energy.
Behin: The Japanese authorities and the developments banks I met these last days seemed on the contrary very keen to support the development of the green finance market in Japan. One of their first objectives is to increase the awareness of the Japanese population about how imperative environmental finance is, about the possibilities to invest in green projects (through their recent pilot issue e.g.) and to setup a frame. That is why the Ministry of Environment issued recently their guideline for instance.
It is also important to note that access to the Luxembourg Green Exchange is not granted to securities investing in either fossil fuel or nuclear energy projects. We had energy companies that were concerned that their bond wouldn’t be admitted on LGX because one of their subsidiaries operates nuclear power plants. Emphasis should be made on the difference between company and project. A green bond is eligible for display on LGX if the company can prove that none of the proceeds will be invested in projects in relation to the nuclear energy operations. We want to encourage them to switch from nuclear energy to renewable energy step by step. Green bonds can be a good facilitator for what we call the energy transition to a low carbon economy. This transition to more sustainable sources of energy is happening everywhere.
—-What is your prediction of development of green bond market this year?
Behin: If the previous years are any indicator of what is to come, we can expect a phenomenal green bond market growth. The market almost doubled over the past two years, it went from USD 42billion in 2015 to USD 81billion in 2016. For 2017 I would not be surprised if this would go beyond 150 billion USD in new issuances. The trend is going in the right direction. However keep in mind that to live up to the COP21 commitment to keep global warming well below 2°,trillions of dollars need to be invested each year. We are well below of this financial target; we are barely scratching the surface. I don’t want to diminish what is being done. We just need more sustainable finance, more positive impact projects in every corner of the world. The green market has picked up considerable momentum over the last years and gained traction with all types of market participants, from political organizations, civil associations to corporations. Even financial markets are moving in realizing that it is not just about financial returns any more. Investors want to get proper financial returns, but they now have the option between investments with 3 to 5% interest and sustainable investments with the same interest rate. As investors don’t have to choose between return and sustainability they are choosing the latter which also offers non-financial value. Even more, green bonds’ interest rates are often higher than the ones of regular bonds. This explains why green bonds are almost always oversubscribed.
I believe that our society is changing; seeking financial returns all the while thinking if their money is going to have a positive impact on the environment.
—What do you think of the green financial market in Japan. I think you have met several financial people here?
Behin: A lot of people I met were already convinced of the importance of the green market as they had been following developments in sustainable finance for many years. Seeing initiatives such as our green exchange, makes them even more confident that they are heading in the right direction and that the sustainable finance market is gaining momentum around the world.
— Do you expect to soon list a Japanese green bond on your exchange?
Behin: I hope. I will be very happy to do so. As I explained to the Japanese people I met here, we have a dedicated team of green finance experts, who are there to support issuers and investors who are looking to better understand the market or develop sustainable finance projects. We are also happy to support Japanese authorities, issuers, banks and investors to better understand what’s happening in green finance around the world but also to share the lessons we learned here in Japan.
— Some said in Japan there are less attractive green products for issuers, what do you think?
Behin: There are foreign green bond issuers choosing to denominate their green bond in Japanese yen to tap into the pool of Japanese investors. For instance, a couple of days ago EDF, a French energy company issued roughly 10 billion yen in bonds. Such a display of investors ‘appetite for green finance is great for the development of green financial products here in Japan. It is very important to keep in mind that the investors are the driving force to make things change.
— On political supports on green financial products, there is no clear coordination within the government, recently the Ministry of Environment prepared to announce their own green bond guideline but depending on no legal basis. Other ministries seem to ignore MOE’s guideline.
Behin: I asked the MOE officials in our meeting, how supportive other ministries were about green initiatives, because they cannot do it without Ministry of Finance. Depending on the projects you might need to corporate with Ministry of Transportation and Ministry of Economy and Trade in order to have a holistic approach. You need at least these 4 Ministries to cooperate in order to develop the domestic green market. You need an inclusive cooperation within the government to move forward. I am confident they will reach a good level of cooperation, but time is running and the energy transition has to accelerate.
（Interviewed by Yoshihiro Fujii）