Financing the climate transition: London Stock Exchange extends its Sustainable Bond Market
Group Director of Capital Markets, LSEG
We are proud to announce that London Stock Exchange has expanded its Sustainable Bond Market (SBM) to allow issuers to display transition bonds on the platform. This initiative is part of a coordinated effort across LSEG (London Stock Exchange Group) to support our clients in raising the finance required to move to a low-carbon economy, with access to sustainable finance products across a range of asset classes.
This latest development opens SBM to an emerging and potentially transformative part of the sustainable debt market, which is intended to help more carbon-intensive industry sectors transition to lower-carbon operating models. It promises to broaden the sustainable finance marketplace, which has until recently been focused on the fast-growing but narrower range of economic activities that are already climate friendly.
It is also important that the Group takes action itself on climate change. For that reason, we have committed to reach net-zero emissions by 2050, becoming the first exchange to join the UN-backed ‘Race to Zero’ initiative.
Playing a leading role
The effort to decarbonise the global economy is well underway. Countries accounting for around 70% of global GDP have committed to reach net-zero carbon emissions by mid-century, in line with the goals of the Paris Agreement. Investment is pouring into companies contributing to the green economy. Green equity indices are outperforming their mainstream peers and sustainable bond issuance doubled last year.
LSEG has played a leading role in enabling sustainable finance. Our pioneering work offering thematic environmental indices, notably FTSE’s Environmental Markets Index Series, dates back to 2008. Similarly, FTSE’s Green Revenues classification system helps investors identify those companies with exposure to the green economy. We are also partnering with the Transition Pathway Initiative (TPI) as a data provider and launched the landmark FTSE TPI Climate Transition Index.
London Stock Exchange is helping its issuers communicate their environmental, social and governance (ESG) disclosures to investors. Its ESG Disclosure Score and tool allows companies to understand their levels of ESG disclosure relative to their industry peers. In addition, the capabilities offered through the Issuer Services platform, including the ability to display green and sustainability documents and the use of Spark Live to boost engagement with investors, helps enhance disclosure and transparency. These services equip issuers with a full suite of capabilities to amplify their sustainability message.
Our innovative Sustainable Bond Market plays an important role in connecting sustainable bond issuers with liquidity. Launched in 2019, SBM allows issuers of qualifying green, social and sustainability bonds to display bonds on the platform, providing enhanced visibility and access to investors. SBM also incorporates eligibility criteria for issuer-level classified bonds, from issuers with green revenue scores greater than or equal to 90%, based on FTSE Green Revenue methodologies, or from issuers issuing sustainability-linked bonds in alignment with the International Capital Markets Association (ICMA) Sustainability-Linked Bond Principles.
Expanding the reach of sustainable finance
Capital available for transition projects is crucial if the ambitious global carbon emission reduction targets are to be realised, as activities in higher-emitting sectors require significant financing to move towards less carbon-intensive operating models. For this group, that are beginning to align their business models with a low-carbon future, access to sustainable finance has historically been limited.
For example, oil and gas companies seeking to rebalance their portfolios and become less reliant on fossil fuels, heavy industries investing in carbon capture and fuel efficient technologies, transport investing in electrical or hybrid fleets and heating and cooling companies investing in upgrading to modern infrastructure – have not had access to sustainable finance yet. Neither have they had the incentive to communicate their strategies to the market – despite the significant impact their participation would have on reducing global carbon emissions.
In response to this gap, the sustainable investment community began exploring the concept of ‘transition finance’. This allows companies that have clearly set out a carbon emission reduction trajectory aligned with Paris Agreement goals to tap the sustainable finance market. They would be able to fund capital and research related operational expenditures which advance the organisation’s climate transition strategy.
The concept of climate transition focuses principally on the credibility of an issuer’s climate change-related commitments and practices – therefore it is key that companies establish best practices on setting science-based, achievable targets and providing information to investors. To support the growth of this part of the market, ICMA – which has been the steward for the principles governing sustainable bond issuance – recently published its Climate Transition Finance Handbook. It sets out guidance and expectations relating to practice, actions and disclosure for transition debt financing – and market participants are confident that it will help expand the sustainable finance issuer base.
London Stock Exchange’s Transition Bond Segment
London Stock Exchange has been a driving force in the discussions around advancing transition financing. In August 2019, we issued a consultation about the potential role the exchange could play, and how we might develop our SBM to that end, setting up a specific workstream within the SBM Advisory Group. We also worked as an active contributor to the ICMA Climate Transition Finance Working Group.
Specifically, the consultation sought guidance on whether transition bonds should be treated as a separate asset class to other types of sustainable bonds, and what disclosure should be required to facilitate their inclusion on SBM.
As a result of this collaborative approach we devised SBM’s new Transition Bond Segment. Launched on 19 February, the new segment is open to either use-of-proceeds bonds (where the issuer is raising debt for identified climate transition-related purposes) or general-purpose sustainability-linked bonds (where cashflows are linked to predefined sustainability objectives).
However, for bonds to qualify for the Transition Bond Segment, the issuer is required to meet additional criteria. By disclosing this information, companies can demonstrate to investors that its transition bond sits within a credible framework. It must:
- Publish a transition framework prepared, with the guidance of the ICMA Climate Transition Finance Handbook, or in line with other global market frameworks;
- Disclose in line with the principles outlined by the Task Force on Climate-related Financial Disclosures or another global recognised standard, or commit to do so within a reasonable timeframe;
- Confirm its commitment to the goals of the Paris Agreement, including approved targets to achieve net-zero emissions by 2050; and
- Commit to report annually on its transition performance.
To establish the segment, we have also worked closely with investors. One such partnership is with the TPI, an asset owner backed initiative which counts support from over 90 investors with $23 trillion of assets under management or advice, and is underpinned by academic analysis from the Grantham Research Institute, London School of Economics Grantham Institute as well as data from FTSE Russell. By including TPI’s innovative methodology in the eligibility criteria, we provide issuers with a pathway to high-quality disclosure, setting ambitious climate targets and accessing financing through transition bonds.
The segment provides a unique solution for a section of the market that is integral to mobilise for the low-carbon transition to be a success. For these issuers, it provides broader exposure to an untapped group of sustainability-led investors.
The new Transition Bond Segment is the latest example of how LSEG has moved quickly in response to issuers’ needs and the evolution of the market. It shows our commitment to provide our clients with a full suite of products and services to address an emerging and potentially large part of the sustainable finance market, in service of the global effort to address the climate emergency.