THE ROLE OF EXCHANGES IN ACCELERATING THE GROWTH OF THE GREEN

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Prepared by the Climate Bonds Initiative Lead contributor to this report The Role of Exchanges in Accelerating the Growth of the Green 1 1. Background: Growth of the green bond market 2. Green bonds and “climate-aligned” bonds listing

The growth of the global green bond Figure 1. Green bond market growth 2012-16 At the end of 2016, labelled green bonds Figure 2. A high proportion of labelled green bonds market, albeit from a small base, has been outstanding totalled USD 180bn. However, are listed on exchanges 81bn a phenomenon in recent years. 2016 has 80 this is only a small segment of a larger just set a new record for global green market of bonds financing “climate-aligned” bonds issuance at USD 81bn1 (Figure 1) . • Commercial that do not carry a green label, which • Corporate amounts to more than USD 694bn.3 Underlying this growth has been strong ABS Climate-aligned institutional demand for financial 60 • Muni 44% (USD 308bn) of these unlabelled bonds instruments that both meet their - • Development Bank climate-aligned bonds are listed on term portfolio risk/ requirements, as • Sovereign exchanges, while the percentage of well as address concerns about the risks of • 43bn labelled green bonds is much higher, at Labelled catastrophic climate change. Green bonds 40 37bn 72% (USD 130bn) (Figure 2). green bonds - with their vanilla bond characteristics, The unlabelled climate-aligned data mostly -grade profiles, and demonstrates the potential for green climate benefits - fit this bill. bond market growth across the world. 20 To make a material contribution to Exchanges can use this information to 11bn 56% 28% 72% 44% addressing climate change, and to identify existing and potential , Unlisted Unlisted Listed Listed continue to attract , the green 3bn fast-growing markets as well as large and bond market needs scale. Government new sectors for green bond issuance. Data source: Climate Bonds Initiative, Bloomberg Bonds Initiative, Climate source: Data Issued (USDbn) Issued 0 support in the form of policies and 2012 2013 2014 2015 2016 For example, according to the analysis sovereign issuance is vital to achieving presented in the State of the Market this. However larger investor participation In addition, the United Nations’ Sustainable Investment Forum, and a forum on green 2016 Report,4 the largest proportion of is also dependent on . Exchanges (UN SSE) initiative finance in Marrakesh running parallel to unlabelled climate-aligned bonds were From their unique in financial has been increasingly involved in green COP22. At the World Investment Forum in issued by Chinese issuers – demonstrating markets, exchanges2 are critical actors finance. The UN SSE held its first event on 2016, the UN SSE announced the launch the huge potential for a green bond market for providing such market liquidity. green finance in 2015 at COP21 in Paris. of a new work stream on green finance in China. As a result, stock exchanges Exchanges also provide regulated and The following year, they held an executive in response to partner exchange . such as the SSE, SZSE and Hong Kong transparent markets, which give investors dialogue on green finance in Nairobi, They will be launching guidelines for (HKEX) could capitalise the necessary confidence that the green alongside the UN Conference on Trade exchanges on facilitating green finance at on the opportunities of growing green bonds they buy can be traded. Exchanges, 2017. March by Bloomberg; Bonds Initiative, Climate source: Data and Development’s (UNCTAD) World COP23 in Bonn, Germany. bonds issuance and listing from Chinese therefore, are institutions facilitating a companies and financial institutions. robust green bond market development. In 2016, exchanges and some regulators Government action on green bonds demonstrated leadership in growing the 3. Why exchanges are important for green bond market growth market: the launch of the Luxembourg 2016 and early 2017 saw many governments lay out implementation plans for Green Exchange (LGX), the establishment achieving their pledged climate change targets by mobilising the capital required of the first green bond segment outside through green bonds, including: Facilitate investor decisions Provide access to a wide range Improve the liquidity of of Europe by the Mexican Stock Exchange of investors green bonds By providing such as (BMV), the announcement of the Shanghai Brazil: The International Finance Singapore: The Monetary Authority guidance, training and tools for investors, Exchanges provide issuers access to Low liquidity is a barrier to investing in the Stock Exchange (SSE) and Shenzhen (IFC) and the Brazilian of Singapore (MAS) announced a exchanges can play an impotant role in a large potential investor base for the bond market generally, and in the green Stock Exchange (SZSE) green bond pilot Development Bank (BNDES) announced grant scheme to subsidize green bond facilitating investment in climate solutions. green bond market, including large bond market in particular. When liquidity is programmes, and the green bond cornerstone funds. issuance for three years. institutional investors such as low, it is more difficult to match potential (LSE) as the first exchange to partner with the The development of the Morocco: The Moroccan Capital China: Seven Chinese state ministries funds, mutual funds and sellers with potential buyers resulting in a Climate Bonds Initiative and join the Green market can be accelerated by the Markets Authority (AMMC) released jointly released the “Guidelines for companies as well as small and more time-consuming process and higher Infrastructure Investment Coalition. creation of performance benchmarks medium-sized institutions and even transaction costs. Greater use of “all-to- a green bond guide. Establishing the Green ”, such as indices, further assisting In February 2017, LSE and Borsa Italiana naming green bonds as a key component. individuals. Thus, exchanges can all” venues such as exchanges enhances India: The Securities and Exchange investors in identifying green finance issued guidance on ESG reporting, support the mobilisation of investor liquidity by enabling greater market Board of India (SEBI) released draft UK: The established investment opportunities. including recommendations on ESG demand for green investment. In connectivity and more centralised liquidity green bond guidelines. the Green Finance Initiative, under the disclosure for green bond issuers. addition, listing green bonds on than the over-the-counter (OTC) market.5 auspices of the Treasury, the ministry Italy: The Italian government convened exchanges gives issuers access to In March 2017, the China Securities ofenvironment (DEFRA) and the Bank Exchanges can also channel the liquidity of the Italian National Dialogue on a deeper pool of investment capital. Regulatory Commission (CSRC) released of . The Governor of the Bank of retail investors, as in the case of LSE’s ORB Sustainable Finance, and issued By receiving enhanced visibility on green bond guidelines, encouraging the England delivered landmark speeches Example: exchange (Shanks green bond) and the ’s recommendations for greening exchanges, green bonds issuers are and Shenzhen on the implication of climate change for collaboration sustainable bonds listed on Borsa Italiana. capital markets. exposed to a far wider segment of Stock Exchange to set up green bond lists financial stability. LuxSE and SZSE have partnered with potential investors. In addition, stock exchanges are situated at and develop green bond indices to further : Issued a landmark €7bn Multilateral: Increased China Central University of Finance the central marketplaces, acting as facilitators boost China’s green bond market. sovereign green bond. Exchanges can also provide small and international collaboration on and Economics to launch a new between issuers and investors. They are medium enterprises with access to green In March 2017, Borsa Italiana established Poland: Issued the world’s first green finance and green bonds: Green Bond Index Series to facilitate the vital part of the ecosystem which finance, as in the case of Borsa Italiana’s a list for green and social bonds on its sovereign green bond (USD 784m). G20, Financial Stability Board (FSB) access to China’s green bonds for enables overall green bond market growth ExtraMOT Pro. markets, MOT and ExtraMOT. and European Commission (EC). European investors. both domestically and internationally.

2 The Role of Exchanges in Accelerating the Growth of the Green Bond Market The Role of Exchanges in Accelerating the Growth of the Green Bond Market 3 4. How exchanges can accelerate the growth of the green bond market Example: green bond lists Table 2. Examples of green bond indices LuxSE, the first exchange to list a • Solactive Green Bond Index Series • ChinaBond China Green Bond Promote green bond green bond in 2007, took a further Index Series Table 1. Exchanges with a dedicated green bond list/segment S&P Dow Jones Green Bond Index transparency nspare step forward by launching the • a nc r y ChinaBond China Climate-aligned Transparency is one T Exchange Type of dedicated list/segment Launch date Luxembourg Green Exchange (LGX) Barclays & MSCI Green Bond Index • • Bond Index of the most important in September 2016. LGX is the first Bank of America Merrill Lynch features of a green Oslo Stock Exchange Green Bonds January 2015 ever platform dedicated entirely to • CUFE-CNI Green Bond Index Series Green Bond Index • bond, with disclosure green securities. and reporting on Stockholm Stock Exchange Sustainable Bonds* June 2015 Admittance to LGX is subject to the use of proceeds adherence to a set of mandatory Support green bond being key elements in London Stock Exchange Green Bonds July 2015 criteria, covering external review of the indices and ETFs Climate Bonds Data meeting market expectations. Exchanges n green bond framework and its intended nd I dic can support the integrity and growth of Mexico Stock Exchange Green Bonds August 2016 A green bond list o es Climate Bonds Initiative provides use of the proceeds, and a commitment B & n the green bond market by encouraging shows adherence e E green bonds data for Solactive, S&P, T to continuous post-issuance reporting. e F Luxembourg Stock Exchange Green Bonds September 2016 with certain green r Barclays & MSCI green bond indices, both the application and development s

The platform not only makes green G of robust standards. Exchanges could bonds visible, but also ensures their criteria but it and helped establish the China Borsa Italiana Green and Social Bonds March 2017 existing standards and guidelines adherence to transparent and robust does not track the Climate-aligned Bond Index with such as the Green Bond Principles and financial performance China Central Depository & * Including bonds related to climate change mitigation, adaptation, enhancing or protecting biodiversity. criteria. In addition, it offers centralised the Climate Bonds Standard to better information via the corresponding of the included Co. and China Energy Conservation promote international harmonisation card6. LuxSE has also opened bonds or identify and Environmental Protection and comparability. environmental risks embedded in the Consulting. Bonds have been judged Such guidance would not only help issuers a window dedicated to social and Establish green bond lists/ . Once sufficient market to meet the minimum criteria of the Encouraging the development of common but also provide assurance for investors segments sustainable bonds. (Appendix 1) Bon d scale has been achieved, introducing CBI Taxonomy. practices can increase investor confidence by en L and encourage further investment in this e is Creating a specialised r t one or more green bond indices could providing them with transparent, consistent rapidly-growing class. G green bond list or a make it easier for investors to track and comparable information on the type of In the future, exchanges could require It is important to note that in most dedicated segment the performance of green bonds, and Implement market education projects financed for the listed bonds. Robust that an ’s auditor attest to the countries the green bond market is enables investors compare returns and with and foster dialogue standards around what is classified as green issuer’s deployment of funds. While to easily discover other . t Educ underpinned by a broad range of ke at can also reduce the risk of ‘greenwashing’ this attestation may add to compliance By providing educational r i a o voluntary standards, principles and and invest in assets n as the market develops and grows. costs, it could further increase investors’ Existing green bond indices have been resources and expert M best practices rather than a single set addressing climate confidence in green bonds at a post- launched by a number of ratings agencies, assistance, exchanges of mandatory requirements. change. They are useful in improving issuance phase. financial institutions and international can assist investors in the visibility of green bonds to investors, Develop green bond guidelines Exchanges could contribute to the institutions (Table 2). understanding wider and encouraging o n d G efforts to promote the strongest of these climate change risks Guidance B u trading. This will facilitate green bond Exchanges could draw lessons from standards in the local context as well as and opportunities. t Dia n i Balancing robustness and ke lo documentation e d issuers access to a deep pool of green the experiences of these institutions r g a e e the further harmonisation of green bond simplicity u could be provided by capital domestically and internationally. or develop partnerships with them to Capacity building M e r l standards more generally. exchanges to pave i establish green bond indices. for issuers and other G n Lists or segments can also play a role in While robust requirements for listing

the way for new e Exchanges can further encourage green bonds can enhance the quality stakeholders can s ensuring the environmental integrity of the In time, as the green bond market scales issuances and listing. the issuance and listing of green also be organised market by requiring issuers to provide a of green assets, a key challenge will be up, such indices could cater to diverse Clarifying criteria bonds by creating more efficient to support them in second or third party review of the green for exchanges to promote robustness investor by developing specific for the eligibility of procedures which shorten and understanding market credentials of the bond in for it to be without placing an unnecessary burden regional or sector focuses. projects, and guidance for reporting on the streamline the issuing process. expectations and included in their lists. on potential green bond issuers. intended and actual use of proceeds are By developing green bond indices, interpreting listing requirements. Exchanges Exchanges can also help green critical for building a fully-functional green Table 1 above shows exchanges that exchanges can enable the development of can foster dialogue on green bonds between bonds issuers to prepare their listing Criteria need to be robust enough to bond market. have launched dedicated green bond ETFs or index-linked structured products all stakeholders including regulators, not only by publishing ensure that investors have confidence (or sustainable bonds) lists/segments. which require indices. Such market investors, issuers, rating agencies, guidance documentation but also by that projects funded by green bonds infrastructure also promotes investment international standard-setting bodies, offering advice on the additional non- In order to ensure and maintain the have demonstrable environmental and liquidity in the green bond market certifiers and auditors. Example: guidelines regulatory best practices. Such tasks quality of green bond lists, exchanges and climate impacts, while still being (Table 3). could be undertaken by internal staff or may need to reserve the legal right flexible and simple to achieve for SSE and SZSE published guidelines for potential green bond issuers. their green bonds pilot programmes accredited external consultants. to exclude or remove bonds from the Example: GIIC in March and April 2016 respectively. list or segment if they do not meet An example of such activity is the These guidelines provide details on ongoing reporting requirements. Green Infrastructure Investment the definition of a “green project”, Luxembourg’s LGX and Borsa Italiana Table 3. Examples of green bond exchange traded funds (ETFs) Coalition (GIIC) India Forum held at eligibility of green bonds issuers, Example: FSB for instance are already doing so. If an issuer fails to provide information on London Stock Exchange (LSE). management of proceeds, reporting Name of green bond ETFs Green bond index tracked Listing exchange The set of recommendations the actual use of proceeds at least one and disclosure, and the use of third To date, other green bonds events produced by the Financial Stability year after issuance, it will be prevented party certification. Lyxor Green Bond Solactive Green Bond EUR USD , London have been held at both the LSE Board’s Task Force on Climate- from being included in the list/segment UCITS ETF IG Index Stock Exchange and LuxSE, connecting potential LSE and Borsa Italiana have included Related Financial Disclosures could, until its reporting obligations are fulfilled. green bond issuers and investors. disclosure guidelines for green bonds for instance, be disseminated by In this way, exchanges can reinforce VanEck Vectors S&P Green Bond Select Index NYSE Arca These events could be replicated by in their ESG reporting guide. exchanges to investors and issuers. transparency in the allocation of green/ Green Bond ETF exchanges around the world. sustainable bonds proceeds.

4 The Role of Exchanges in Accelerating the Growth of the Green Bond Market The Role of Exchanges in Accelerating the Growth of the Green Bond Market 5 5. Why exchanges should act Table 4. Examples of green bonds from emerging markets listed offshore

Issuer Date of Amount Exchange Reputation and credibility Protect investor interests Attracting green assets Issue enhancement While investors are driven to maximise By bringing together supply and demand BRF SA June 2015 EUR 500m (USD 564m) Luxembourg Brands and reputation are the most their investment returns, they do so and creating new market segments or important assets of exchanges; this can within a specific risk profile and while sectors for green bonds, exchanges can be derived from their participation in the (in the case of asset managers) facilitate investments in climate mitigation Br a z il Fibria Jan. 2017 USD 700m Frankfurt/New York green bond market. By harnessing the respecting the full range of their fiduciary and adaptation projects while attracting green bond market to drive the transition duties. In recent years, environmental, more assets onto their platforms. Agricultural Bank of China Oct. 2015 USD 995m in three to a low carbon economy, exchanges will social and governance (ESG) factors The launched · CNY 600m (USD 95m) London be able to generate clear climate change are increasingly being recognised as and listed the first ever green bond on · USD 400m London credentials, enhancing their reputation having a material impact on risk, as LuxSE in 2007. As of April 2017 LGX · USD 500m London and credibility with future green bond well as being a component of broader 7 displays 112 green bonds. issuers and cementing their role in fiduciary duty. By facilitating greater London Taxi Company (Geely) May 2016 USD 400m Singapore climate finance. Furthermore, applying transparency of green finance The rise of the green bond market in emerging economies such as Brazil, a green bond product-specific approach opportunities, stock exchanges can Bank of China July 2016 USD 3.03bn in 5 tranches will prepare them to continue to serve provide investors with additional India, Mexico and China, is driving · CNY 1.5bn (USD 225mn) Hong Kong international capital markets as green investment tools with which to manage cross-regional trades and demonstrates CHI N A · UDS 1bn Luxembourg finance scales up to occupy a larger climate related investment risk, and meet international opportunities for exchanges · USD 750m Luxembourg of the market. their broader fiduciary duties. (Table 4). · USD 500m Luxembourg · EUR 500m (USD 555m) Luxembourg

6. Summary and actions Bank of China Nov. 2016 USD 500m London T A S Banco Nacional de Costa Rica Apr. 2016 USD 500m Luxembourg O Exchanges have played, and will continue Organisations such as the Climate R ICA C to play, an important role in growing the Bonds Initiative, United Nations’ SSE, Example: UN SSE Export-Import Bank India Apr. 2015 USD 500m Singapore green bond market by facilitating liquidity, and the Sustainability Working Group 2017. The UN Sustainable Stock Exchange geographic diversity and market integrity. of the World Federation of Exchanges initiative and the Sustainability will continue to promote collaboration IDBI Nov. 2015 USD 350m Singapore As more exchanges adopt the practices Working Group of the World and harmonisation by working with

outlined in this paper, such as the Federation of Exchanges have I N DIA exchanges around the world. Axis Bank June 2016 USD 500m London/Singapore creation of green bond lists/segments, fostered collaboration by providing collaboration between exchanges and tools and guidance on promoting NTPC Aug. 2016 INR 20bn (USD 300m) London/Singapore harmonisation of standards will become sustainability and transparency particularly important to ensure that the through ESG tools and metrics. In Greenko Aug. 2016 USD 500m Singapore

market does not become fragmented. addition, the UN SSE initiative’s March by Bonds Initiative, Climate

green finance work stream aims to O Nacional Financiera Nov. 2015 USD 500m Dublin help educate stock exchanges on opportunities and best practices in Mexico City Airport Sept. 2016 USD 2bn Singapore MEXIC the promotion of green finance. National Bank of Abu Dhabi Mar. 2017 USD 587m London UAE Data Source: Bloomberg, Bloomberg, Source: Data

Appendix 1 Develop green bond Support green bond guidelines indices or ETFs Luxembourg Green a window dedicated to social and can apply for LGX display. The issuer Exchange social and sustainable (S&S) bonds. This new must commit to disclosing detailed sustainable window segment is integrated in LGX. information relating to planned use of proceeds, provide an ex-ante external After the successful launch of the To be accepted to the S&S window of review, as well as a post-issuance report Foster market dialogue Luxembourg Green Exchange (LGX) LGX, a similar process as for green bonds Promote transparency presented regularly throughout the and collaboration in September 2016, the Luxembourg applies: once a social or sustainable bond is lifespan of the security. Stock Exchange (LuxSE) has opened listed on one of LuxSE’s markets, an issuer

Notes: Establish green bond lists 1. This figure includes all green bonds aligned with 3. Data source: Bonds & Climate Change: State of the 6. https://www.bourse.lu/listing-green-bonds. Foster market education international definitions. By taking into account bonds Market 2016 report, cut off data is end of May 2016. 7. UNEP-FI, fiduciary Duty in the 2st Century, http://www. or segments aligned with the People’s Bank of China’s green categories 4. Bonds & Climate Change: State of the Market 2016 unepfi.org/fileadmin/documents/fiduciary_duty_21st_ but not fitting the international definitions, the number report, Climate Bonds Initiative. century.pdf would reach USD 93bn. 5. Novick, B., Prager, R., VedBrat, S. & Riaz, K. (2014) 2. In this report, an exchange refers to a bourse where Market Structure: The Time for Reform is equities, bonds, and other securities are traded. Now. BlackRock.

6 The Role of Exchanges in Accelerating the Growth of the Green Bond Market The Role of Exchanges in Accelerating the Growth of the Green Bond Market 7 Climate Bonds Initiative can assist exchanges in harnessing the green bond market. Partnering with CBI’s strong, visible and independent brand helps exchanges to generate clear climate change credentials, enhance their reputation and credibility, and in so doing, attract more assets onto their respective platforms.

Climate Bonds Initiative’s Partner-only Services for Exchanges

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Climate Bonds Initiative’s Exchange Partners: London Stock Exchange Luxembourg Stock Exchange

© Published by the Climate Bonds Initiative, May 2017 We would like to thank Chiara Caprioli, Zuzanna Reda- Disclaimer: This report does not constitute investment The Climate Bonds Initiative is an investor focused not-for- Jakima, Anthony Miller, Tiff any Grabski, Alba Aguilar, advice and the Climate Bonds Initiative is not an profi t, working to mobilize debt capital markets for a rapid Edwin Wiest, Corli le Roux, Shameela Soobramoney and investment adviser. Neither the Climate Bonds Initiative transition to a low-carbon and climate resilient economy. Akshar Sewkuran for their input. We acknowledge the nor the Luxembourg Green Exchange is advising on the contribution of Luxembourg Green Exchange, London Stock merits or otherwise of any bond or investment. A decision Prepared by Climate Bonds Initiative. Written by Exchange, Borsa Italiana, The Nigerian Stock Exchange to invest in anything is solely yours. The authors accept no Alan Xiangrui Meng, Bridget Boulle and Diletta Giuliani. and Johannesburg Stock Exchange in the preparation of liability of any kind for investments anyone makes, nor for this report. investments made by third parties. Design: Godfrey Design Design: Godfrey

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