Sustainability standards and labels

The Luxembourg Green Exchange (LGX) is the world’s first and unique platform displaying a variety of sustainable finance instruments. Since its creation in 2016, the platform has expanded from solely green bonds to include social and sustainability bonds, funds, indices, and other instruments. All instruments and/or issuers displayed on LGX must be aligned with a recognised international standard, framework, taxonomy, methodology or label and comply with LGX’s strict eligibility criteria.

Sustainability standards and labels

A number of different standards, frameworks, taxonomies, methodologies and labels are included in the LGX eligibility criteria:
 

• Bond standards: ICMA’s Green Bond Principles (GBP), Social Bond Principles (SBP), Sustainability-Linked Bond Principles (SLBP) and Sustainability Bond Guidelines (SBG), the Climate Bonds Taxonomy, the People’s Bank of China Green Bond Endorsed Projects Catalogue, the ASEAN Green Bond Standards and other frameworks.

 

• Financial products regulation: On 10 March 2021, the Sustainable Finance Disclosure Regulation (SFDR) came into force. SFDR is the capital market’s piece of the EU’s commitment to the UN 2030 Sustainable Agenda.​
  SFDR aims to reduce information asymmetries in principal‐agent relationships with regard to the integration of sustainability risks, the consideration of adverse sustainability impacts, the promotion of environmental or social characteristics, and sustainable investment, by requiring financial market participants and financial advisers to make pre‐contractual and ongoing disclosures to end investors when they act as agents of those end investors (principals). – ​Source: SFDR

 

• Issuer methodologies: Climate Bonds Initiative (CBI)’s Climate-Aligned Data Set.

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 Taxonomy.

Standards

Green bonds

The Green Bond market, as it is structured today, is supported by several internationally recognised standards, which can be used by entities wishing to issue a Green Bond.

The standard applied to each new issuance depends on the market and investors where the security is being issued.

For international securities displayed on LGX, issuers may align with International Capital Markets Association (ICMA)’s Green Bond Principles, the Climate Bonds Initiative (CBI) Climate Bonds Standard, the People’s Bank of China (PBoC) Green Bond Catalogue, the ASEAN Green Bond Standards or another framework aligned with the above mentioned standards.

Below is a list of broad categories that align with both ICMA’s Green Bond Principles and CBI’s Climate Bonds Standard of green projects:
 

• 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 which meet regional, national or internationally recognised standards or certifications

Comparing green bond standards and frameworks

The table¹ below compares various Green Bond standards, including those recognised by LGX and includes the ICMA’s Green Bond Principles, CBI’s Climate Bonds Standard, PBoC's China Green Bond Catalogue and the ASEAN Green Bond Standards. The table also includes a comparison of these standards with the European Commission’s High Level Expert Group (HLEG) and Technical Expert Group (TEG) on Sustainable Finance’s proposed² EU Green Bond Standard³.
 

Specific topic	ICMA Green Bond Principles	CBI Climate Bonds Standard	PBOC Green Catalogue	Proposed EU Green Bond Standard	ASEAN Green Bond Standards
Reference of alignment with standard/framework in legal documentation	Recommended	Required	Not required	Required Alignment with the EU Taxonomy, including four requirements (1) substantial contribution to environmental objectives, (2) do-no-significant harm, (3) minimum social safeguards and (4) technical screening criteria. (For details, see Annex 1 of the TEG June 2019 Report.)	Recommended
Project categories	Guidance on high-level categories	Linked to detailed qualification criteria	Detailed green catalogue	Compliance with the EU Taxonomy. Green Bond Framework required. (For a template, see Annex 2 of the TEG June 2019 Report.)	Guidance on high-level categories. The ASEAN GBS explicitly exclude fossil fuel power generation projects.
Disclosure of proportion of proceeds used for refinancing	Recommended	Required	Recommended	Required (For a reporting template, see Annex 3 of the TEG June 2019 Report.)	Recommended
Impact monitoring and reporting	Recommended	Addressed in Climate Bonds Standard qualification criteria	Recommended	Required (For a reporting template, see Annex 3 of the TEG June 2019 Report.)	Recommended
External review requirements	Recommended External review may be partial, covering only certain aspects of an issuer's  green bond or associated green bond framework, or full assessing alignment with all four core components of the GBP	Required	Recommended	Required Verification of the Green Bond Framework and the Final Allocation Report by an accredited verifier to confirm conformity with the EU GBS.	Recommended The external review may be partial, covering only certain aspects of the Issuer’s ASEAN Green Bonds framework or full, assessing alignment with all four core components as stated in the ASEAN GBS.
Publication of external review	Recommended	Recommended	Recommended	Required	Required
Accreditation of external reviewers	Not addressed in GBP	Have a dedicated “Approved verifier” list	Required	A centralised scheme of accredited verifiers, operated by ESMA. Voluntary interim registration scheme for an estimated transition period of up to 3 years.	The external review provider must have the relevant expertise and experience in the components of the ASEAN Green Bonds which they are reviewing and must also disclose their relevant credentials and expertise, and the scope of the review conducted in the external review report.

¹This table is of a non-exhaustive informative nature, it will be updated on a regular basis
²The European Commission is assessing a possible legislative initiative on the proposed EU Green Bond Standard
³EU Technical Expert Group on Sustainable Finance, Report on EU Green Bond Standard, June 2019, available here
  Usability guide for the green bond standard, available here

Social bonds

When the proceeds from an instrument are used exclusively to finance or refinance social projects, the bond will be displayed on LGX as a social bond. There are several broad categories of eligibility for social projects that align with the ICMA’s Social Bond Principles (SBP):

• Affordable basic infrastructure (e.g. clean drinking water, sewers, sanitation, transport, energy)
• Access to essential services (e.g. health, education and vocational training, healthcare, financing and financial services)
• Affordable housing
• Employment generation including through the potential effect of SME financing and microfinance
• Food security
• Socioeconomic advancement and empowerment

Examples of target populations include, but are not limited to:

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

There are several categories and sets of criteria defining social projects that can be used as complementary guidance.

Sustainability bonds

When the proceeds of a bond are used to finance a blend of green and social projects and are aligned with the GBP and SBP, the bond will be classified as a sustainability bond. It is understood that certain social projects may also have environmental co-benefits and that certain green projects may have social co-benefits. The classification of the use of proceeds of the bond, such as green bond, social bond or sustainability bond, should be determined by the issuer based on its primary objectives for the underlying projects.

 

Sustainability-Linked bonds

Sustainability-Linked Bonds (SLBs) have been gaining momentum since the International Capital Market Association (ICMA) released its Sustainability-Linked Bond Principles (SLBP) in June 2020.

SLBs are performance-based bond instruments where the issuer commits to future improvements in sustainability outcomes within a predefined timeline. The novelty of this instrument is that the financial or structural characteristics of the bond can vary depending on whether the issuer achieves the predefined sustainability objectives. 

Unlike Green, Social and Sustainability Bonds, the proceeds of the SLBs are used to finance general corporate activities and the scrutiny is placed at the level of the issuer itself. As such, SLBs represent a source of financing for companies that set clear and ambitious science-based targets to become more sustainable, without earmarking the proceeds of the bond for a specific, investable project.

The SLBP are voluntary guidelines that cover five core principles:

1. 1. Selection of Key Performance Indicators (KPIs) 
2. 2. Calibration of Sustainability Performance Targets (SPTs) 
3. 3. Bond characteristics 
4. 4. Reporting 
5. 5. Verification

SLB eligibility criteria for display on LGX

The LGX eligibility criteria are built on ICMA’s Sustainability-Linked Bond Principles and can be summarised as follows:

• Pre-issuance Second Party Opinion (SPO) covering the bond’s alignment with the 5 SLBP principles
• Appropriate post-issuance disclosure in case of any material change to the perimeter, KPI methodology and/or the Sustainability Performance Targets (SPT) calibration
• Inclusion of a financial and/or structural impact involving trigger event, depending on whether the selected KPI(s) reach (or not) the predefined SPT(s), in pre-issuance legal documentation
• Commitment to reporting - ideally on a yearly basis or (where the intrinsic nature of the KPI(s)/SPT(s) would not allow for such frequency) at least once prior to the trigger event - containing information in line with the recommendations of the SLBP
• Commitment to verification- ideally on a yearly basis or (where the intrinsic nature of the KPI(s)/SPT(s) would not allow for such frequency) at least once prior to the trigger event -  in line with SLBP recommendations

Chinese domestic green bonds

Chinese domestic issuers are subject to different green bond guidelines which will define what constitutes eligible projects to be financed by a Chinese domestic green security. The following guidelines exist:

• Green bonds issued by financial entities are subject to the People’s Bank of China (PBOC) Green Bond Endorsed Project Catalogue
• Green domestic corporate bonds (and in general non-listed companies) are subject to the National Development and Reform Commission (NDRC) Green Bond Guidelines
• Green bonds issued by listed companies and corporate asset backed securities are subject to the China Securities Regulatory Commission (CSRC) Guidelines for Supporting Green Bond Development

Alignment between China and international standards

Green labelling

	Current level of alignment	Roadmap to achieve harmonisation for Chinese and international green bonds
Management of proceeds	Fully aligned	Continue current approach
Reporting and disclosure	Fully aligned	Continue current approach
External reviews and assurance	Closely aligned	Further encourage third party assurance as standards and criteria are adopted and Chinese verifiers' capabilities improve

Green Definitions

	Current level of alignment	Roadmap to achieve harmonisation for Chinese and international green bonds
Categories	Mostly aligned	Excellent alignment already. A small number of areas to explore further, such as low-carbon equipment supply chains and projects involving fossil fuels
Sector-specific criteria	Some alignment	Further work on investigating overlaps and differences between Chinese definitions and international criteria. Important work needed to align with international efforts as China builds out (or adopts) its library of sector-specific criteria
Basis for criteria	Some alignment	Use a scientific framework to ensure that the project-level criteria for green bonds are in line with China’s national environmental targets, including emission reduction targets

Climate Bond Initiative – Roadmap for China: green bond guidelines for the next stage of market growth – April 2016


An overview of green definitions endorsed by PBOC and NDRC

PBOC: China Green Bond Endorsed Project Catalogue

Categories	Sub-categories
1. Energy saving	Industrial energy-saving Sustainable buildings Energy management centre Urban and rural infrastructure construction with energy-saving efficiency
2. Pollution prevention and control	Pollution prevention and control Environmental restoration project Clean utilisation of coal
3. Resources conservation and recycling	Water saving and unconventional water use Redevelopment and integrated utilisation of tailings and associated mine byproducts Recycling and utilisation of industrial solid waste exhaust gas and effluent Recycling, processing and utilisation of renewable resource Remanufacturing of electromechanical products Recycling and utilisation of biomass resources
4. Clean transportation	Railway transportation Urban rail transit Public urban and rural transportation Waterway transportation Clean fuel new energy automobile Internet application on transportation
5. Clean energy	Wind power generation Solar photovoltaic (PV) power generation Smart grid and energy internet Distributed energy resource Solar thermal application Hydropower generation Other new energy application
6. Ecological protection and climate change adaptation	Natural ecological protection and protective development of tourism resource Ecological agriculture, husbandry and fishery Forestry development Emergency prevention and control of disaster

NDRC green bond guidelines

	Areas
1. Energy saving	Technology improvement for energy saving and emission reduction Green urbanisation – energy Energy saving and environmental protection industry
2. Pollution prevention and control	Pollution prevention and control
3. Resources conservation and recycling	Circular economy Water saving and unconventional water use
4. Clean transportation	Green urbanisation – transport
5. Clean energy	Clean and efficient use of energy New energy – hydropower, wind, nuclear, solar, bioenergy, geothermal, shallow geothermal energy, marine and air energy
6. Ecological protection and climate change adaptation	Ecological agriculture and forestry Ecological civilisation demonstration projects Low-carbon industry projects Low-carbon demonstration projects

Climate Bond Initiative – Roadmap for China: green bond guidelines for the next stage of market growth – April 2016

Labels, for information

While the Sustainable Finance Disclosure Regulation (SFDR) provides transparency and harmonises the sustainability disclosures, labels official mark or quality seal that confirms whether a product or service meets certain criteria. Below is a list of such labels.

The European Commission is developing an EU Ecolabel for Retail Financial Products. More details are available on the EU Commissions’s website.

Methodologies

CBI Climate-Aligned Data Set

Defined and monitored by Climate Bonds and displayed on the dedicated LGX section, Climate-Aligned Issuers are identified based on their sector of activity and the percentage of their revenue streams derived from climate-aligned activities. Climate-Aligned Issuers are public or private companies that have outstanding debts that are not labelled as green, social or sustainability bonds, but which finance climate-aligned activities:

• • Fully-aligned issuers: derive more than 95% of their revenues from climate-aligned activities
  • Strongly-aligned issuers: derive more than 75% of their revenues from climate-aligned activities

​Climate Bonds has identified eight climate-themes for the Climate-Aligned Issuers category: renewable energy, low-carbon transport, low-carbon buildings, water management, waste management, sustainable land use & agriculture, climate adaptation, and information and communications technology (ICT).
 

Disclaimer

Display on the LGX platform should not be considered an assessment of the sustainable nature of a financial instrument. Users of the LGX platform are advised to consult all supporting documentation relating to an instrument available from the issuer, as well as the related reference standard, framework, taxonomy or label referred to by the issuer.