Julie Becker (Luxembourg Stock Exchange): New financial products to accelerate sustainable finance
Julie Becker, CEO of the Luxembourg Stock Exchange, shares her views on market trends regarding ESG products and on the 2020 launch of Sustainability-Linked Bonds, where issuers commit to future improvements in sustainability outcomes with a clear timeline and ambitious science-based objectives.
2020 was a record year for sustainable finance, what were the main drivers?
2020 saw record levels of new sustainable bond issuances worldwide, in large part driven by a steep uptick in social and sustainability bonds issued in response to the COVID-19 pandemic. These bonds raise financing for social projects linked to food security, affordable housing, access to essential services etc., all areas heavily impacted by the current crisis. On LGX, we saw a 134% growth in new sustainable bonds in terms of value in 2020 compared to 2019.
The pandemic accelerated the focus on the social element of ESG and on sustainability more generally across the world. It installed a new sense of urgency and a new awareness that we need to act now to address global challenges. The investor appetite for sustainable instruments is considerable. Today, there is a lack of supply to meet investor demand, and this may encourage other issuers to bring sustainable instruments to the market.
"Sustainability data is constantly improving and a lot of efforts are currently being done to define taxonomies and sustainable accounting standards."
The universe of thematic bonds has evolved considerably over the past years, what are the latest trends in this field?
Up until last year, LGX was dedicated to green, social and sustainability bonds, which are use-of-proceeds bonds that finance specific green or social projects.
Last year, a new product started to gain traction, namely the Sustainability-Linked Bonds (SLBs). SLBs are forward-looking performance-based bond instruments where the issuer commits to future improvements in sustainability outcomes with a timeline and clear and ambitious science-based objectives. Unlike green, social and sustainability bonds, the proceeds of SLBs are intended to be used for general corporate purposes. SLBs are therefore based on the issuer’s overall sustainability strategy and ambitions, and finance its transition to a more sustainable model. It is an innovative product that supports the ongoing transition efforts, and we opened LGX for SLBs last year. Going forward, we also expect transition bonds to emerge, but there is not yet a recognised market standard for this type of bond.
What role will a company’s ESG profile play in financial markets in the coming years?
A company’s ESG profile will be unavoidable! At some point, access to capital markets may even be preconditioned by the ESG profile of issuers. Investors are increasingly considering ESG factors and non-financial data when deciding what companies to invest in. This is what led us to add a new section on LGX recently to highlight Climate-Aligned Issuers and broaden the universe of available sustainable investment opportunities beyond labelled bonds.
For Europe to become climate neutral by 2050, all sectors need to accelerate their transition efforts. Those who lag behind are likely to face a backlash from investors and customers. It is a complicated matter in the sense that there are no universal standard by which we can easily define an organisation’s ESG profile and measure its social and environmental impact. That said, sustainability data is constantly improving and a lot of efforts are currently being done to define taxonomies and sustainable accounting standards.