FAQ LGX bonds

LGX is a unique platform entirely dedicated to green, social and sustainable financial instruments launched by the Luxembourg Stock Exchange (LuxSE) in September 2016.

The platform offers an environment where issuers of green, social and sustainable securities can market their instruments and publish information relating to the use of proceeds, both at the start and during the lifetime of a security. At the same time, the platform caters to responsible investors by providing full and unrestricted access to a list of securities that are 100% green, social or sustainable, together with their respective security-specific information.

LGX is the first platform that makes industry best practices for green, social and sustainable securities a mandatory requirement. It is also the only exchange that requires issuers to commit to post-issuance reporting once a security has been registered or listed. Within the industry’s best practices, LGX recognises in particular ICMA’s Green Bond Principles (GBP), the Climate Bonds Initiative’s (CBI) Climate Bonds Standard (for green bonds), the ICMA’s Social Bond Principles (SBP) and the ICMA's Sustainability Bond Guidelines (SBG).

Demand for green investments is growing rapidly. But the risk of greenwashing threatens the integrity of the green market. As the market evolves, there is a growing need for greater transparency. The same applies to social and sustainable instruments.

With the creation of LGX, LuxSE aims to provide green, social and sustainable issuers and investors with a dedicated infrastructure where they can post and access information relating to security use of proceeds and impact in a transparent and efficient way, thus boosting investor trust and integrity in the market.

The opening of the green bond window in September 2016 has been a trailblazer for our platform. As the international framework governing green, social and sustainability bonds is nearly identical (with the obvious exception of the specific taxonomies) it was a natural step for LGX to extend green bonds eligibility criteria to social bonds and to sustainability bonds.

To be eligible, the issuer will have to declare (similarly to green bonds) the social or sustainable nature of the financed project(s) in line with the ICMA’s Social Bond Principles (SBP) and the Sustainability Bond Guidelines (SBG). As with green bonds, there is a need for the issuer to provide an external review and a commitment to conduct post-issuance reporting on the way the proceeds are used. Similarly, issuers are also encouraged to make their KPIs/metrics known and report against these with special attention to anticipating the social/sustainable additionality of the projects behind the financial instrument.

Today, most responsible investors still do not differentiate their sustainable investments. Yet, as the market matures and knowledge improves, investors might want to assess financial instruments more specifically around product features. The opening of our social window and sustainable window is our bet on the future scale and diversification of the sustainable finance market.

Today, many responsible investors still do not differentiate their sustainable investments. Yet, as the market matures and knowledge improves, investors might want to assess financial instruments more specifically around product features. Differentiating between the green, social and sustainability windows is our bet on the future scale and diversification of the sustainable finance market.

Advantages for investors
LGX acts as a unique repository for green, social and sustainability information and thus constitutes an accessible and comprehensive place where trustworthy information can be retrieved easily and for free. Investors will have free and unrestricted access to available information relating to a security displayed on LGX (e.g. frameworks, external review opinions, certifications, rating reports, use of proceeds reports, project information, corporate sustainability reports, etc.). This translates into lower costs of research, analysis and comparison for investors and thus enables granular due diligence of the security.

Advantages for issuers
In addition to being part of the internationally recognised platform for sustainable securities, issuers joining LGX will benefit from a dedicated security card where they can display all relevant supporting documentation, including post issuance reporting information in line with internationally recognised best practices. It also allows issuers to choose from a variety of different disclosure methods.

LGX acts as a curator of green, social and sustainability information. Strict adherence to its rules and widely accepted green and social principles reduces the risk of greenwashing, ensuring that only issuers that commit to entry requirements and provide transparency can be displayed on LGX.

LGX also acts as a platform that brings green, social and sustainability investors and issuers together. Having securities admitted to LGX offers issuers the opportunity to raise awareness about their sustainability performance via enhanced transparency.

Lastly, issuers will get commercial value for their additional disclosure efforts via the free display of their sustainable documentation on the LGX platform.

 

To join LGX, a bond issuer must first list its security on one of LuxSE’s listing venues: the EU-regulated Bourse de Luxembourg (BdL) market, the exchange-regulated Euro MTF or the Securities Official List (SOL).

In addition to listing the bond, an issuer shall confirm that the net proceeds raised via the bond will be dedicated to green, social or sustainability projects in line with ICMA’s Green Bond Principles (GBP), ICMA’s Social Bond Principles (SBP) and the Sustainability Bond Guidelines (SBG), Climate Bonds Initiative’s (CBI) taxonomy, or, in the case of Chinese domestic green bonds, with the PBOC Green Catalogue, or another standard. Issuers shall also provide a third party external review and commit to conduct post-issuance reporting on the way the proceeds are used. Issuers are also encouraged to make their KPIs/metrics known and report against these with special attention to anticipating the green, social or sustainability additionality of the projects behind the financial instrument.
 
For more details about the entry requirements, visit our dedicated page.

LuxSE recognises several broad eligibility categories depending on the nature of the bond. These are defined within the relevant recognised standard that has been applied to the bond. The large majority of  bonds displayed on LGX follow eligible categories as described in ICMA’s guidelines and principles, and are detailed below. The Chinese domestic green bonds follow eligible categories included in the PBOC Green Bond Endorsed Projects Catalogue, as detailed below. 

Note that (as per CBI) the PBOC Green Bond Endorsed Project Catalogue accepts retrofits of fossil fuel power stations, clean coal and coal efficiency improvements, and rail lines that mainly transport fossil fuels, which are not accepted under the Climate Bonds Initiative’s eligibility taxonomy.    

Green bonds
The entirety of the net funds raised via the security will be invested in the financing or refinancing of green projects, as defined by the Green Bond Principles (GBP) and/or the Climate Bonds Initiative’s eligibility taxonomy.
This includes several broad categories of eligibility for green projects defined by the GBP's, including:

• Renewable energy
• Energy efficiency
• Pollution prevention and control
• Environmentally sustainable management of living natural resources and land use
• Terrestrial and aquatic biodiversity conservation
• Clean transportation
• Sustainable water and wastewater management
• Climate change adaptation
• Eco-efficient and/or circular economy adapted products, production technologies and processes
• Green buildings 

Social bonds
The entirety of the net funds raised via the security will be invested in the financing or refinancing of social projects as defined by the ICMA’s Social Bond Principles.
This includes several broad categories of eligibility for social projects:

• Affordable basic infrastructure
• Access to essential services
• Affordable housing
• Employment generation including through the potential effect of SME financing and microfinance
• Food security
• Socioeconomic advancement and empowerment

Additionally the social projects should define the target population,  which may include, for example:

• Living below the poverty line
• Excluded and/or marginalised populations/communities
• Vulnerable groups, including as a result of natural disasters
• People with disabilities
• Migrants and/or displaced persons
• Undereducated persons
• Underserved persons, owing to a lack of quality access to essential goods and services
• Unemployed persons

Sustainability bonds
The entirety of the net funds raised via the security will be invested in the financing or refinancing of a blend of green and social projects, as outlined above under the green and social bonds sections and as defined by ICMA’s Sustainability Bond Guidelines (SBG).

Chinese domestic green bonds
Eligibility categories are defined by the People’s Bank of China (PBOC) Green Bond Endorsed Project Catalogue, the National Development and Reform Commission (NDRC) Guidelines and China Securities Regulatory Commission (CSRC) Guidelines.
This includes several broad categories of eligibility for green projects including:

• Energy saving
• Pollution prevention and control
• Resource conservation and recycling
• Clean transportation
• Clean energy
• Ecological protection and climate change adaptation

We take into consideration the specific use of proceeds of each individual bond, without considering the wider business activities of the issuer. We do not exclude issuers based on their line of business, as any line of business can contribute to the transition to a more sustainable economy. We do, however, check to confirm that the green/social/sustainability instrument to be displayed on LGX will dedicate the proceeds to green/social/sustainability activities, as defined by the relevant recognised standard applied. 

Any type of issuer may apply to join LGX provided the bond issued meets LGX eligibility criteria.

Entry to LGX is at the discretion of LuxSE’s LGX team who will review compliance with the eligibility criteria (i.e. listing requirement, use of proceeds requirements, mandatory external review, commitment to ongoing reporting).

If a bond does not meet the entry requirements for LGX, it can still list on one of LuxSE’s listing venues, without additional display on LGX.

An external review is a mandatory entry requirement to LGX. Different forms of third party external reviews exist, including second party opinions, verification reports, certifications or scoring/ratings. In exceptional circumstances, LGX may conduct internal due diligence in the absence of a third party external review (for example for large issuers whose activities are dedicated to eligible activities as defined in the relevant standard applied).
External reviews generally focus on the following areas:

• Review of the bond’s use of proceeds framework with a conclusion about whether the framework is aligned with acceptable green, social or sustainability taxonomies, generally issued prior to bond issuance
• Review of the actual use of proceeds as compared to the planned use of proceeds, often carried out within the first 12 months after issuance of the bond
• Review of the alignment of the process around project selection and evaluation, allocation and management of proceeds, reporting, with internationally accepted principles such as those issued by ICMA (GBPs, SBPs, SBGs), carried out either pre- or post bond issuance
• Review of the controls in place within the bond management process, as well as review of allocation of proceeds and impact reporting (where provided), carried out over the post-issuance period, often through to the maturity of the bond, or until full allocation of proceeds.

LGX has adopted the Guidelines for External Reviewers issued by the Executive Committee of the Green Bond Principles. The guidelines provide voluntary guidance relating to professional and ethical standards for external reviewers, as well as to the organisation, content and disclosure for their reports. The guidelines promote best practices in the provision of external review services for green, social and sustainability bonds.
 
External reviewers are invited to voluntarily provide information about the different external review services they provide by completing and publishing the “External Review Service Mapping” template. The purpose of this template is to provide market participants with greater clarity on the increasingly complex universe of external reviewers and their services.

LGX encourages external reviewers to voluntarily fill in this template in order to promote transparency and disclosure, and support market efficiency.
 
The guidelines complement the Green and Social Bond Principles, the Sustainability Bond Guidelines and reference other existing relevant guidance such as the Assurance Framework for the Climate Bond Standard, Guidelines for the Conduct Assessment and Certification of Green Bonds (Interim) Jointly Issued by the People's Bank of China and the China Securities Regulatory Commission, the draft EU Green Bond Standards Published by the High-Level Expert Group (HLEG) on Sustainable Finance, and the ASEAN Green Bond Standards.

 

Once a security is displayed on LGX, LuxSE will conduct an annual review to ensure the issuer complies with the commitment to disclosure and transparency. 

To remain on LGX, issuers must provide information about the intended and actual use of proceeds. The aim of the ongoing reporting is to inform investors about how funds are being allocated to projects and, where possible, about the expected environmental, social and sustainability impacts.

The first mandatory reporting should be supplied as from 12 months after the bond was issued or as at another date (as agreed with LuxSE). Issuers can also publish reports more frequently, on a voluntary basis. Issuers are encouraged to report on the use of proceeds and impact throughout the duration of the bond up until maturity; at a minimum, issuers shall report up until full allocation of proceeds.

Accepted formats of ongoing reporting include:

• Dedicated use of proceeds reports
• ESG/Sustainability reports featuring information on the funding behind the bond
• Newsletters (or equivalent) giving appropriate information on the use of proceeds (projects, sectors, geographies and, expected impact)
• Impact reports

It is at the issuer’s discretion to choose its preferred reporting format, KPIs and frequency.
LGX does not impose any standards or rules on documentation for post-issuance reporting, but LuxSE reserves the right to withdraw a security from LGX if it does not sufficiently abide to the above requirements.

No. LGX is not a separate market. It is a dedicated platform for securities that are listed on one of the LuxSE’s markets (Bourse de Luxembourg, EuroMTF) or registered on the Securities Official List (SOL). In other words, LGX complements LuxSE’s existing markets by focusing on ESG, green, social or sustainable securities.

The Chinese domestic Green Bond Channel is a cooperation between the Luxembourg Stock Exchange and the Shanghai Stock Exchange which aims at improving international investors’ access to data about Chinese domestic green bonds listed in Shanghai, by providing relevant information in English. Further information can be found here.