Dechert's International Capital Markets Team In Conversation With...

February 06, 2023

Luxembourg Stock Exchange

In the latest issue of Dechert’s international capital markets team’s “In Conversation With…” series, partner Jennifer Rees and associate Nick Quarrie sit down with Arnaud Delestienne and Chiara Caprioli, director of international capital markets and member of the executive committee, and senior business development manager and sustainable finance expert, respectively, at the Luxembourg Stock Exchange (“LuxSE”), to discuss their take on developments and expectations in the capital markets. In this issue, we discuss:

The macroeconomic climate.
Sustainable finance.
Market technology.
Looking to the future.

The Macroeconomic Climate: Marketplace Context and Trends

Dechert: The LuxSE Group experienced an 8.1 percent growth in revenue in 2021 as compared to 2020, principally due to the global increase in issuances and financing activities in the wake of the COVID-19 pandemic, as well as 2021 being a record year for sustainable finance, both internationally and on the LuxSE. In 2022, we have seen disruptive international events and volatile market conditions, and the short-term outlook is for continued unpredictability, with increasing commodity prices, interrupted supply-chains and rising inflation levels. What trends have you seen and do you see developing in the near and medium term?

LuxSE: Like any other global market operator, we have observed a significant deterioration in market conditions following the start of the conflict in Ukraine. This exacerbated several macro-economic trends and challenges that were already there, such as inflation, supply-chain problems or geopolitical tensions, and this has heavily impacted the way in which the equity and debt markets function.

The impact was felt in two broad ways: decreased asset valuation and a severely limited access to capital markets investment. If you look more closely at bond markets, this combination translated into rising yields, reduced bond issuance volumes and individual transaction sizes, demand for shorter maturities and a flight to quality assets, which benefited the Sovereign, Supranational and Agency (“SSA”) sector, and financial institutions.

Perhaps one of the very few segments that has seen a good 2022 has been the covered bonds segment, which has seen a spectacular increase in issuance volumes. On the opposite side of the spectrum, corporate debt issuance volumes have suffered significantly. Based on figures from Dealogic, in October 2022, global issuance volumes in this segment were down by around 40 percent compared to the year before, which is quite dramatic.

The high yield bond sector has suffered even further, making it virtually non-existent when compared to previous years. Likewise, emerging markets issuers have been considerably affected by this adverse environment, due to their dependency on the U.S. Dollar for their foreign financing activities. Equally, the appetite for local currency issuances, both from emerging markets issuers and from mainstream names, has decreased in this environment of rising rates.

Overall, what we have seen from public statistics is that public debt markets were down by roughly 30 percent in 2022. If we look at that from a LuxSE standpoint, we can be satisfied with the way we have navigated through these rather rough waters. We have kept our position as global market leader in terms of the volume of international bond listings, a position that we have held for several years now. We are also proud to see that this sustained activity resulted in an increase of our market share to around 30 percent of new listings year-to-date in October 2022.

This market share is even higher, beyond 40 percent, if we look at specific segments, such as the SSA sector and environmental, social, and governance (“ESG”) bonds, meaning green, social, sustainability and sustainability-linked (“GSSS”) bonds. We see this as a huge vote of confidence from our clients. This is also a signal that, when things go the wrong way, markets find more comfort and value in dealing with established, solid and trusted market infrastructures.

Dechert: What actions did the LuxSE have to take (or believe may become necessary) to (i) mitigate any negative impact felt by issuers and investors as a result of the Russian invasion of Ukraine, and (ii) keep pace with financial sanctions imposed on Russian banks, persons and entities in Europe, the United States and worldwide?

LuxSE: As the national stock exchange in Luxembourg, we have a constant dialogue with our regulator, the Commission de Surveillance du Secteur Financier (CSSF), and we have had frequent interactions with the regulators since Russia’s invasion of Ukraine in February 2022. The way in which we managed the waves of sanctions that followed the invasion is what you would expect from a regulated entity like ours. Being part of the market infrastructure, we took a full-compliance approach. At times it was a struggle to understand what the real implications of the sanctions were, but that is where we had the opportunity of having this dialogue. When we applied the sanctions, which meant having to suspend or even delist securities, this was always done in coordination with the regulators. We also engaged with the relevant authorities, such as the Luxembourg Ministry of Finance, to make sure that we were acting in line with both the text and the spirit of the decisions. It was essential to keep that channel of communication open.

In addition to engaging with the authorities, we also maintained a positive dialogue with our clients when we requested more information from them, for example where there was some uncertainty around underlying assets. In these situations, we had to proactively approach our clients and we can only praise the level of support and dialogue we managed to have with them. We are confident about the way in which we have managed the crisis and the set of measures put in place.

Dechert: In light of these recent and ongoing disruptive macroeconomic events, what safeguards does the LuxSE believe will be necessary in order to insulate investors and issuers from further market volatility?

LuxSE: We do not think that we can shield clients from all the impacts of such a crisis. But we can always do what we do best, which is to operate a transparent and orderly market. That is what we are trying to stick to when it comes to these times of crisis. That means we are making sure that we are close to our clients, that we are providing the type of first-level support that they expect, that we are doing a close follow-up on the issuance process and that we are constantly innovating in terms of new solutions. To that effect, we launched a new service in October 2022 called “FastLane” designed to make our clients’ lives easier, particularly for those that are seeking a listing on our Euro multi-lateral trading facility (“Euro MTF”). Regulated by the LuxSE itself, the Euro MTF is a full-listing market and the largest exchange-regulated multi-lateral trading facility (“MTF”) for the listing of debt securities in Europe. The recently introduced “FastLane” regime permits sovereign issuers and issuers that are listed on an EU-regulated market (or equivalent) to benefit from lighter requirements when listing on the Euro MTF, providing a faster admission process.

The forms of innovation that we bring to the market are also about making our operating platform more robust and resilient. We are currently investing significantly into cyber security protocols, given that this threat has taken on another dimension in the current context. Similarly, we recently completed our transition to the cloud architecture. All of these things make the LuxSE platform more reliable. This is one of the things we can do in terms of infrastructure in these turbulent times to help our clients be confident that they can rely on our systems and services.

Dechert: What are the Unique Selling Points (“USPs”) of the LuxSE?

LuxSE: We believe that at LuxSE we have many USPs to put forward. In terms of service levels, with the range of listing options that we offer to our clients, we are able to address the needs of different issuance segments:

We position our EU regulated market, the Bourse de Luxembourg, as a gateway to European investors. This has been leveraged by sovereigns, supranational issuers, listed corporates and others who want to benefit from our positioning at the center of Europe.

We also have an attractive alternative, the Euro MTF, which is the first, and remains the leading, MTF in Europe in terms of listing debt instruments, with a very strong reputation gained over the years. For example, it benefits from the recognition of the European Central Bank for bonds that are listed there to qualify as collateral.

We also offer a third listing solution, the Securities Official List (“LuxSE SOL”). This allows issuers to register their securities on the official list without having them admitted to trading, which addresses the specific needs of certain types of issuers.

We are therefore confident that we have been able to demonstrate our agility and ability to adapt and meet the needs of the market.

We also offer flexibility through the services we provide. We operate in multiple languages and offer a platform that supports multi-currency listing and trading, as well as several post-trade models. Moreover, we have a very stable operational and commercial team with strong expertise, which we can leverage when exploring new structures. We are able to assist issuers and advisors seeking to clarify or test certain concepts early in the issuance process.

Finally, we would highlight the evolution we have gone through in terms of driving the sustainable finance agenda. We launched the first platform dedicated to sustainable finance, the Luxembourg Green Exchange (“LGX”) in 2016, which has since become a global leader in its field. This platform also benefits from value-added services launched in response to newly evolving market needs and ranging from educational services, such as the LGX Academy, to data services, such as the LGX DataHub. These contribute to creating much more than a leading platform for sustainable securities. LGX is a place where we are able to raise the visibility and profile of issuers while, at the same time, addressing the evolving needs of investors, who, at the moment, have to meet onerous regulatory requirements and have difficulty accessing and analyzing unstructured and often incomparable data.

Sustainable Finance

Dechert: That brings us neatly to our next topic for discussion, namely sustainable finance. Can you tell us more about the sustainable finance services offering of the LuxSE?

LuxSE: We have launched two products in response to market demand:

The first, the LGX DataHub, focuses on data. The LGX DataHub combines normalized ESG data for the full spectrum of GSSS-labelled bonds, listed both in Luxembourg and elsewhere. The LGX DataHub currently provides a centralized data source of approximately 150 data points for more than 9,000 outstanding bonds (10,000 bonds when matured bonds are included). This product is primarily aimed at investors and asset managers, assisting portfolio management when deciding which securities to buy, sell and hold, as well as with compliance with reporting requirements for compliance and risk teams. Research centers and issuers have also used the LGX DataHub, including, recently, the Organization for Economic Co-operation and Development (OECD), which used data from the LGX DataHub to inform a report on the state of the GSSS universe in emerging markets, which was published in the run up to the 2022 United Nations Climate Change Conference (COP27). We are also in discussions with a number of central banks who are interested in analyzing data from a systemic risk perspective.

The second product is the LGX Academy, which we launched in May 2020. The LGX Academy was originally conceived to offer in-person courses on sustainable finance matters, but the pandemic forced us to reconsider the format. This was a blessing in disguise because we have been able to reach a much wider audience than we would have done with a traditional format – especially participants from emerging markets that wish to accelerate the sustainability journey of their organizations. We provide both standard online courses on products, labels, regulations, taxonomies and principles and also fully customized courses, accommodating course participants from around the world and from a wide range of sectors.

Dechert: The LuxSE has a reputation for developing and pioneering ESG-linked securities on its marketplaces and we have seen the green, social and sustainable bond market grow significantly in recent years. Can you tell us more about LuxSE’s approach to sustainable finance?

LuxSE: The LGX platform is the world’s biggest platform for sustainable debt securities. In order for a security to be eligible for display on the LGX platform, the security must be structured in one of four formats, based on the International Capital Market Association’s (“ICMA”) green, social, sustainability or sustainability-linked bond principles and guidelines.

We have also pioneered the practice of admitting to the LGX platform general corporate purpose bonds of issuers that we consider to be climate-aligned or “pure-players”, based on the climate-aligned issuer methodology published by the Climate Bonds Initiative (“CBI”). The CBI reviews the list of eligible climate-aligned issuers on a yearly basis by analyzing their revenue streams. The issuers can be private or public companies and the minimum threshold to be considered climate-aligned is to have at least 75 percent of revenues derived from unambiguously green activities. Solar panel producers or railway companies, as the classic examples, meet these criteria.

The reason for admitting these types of bonds to LGX, in a separate section from the labelled (GSSS) products, is that we want to offer the market an opportunity for investment that might otherwise be invisible. Bonds issued by climate-aligned issuers might not be tagged as green or sustainability-linked but still contribute to positive environmental objectives and may fit with certain investors’ ESG mandates.

Overall, we have more than 1,500 bonds on the LGX platform, worth more than €830 billion in total. We have also expanded the platform to funds. We want to give visibility to funds that, similarly to bonds, are being transparent about their ESG investments. Eligible funds will be funds that self-classify as falling under the scope of either article 8 or 9 of the Sustainable Finance Disclosure Regulation, or “SFDR”, the European regulation for sustainability risk disclosures. One qualification is that, whether it is a bond or a fund, it will have to be listed on one of our markets before it can be displayed on the LGX platform.

Dechert: One of the more recent, innovative ESG products introduced to the global capital markets is gender bonds, as Dechert discussed in an OnPoint published in July 2022. What is the LuxSE’s experience with gender bonds and how does the LuxSE differentiate between different types of bonds?

LuxSE: Focusing on bonds that allocate 100 percent of the proceeds to projects promoting gender equality can be restrictive. We are taking a slightly more nuanced approach in helping the market identify bonds with an intentional gender component by flagging those bonds that are issued under social, sustainability or sustainability-linked frameworks and that have a strong gender component, be it at the level of the use of proceeds or the sustainability-linked performance targets and relevant key performance indicators (“KPIs”). For use-of-proceeds bonds, given frameworks are often targeting broad investment categories and knowing issuers will not necessarily be able to allocate the proceeds to all of the categories, we have decided to tag bonds only after the first allocations are made public on the condition proceeds have partially or completely been invested in gender-related projects.

In other words, we consider gender-focused bonds to be a subset of social, sustainability or even sustainability-linked bonds which contribute to the United Nations' Sustainable Development Goal no.5 ("SDG 5"), “gender equality”. Generally speaking, we mostly see projects within three broad categories: promoting female entrepreneurship, improving education and training opportunities, and, finally, opening up financial inclusion. We then tag the bonds with our gender-focused bond flag, which helps investors identify investment opportunities that contribute to the empowerment of women and girls across the world. Use-of-proceeds bonds can dedicate part or all of their proceeds to projects advancing gender equality objectives. For sustainability-linked bonds, the difference is that we do tag the bond when it is launched if one of the KPIs is unambiguously gender-focused. This often includes board-level representation or training targets, but it can also be something more innovative, for instance at the level of procurement targets. So far, we have 38 gender-focused bonds displayed on the LGX, from a diverse but concentrated pool of issuers.

This initiative is framed by a memorandum of understanding (“MoU”) the LuxSE signed with UN Women in May 2022 to advance gender finance. The overarching goal of the partnership is to mobilize capital flows to contribute to SDG 5, “achieve gender equality and empower all women and girls”, by helping the market identify products whose proceeds and/or targets are unambiguously directed to such goals. One of our commitments, on top of helping the market identify relevant investment projects, is to highlight best practices in structuring and disclosures for debt products that aim to reduce the gender gap.

Dechert: Are there other similar innovative products in this sector that investors should be aware of/you have seen grow in popularity?

LuxSE: There are also blue bonds. While we still consider them as a subset of green bonds, there are separate taxonomies that are being developed by multilateral development banks and in some island countries. For instance, we have been working with the Cabo Verde Stock Exchange to support the launch, in the middle of COP27, of their “Blu-X” platform, a platform similar to the LGX but mostly devoted to blue economy investments. The objective of Cabo Verde in this field is to leverage their own blue taxonomy to develop awareness and strengthen capital flows into such areas. While these are still green specific themes, they are getting their own standard legitimization in terms of product and marketing.

Market Technology

Dechert: Regulators and financial exchanges are increasingly preparing for an uptick in demand to digitalize trading and general market processes, including using blockchain technology. For example, in 2022, the UK government publicly consulted on extending the scope of certain UK regulations to include direct transactions in crypto assets (an area Dechert recently published commentary on). Through legislative updates, the EU has signaled its intention to enable the use of innovative technologies, including Distributed Ledger Technology (“DLT”), a system which allows the ledgers of securities (accounts of transactions in the securities’ trading history) to be recorded in multiple places by multiple participants simultaneously, removing the requirement for a central data store or administrative function to keep a traditional ledger of transactions.

In January 2022, the LuxSE admitted onto its Securities Official List the first financial instruments registered via a public DLT, being security tokens (digital assets issued in “tokenized” form) issued by the digital assets arm of Société Générale. What steps is LuxSE taking to keep pace with technological advances?

LuxSE: In order to flourish in this very competitive environment, it is essential that we maintain our agility and ability to innovate. This is even more relevant given that we compete with much bigger exchange groups. Hence, we need to choose our battles wisely. That is why we focus on certain niches, where we know we have the expertise, the know-how and the recognition. However, we also need to keep innovating. We have discussed sustainable finance, which is one such area, but digital assets and digitalization is another important area.

We took steps in that direction a few years back when we invested in the Origin Markets issuance platform. This platform is designed to digitalize the entire flow between issuers, dealers and infrastructures to facilitate the issuance process and shorten the time to market for issuers. We connected to the platform to offer what we call “Listing in a Click”. This means that when you are issuing and dealing in this marketplace, you can obtain all the documents you need and request your listing through a digital, fully automated workflow.

We also took the first steps into DLT in 2022 when we admitted the first three bonds and structured products that are natively issued using DLT. These native tokens were admitted on LuxSE SOL, meaning that the securities are registered on our Official List but are not admitted to trading because the current regulatory framework does not allow it. This registration comes with some benefits for investors, in terms of transparency, access to documents and possible indicative prices that are available via the LuxSE.

These are our first steps and we will not stop here, because we are convinced that there is potential for DLT with certain issuers, investors and intermediaries in the value chain.

However, we do not believe that DLT will simply eliminate intermediaries and reduce the value chain in the capital markets to mere issuer-investor relations. The reality of our business is much more complex and the adoption of this technology should be leveraged by the different players to enhance their processes and could be a game-changer if it makes the entire bond issuance journey seamless and efficient for all.

Dechert: What plans does LuxSE have in order to further its digital transformation?

LuxSE: We see the push to digitalization as an industry collective effort. We believe that it can only succeed if we all collectively move in the same direction. That is why we are also contributing significantly to the work being done at the level of different associations, such as ICMA. At the national level, we are also involved with the local banking association and the local capital markets association in order to help resolve some of the challenges that this new technology brings.

Looking to the Future

Dechert: In June 2022, the LuxSE and the India International Exchange (IFSC) Limited (India INX) signed a co-operation agreement, following an MoU in November 2020, which works towards two aims: (a) to increase the visibility of Indian-listed securities in the international capital markets by admitting Indian securities on the LuxSE; and (b) to strengthen cross-border co-operation in sustainable finance, by especially focusing on advancing green finance in India. The LuxSE also entered into several MoUs and cooperation agreements with exchanges based in Africa in 2022. Why is this important and does the LuxSE have any plans to pursue similar relationships with other exchanges?

LuxSE: We have been collaborating with several exchanges across emerging markets, to help raise the understanding, knowledge and level of sustainable finance in their domestic markets. We are working with them on common industry criteria that might potentially pave the way for the development of similar infrastructures within their own models. This also leads the way to potential dual listings, meaning an emerging market issuer could in the future access the domestic investor space by way of being listed domestically but also, if criteria turn out to be streamlined and fairly compatible, benefit from a fast-track listing on our exchange. This would allow them to access a much broader pool of international capital.

That is the way in which we are starting to work with eight exchanges, five of which are in Africa, one in Latin America and two in Asia. We have signed MoUs and we are now moving to cooperation agreements, analyzing differences and similarities in listing criteria and seeing what we can work out in terms of a smoother, more integrated process.

We also have other stock exchanges that are part of LGX Academy projects as they might want to bring their infrastructure up to speed and have appropriate disclosure-related criteria for ESG products.

Dechert: Do you see many dual listings on the debt side, and do you see those currently within Europe, or are you seeing them, for instance, having a Singapore- and a Luxembourg-listed security?

LuxSE: Firstly, we have seen many dual listings because of LGX. We have seen issuers with GSSS securities listed on either their domestic market or another international market having these dual-listed in Luxembourg because of the additional visibility brought by LGX and the opportunity to use the platform as a central depository for their GSSS disclosures, such as frameworks, external reviews, investor presentations, allocation reports and impact reports. Another typical dual-listing case entails bonds issued by Chinese companies seeking exposure to European investors. Typically, domestic bonds issued by companies from mainland China are not authorized to have their securities traded outside of the domestic market. That’s where our listing without trading venue (through LuxSE SOL) comes in, allowing the bonds to be registered on the Official List, and potentially access LGX, while leaving trading for other channels. For bonds displayed on LGX, ESG disclosures need to be made publicly available in English, helping to bridge the gap between international investors and the Chinese domestic market. China has one of the world’s largest bond markets, however, the market may appear off-limits to the international investor community due to the difficulties in accessing information on traded bonds.

This is why we established the Chinese Domestic Green Bond Channel in 2018. By providing information in English about Chinese domestic green bonds traded either on Chinese exchanges or on the Chinese Interbank Bond Market (CIBM), the LGX is bridging the information gap between Chinese issuers and international investors. The LuxSE has also established cooperation agreements in terms of dual listings with exchanges in Macao and India.

Dechert’s International Capital Markets Team would like to thank Arnauld Delestienne and Chiara Caprioli, as well as the team at the Luxembourg Stock Exchange, for their contributions to this piece.

Previous Issues

In this issue of Dechert’s International Capital Markets Team’s “In Conversation With...” series, associate Amy Rees and partner Patrick Lyons sit down with Maurizio Pastore, Head of Debt and Funds Listing at Euronext Dublin, to discuss:

Trends seen in the debt capital markets to date in 2022;
The growing importance of environmental social and governance (“ESG”) considerations for both investors and issuers; and
Euronext’s Federal Model.

Recent General Market Developments and Trends

Dechert: What are the main trends Euronext Dublin has seen on issuance volumes and types of issuances as a result of the COVID-19 pandemic? Do you expect these trends to continue?

Maurizio Pastore: The pandemic has demonstrated the resilience of the ESG asset class with an increasing demand from investors during the COVID-19 crisis period. Euronext experienced a great listing flow of ESG products in 2020 and we expect this to grow in the future. In particular, many ESG products were issued to remedy the social impact of the COVID-19 pandemic, to provide funding for public entities and corporates in the public sector, social welfare plans, hospitals and municipalities.

2021 was also a great year for collateralised loan obligation (“CLO”) listings, with almost 6,000 CLOs listed in Dublin. We also saw public entities and blue-chip issuers from several jurisdictions, including Latin America and the Middle East tap the market. While we recognise that the majority of CLO deals were issued as resets and refinancings, we do believe that CLOs, and asset backed securities (“ABS”) products in general, will continue to be popular. This was indicated by the deal pipeline for the first quarter of 2022, which unfortunately did not materialise due to instability in the market following the outbreak of war in Ukraine. However, in May we saw a few CLOs and High Yields going public as issuers become comfortable with the new market conditions and pricing, and we consider that the pipeline is potentially strong in 2022, although in a very different context compared to 2021. We have many years of experience with ABS products and we are trusted by issuers to provide an informed and efficient process.

Dechert: The Russian invasion of Ukraine in February this year, the ongoing conflict and the subsequent financial sanctions placed on Russia by the international community have led to volatility in the debt capital markets. What impact has this had on Euronext Dublin to date in 2022?

Maurizio Pastore: Naturally, the conflict in Ukraine added further instability to an already challenging macroeconomic environment, which did not help the issuance pipeline both on the equity side and on the debt side. Investors were nervous of the high volatility and issuers were hesitant to tap the market with growing yields. There has, however, recently been a “normalisation” of conditions and the market is beginning to pick up again.

Euronext has contingency plans in place and is monitoring the current situation closely. As a Pan-European exchange we have taken actions to delist, suspend or mark as non-negotiable securities domiciled in Russia or Belarus, where deemed necessary, to comply with applicable sanctions.

Dechert: In 2021, 78 percent of new listings were on the Global Exchange Market (“GEM”), as compared to the Main Market. What is the reason for the increase in issuer appetite to list on GEM?

Maurizio Pastore: Excluding 2021, which was an exceptional year, our exchange regulated market, GEM, has grown by approximately 60 percent year on year, as compared to the 40 percent growth seen by the Main Market. This is because investors are becoming more and more confident in “solid” multilateral trading facilities (“MTF”) (i.e., MTFs, which provide transparency and security for institutional investors).

We have worked very hard to ensure that GEM strikes the right balance of delivering efficiency of review and competitive pricing without sacrificing transparency and reputation. Euronext prides itself that a listing on GEM is widely recognised by investors as having been subject to sufficient scrutiny but at the same time our clients can take advantage of our flexible industry-focused approach. In addition, GEM provides certainty of timeframe, which is valued by all parties and their advisors. It is these traits that have appealed to issuers and investors alike and have contributed to the success of GEM. Our review team also has many years of experience and specialist expertise in listing certain products such as CLOs and therefore can offer expedited reviews. For these reasons, a large number of such issuers chose to list with us last year, which contributed to the exceptional growth numbers mentioned.

We know that the Main Market plays a crucial role in housing investments for investors such as pension funds, insurance companies and banks, which may have wider asset allocation if listed on a regulated market. We therefore consider GEM’s growth to be healthy but also recognise the importance of a functioning EU regulated market for debt issuers.

ESG Matters

Dechert: Last year, there was an 86 percent increase in ESG bond listings on Euronext, with 436 ESG bonds listed in 2021, as compared to just 235 in 2020. This seems to demonstrate the growing importance of ESG considerations to investors; how does Euronext Dublin think this will affect the markets in the longer term?

Maurizio Pastore: As regulatory powers, investors (and society in general) push companies to implement ambitious sustainability targets, we expect that ESG bonds will continue to multiply in order to support these commitments. We have noticed that small and medium corporates are particularly keen to increase the use of sustainability-linked bonds or green bonds and, as a result, in the coming years we expect that almost all debt issuances will have an ESG angle.

We are invested in supporting this positive trend with the aim of becoming a world leading ESG bond listing venue by the end of 2022. We are also tracking the 1.5-degree commitment of our issuers.

Companies are incorporating sustainability risks and factors into their overall strategy, which appeals to an ever-growing investor appetite for ESG opportunities. There is no doubt that COVID-19 has helped accelerate this growth and the diversification of this sector in 2021. The highly volatile market conditions in the first quarter of 2022 have also impacted ESG growth. Sustainable bond issuances reached US$232 billion in the first quarter of 2022, which represents a decline of 19 percent from the first quarter of 2021 (US$287 billion). During the period, we have seen ESG bond issuances slow down from public agencies and sovereigns, while European corporates showed resilience and experienced a slight increase compared to the first quarter of 2021. Euronext is capturing this business and our ESG business grew during the first quarter of 2022 despite declining ESG markets.

Dechert: Do you see any potential obstacles to this growth continuing, for example, the increased concerns of “greenwashing”?

Maurizio Pastore: We consider the risk of greenwashing for the issuers listed with us to be limited at present as no market participant wants to be associated with such practice due to the public focus on the issue and the consequential reputational damage. Investors are becoming increasingly demanding in relation to ESG reporting requirements and key performance indicators and it is likely that a reduction in the risk of greenwashing will be a target of incoming reforms to the Prospectus Regulation.

We believe that more stringent regulations will be implemented in the near future and understand that the EU Commission is preparing a green bond standard.

One issue is that small and medium-sized enterprises that could benefit from ESG bond issuances may suffer from the disproportionately large cost of reporting. At the moment, issuers of ESG bonds are not sufficiently compensated by pricing premiums, as compared to normal bonds, despite the enthusiasm for ESG bonds. In our view, regulators and legislators need to somehow offset the burdensome and costly reporting requirements to make such issuances more attractive.

Dechert: The majority of the ESG listings on Euronext last year were “green bonds” and only a few were “social bonds” and “sustainability-linked bonds”. Does Euronext Dublin see this as likely to change in 2022 and the coming years? Does Euronext Dublin expect significant uptake of other “new bonds”, such as “gender bonds”?

Maurizio Pastore: At Euronext, green bonds continue to lead the way in terms of listed ESG asset classes. But since 2020 we have also experienced a significant increase in the listing of social bonds, which were issued to mitigate the negative impact of the COVID-19 pandemic. Since ICMA issued its sustainability-linked bonds criteria and the ECB accepted this paper as collateral, this product has grown exponentially, from three sustainability-linked bonds listed with us in the first quarter of 2021 to 13 in the first quarter of 2022.

We actively support any product that helps companies to transition to a more sustainable form of financing. We believe Euronext is well positioned to support the uptake of any new ESG product (blue bonds, gender bonds, etc.) since these types of instruments are reviewed under the same stringent EU regulatory framework but require an efficient and agile listing process.

Dechert: In 2021, Euronext helped issuers raise €703,040 million in ESG bonds, a larger amount than that seen on the Luxembourg and London Stock Exchanges. What do you think differentiates Euronext’s ESG Bonds Platform from the other listing venues?

Maurizio Pastore: Euronext Dublin is catching up to the Luxembourg Stock Exchange in terms of green bond issuances and it was the first exchange to list sustainability-linked bonds (even before the ICMA guidance was published in 2019). Euronext Paris also has a strong leading focus on ESG investments.

A listing of existing ESG bonds is displayed on our Euronext ESG Bonds Platform free of charge, providing issuers with greater visibility at no extra cost. Documents and information about the ESG nature of the bond, including second party opinions, credentials reports and ESG frameworks, are provided by the issuers and are uploaded in a repository on the platform for public access. We now have a dedicated “ESG Champion” who is an expert on all things ESG and focuses on development and supports issuers in their journey to list their ESG bonds with Euronext. We hope that this resource will help international issuers access the debt capital markets with confidence and an ESG purpose. We also plan on including a dedicated section within our website to promote ESG bond issuers who have committed to the Paris Agreement objective and the 1.5-degree target.

Recently Euronext produced one of the first ESG Bonds Barometer publications, which reports on public trends, regulatory changes and interviews with relevant entities every quarter. The report aims to increase visibility of the considerations and issues surrounding ESG bond issuances.

Dechert: In February this year, as part of its “Growth for Impact 2024” strategy, Euronext became a founding member of Sustainable Trading, a non-profit membership network aiming to transform ESG practices within the financial markets. Please could you describe the aims behind this strategy and the impact Euronext Dublin expects this to have on brokers and trading members in the future?

Maurizio Pastore: Getting involved with the Sustainable Trading initiative from the start has been a strategic decision for Euronext. As a board member of this initiative, Euronext will be working in collaboration with the entire industry to drive positive ESG change by developing best practices, benchmarking and transparency, with a focus on how the financial trading industry builds, maintains, and operates trading infrastructure.

Euronext Federal Model

Dechert: Euronext Dublin is part of Euronext’s wider federal model, including Euronext Amsterdam, Euronext Paris, Euronext Brussels, Oslo Bors and Borsa Italiana. What are the advantages to this model?

Maurizio Pastore: The federal model has allowed Euronext to leverage the different areas of expertise brought by the various jurisdictions and markets it operates in. The federal model represents the European ambition for different countries with diverse cultures that work together without being limited by geographic boundaries. We are uniquely positioned to support issuers and investors accessing our markets, providing unparallel domestic knowledge in each jurisdiction and global distribution with Euronext Dublin.

Dechert: What benefits does this federal model provide to Euronext Dublin and, more importantly, issuers that choose to list on Euronext Dublin?

Maurizio Pastore: An example of the benefits brought by the federal model is the recent integration of Borsa Italiana, which has brought increased market reach, technical expertise with regards to secondary trading and additional product types. The different market strengths of Italy, with its strong retail market, and that of the UK and Ireland, which is predominantly wholesale, allows the team to provide bilateral assistance in the areas of our respective expertise. With this unique local/global dimension, Euronext is consolidating a leadership position in the listing of ESG bonds and can offer a complete value proposition to debt issuers.

Dechert: How has Euronext Dublin’s operations and product offering changed since it became part of the Euronext group in 2018?

Maurizio Pastore: Prior to joining the group, the Irish Stock Exchange had already established a reputation as one of the leading markets for bond listings. This was very positive, but the market was also limited in terms of its product offering and scale. On becoming part of the Euronext family and rebranding as “Euronext Dublin”, it has grown in terms of market penetration, product diversity, influence and scale.

We are now operating in an enhanced exchange environment with multiple business lines, which is enriching our innovative thinking and opening cross-selling opportunities. Euronext is the undisputed world leader in debt listing, with potential for a vertical and integrated fixed income offering (primary listing, secondary trading and post-trade solutions). The transformation that we all face in terms of ESG conversion or technology disruption would have been too big to tackle alone, however, within Euronext these changes are exciting challenges which we look forward to facing together.

Dechert’s International Capital Markets Team would like to thank Maurizio Pastore and the team at Euronext Dublin for their contributions to this piece.

In the first issue of Dechert’s International Capital Markets Team’s “In Conversation With...” series, associates Amy Rees and Nick Quarrie sit down with Shrey Kohli, Director of Fixed Income and Funds at the London Stock Exchange Group (LSEG), to discuss key trends in the debt capital markets in 2021 and 2020, as well as expected drivers for growth and change going forward.

In this issue, we discuss:

Recent Market Trends

Dechert: The past couple of years have seen a number of momentous shifts at both a national and an international level, some anticipated, others unforeseen. Brexit, COVID-19, climate change – these and other factors all have an impact on global markets in several different ways. What trends has the LSE noticed in particular over the past year or two?

Shrey Kohli: The London Stock Exchange ("LSE") saw a large and immediate response to the COVID-19 pandemic in debt capital markets in 2020. London-listed debt issuances raised almost US$ 1 trillion, a significant amount of which was raised by governments directing proceeds to both mitigate the impact of the pandemic and to raise funds for medical research and the infrastructure required for sustainable economic development. Social bonds, such as those issued by the International Finance Corporation and the African Development Bank, opened up the market again in March 2020 following a difficult pricing environment. This was the first time the market understood that use of proceeds for social bonds could be used not just for access to water, healthcare or sanitation, but also for the medical infrastructure eventually needed for COVID-19 vaccines and the rollout of the vaccine over the last two years.

Over the last two years we’ve witnessed the power of capital markets to channel capital to areas that need it. In 2021, the LSE continued to see strong issuance levels with more than US$700 billion raised, with generally a good level of risk appetite. Green and social bonds are no longer niche products and are increasingly considered business as usual for issuers across the globe.

Dechert: And what about the impact of Brexit?

Shrey Kohli: With Brexit, we’ve seen the wholesale markets continue to work well. Additionally, bonds listed on the LSE maintain European Central Bank collateral eligibility, subject to the bonds meeting other eligibility criteria. There is also a large amount of work ongoing in relation to the UK listings review, launched by the Treasury to strengthen the UK’s position as a leading global financial centre.

Wholesale debt capital markets are largely global, and we’ve seen instances where more than 60 global issuers have switched their bond listings to the LSE. Such switches are due to our investments and innovations in our markets, which have made them simple to access, customer centric and both time and cost efficient, as well as offering a joined-up approach for our issuers. The London Stock Exchange Group now operates as a broad financial market infrastructure group. We offer services to issuers at multiple levels, from offering vast amounts of data to our clients, whether market information or ESG data, and to offering a platform for issuers to live-streamed investor events. This changes the proposition of what ongoing value a listing venue offers to an issuer.

The Expansion of the Sovereign Prospectus Exeption

Dechert: In respect of post-Brexit rule changes, a key change that a number of our sovereign clients have benefitted from is that, since 1 January 2021, sovereigns, local and regional authorities and central banks of any country are now exempt from the requirement to produce an FCA-approved prospectus to offer debt securities to the public or to admit such securities to trading on the UK’s regulated markets, such as the LSE’s main market. We understand that this change was designed to offer such issuers a faster and less burdensome route to the international capital markets. Have you found use of the exemption to be as popular as expected?

Shrey Kohli: Dechert was one of the first to advise issuers that used the UK sovereign exemption in the UK Prospectus Regulation. That was a change we worked on with the FCA to deliver at the point of Brexit. If it weren’t for the co-operative relationship between the FCA, the LSE and the advisory community, it wouldn’t have been as seamless when the first few transactions came to the market. Beyond that, those transactions were able to use the profile that the LSE offers to raise the visibility of such milestone transactions.

As with any new rule, there is a period of time during which the market adapts to new processes involved. The exemption is framed broadly, which allows many issuers, whether sovereign, municipal, agency, a public international body with at least one country as a member, or an issuer guaranteed by any of these, to be able to seek eligibility as an exempt issuer. Once the market understood how eligibility would work, we saw a large number of issuers across these categories access the markets. The drafting of the rule has ensured that the widest range of issuers have come to market and the process has worked smoothly as well.

Dechert: Have many such issuers been tempted to cross to the LSE from other stock exchanges, as a result of the expanded exemption?

Shrey Kohli: We have seen a number of sovereign listings move to the LSE this year from regions like West Africa, the Middle East, both North and South America, and an increasing number of issuers in East Asia. I think this is due to a combination of two factors:

(i) the exemption rules and the way they operate; and
(ii) the LSE’s customer-centric offering.

An example of this would be that listing agents are optional, which is not the case for other exchanges. Teams are able to pick up the phone to the LSE’s admissions team or the FCA’s early engagement team to clarify the process and to ensure there is a relatively smooth path to execution.

Sukuk Trends

Dechert: The Sukuk market has risen in prominence over the last decade as demand for Islamic financial products and services has increased globally, with global outstanding sukuk reaching US$754.1 billion in the second quarter of 2021 (a 5% increase from the first quarter of 2021). More than US$50 billion of that has been raised from Sukuk listed on the LSE. What has the LSE been doing in recent years to establish itself as a key venue for Sukuk listings?

Shrey Kohli: The UK has always been the leading western centre for Islamic finance, both in terms of the number of financial institutions that enable corporate or individual investors to access products in line with shari’a principles, and the asset management community looking to invest in assets in a shari’a-compliant manner. The LSE has become the largest international venue for capital raising for debt and Sukuk issuers from the Islamic world, especially the Middle East.

Dechert: And the LSE was selected as the listing venue of choice by the UK government for its £500 million trust certificates due 2026 by HM Treasury UK Sovereign Sukuk Plc in March 2021.

Shrey Kohli: Yes, the UK government cemented the LSE’s leading position by listing its second sovereign Sukuk on the LSE. Large corporates such as Saudi Aramco have also diversified their debt issuance programmes by issuing in conventional form and Sukuk on the LSE.

Sovereigns from across the world, such as Saudi Arabia, have conventional bond programmes and Sukuk programmes listed on the LSE. Other sovereigns are exploring adding Sukuk financing as it is a good way to align the way capital is raised with the faith and values of the country.

Dechert: What trends do you see for the Sukuk market?

Shrey Kohli: At COP26, the LSE launched a high-level working group on green Sukuks with the UK government, the Republic of Indonesia and the Islamic Development Bank in a bid to bring together teams to develop the Sukuk market and the green bond market. Green Sukuk this year have accounted for US$8 billion of a US$180 billion market, which is a small proportion compared to its potential.

Dechert: How does the LSE differentiate itself from other listing venues for Sukuk?

Shrey Kohli: Within the LSE’s exchange-regulated International Securities Market (ISM) rulebook, there are hard-wired debt derogations relating to issuers of asset-backed and asset-based securities, which generally apply to Sukuk issuances. There is also an ongoing discussion around whether the prospectus exemption we just discussed will be extended to apply to sovereign Sukuk issuers, which would make it more efficient for Sukuk issuers to come to the market. We are also able to help issuers in other ways, such as raising the visibility of new transactions, as well as providing tools like “SparkLive” to transmit the issuer’s message to a wider set of investors across the world.

Issuers get exposure to the widest peer group when listed on the LSE. The LSE continues to be one of the most international exchanges globally, and when you look at the diversification of bond issuers listed on the LSE, you generally get a book that is balanced across the world. FTSE Russell and Refinitiv, both LSEG businesses, also provide a significant amount of thought leadership and market intelligence on Sukuks and the development of the Sukuk market. FTSE Russell enabled the development of shari’a-compliant indices, which are used by investors across the world.

Trends Seen in the International Securities Market

Dechert: Since its launch in 2017, the International Securities Market (which operates alongside the LSE’s other markets as a direct competitor to the European exchange-regulated markets) has seen bond issuers from across different continents and industry sectors, as well as a number of market firsts in terms of currencies and ESG-related bond issuances. What trends have you seen (and what trends do you expect to see in the short term) in relation to issuers that choose to list their securities on the ISM?

Shrey Kohli: 2021 has been the ISM’s most successful year in terms of the number of listings. We have seen more issuers use the simplified disclosure route, which allows for shorter admission documentation where there is a listing on another suitable exchange, including the LSE’s own markets for equity such as the Main Market and AIM.

More structured products issuers use the ISM because the submission process is a lot more straightforward than other exchanges. We have hard-wired derogations in the ISM rulebook, incorporation by reference for future financial information and MAR1-related announcements and promote early consultations with the regulatory team. All of that makes the ISM a market that is easily accessible.

We expect the listing process to be further simplified in 2022 following the UK Listing Review and once we consult on future changes to the ISM rulebook.

The Success of the Sustainable Bond Market

Dechert: Since the LSE became the first exchange to provide dedicated “green bond” recognition in 2015, the demand for sustainable financing and investing has grown and so has the number of instruments listed on the LSE’s Sustainable Bond Market, or SBM. Many of the bonds listed on the SBM are “world firsts” in terms of currency, geography or structure. In 2020, the Arab Republic of Egypt, a Dechert client, chose to list its debut green bond on the SBM, as well as the Main Market. How successful has the SBM been in helping to promote visibility of sustainable debt finance instruments?

Shrey Kohli: In 2015, the LSE became the first exchange to set up dedicated segments for green bonds in response to the development of the green bond principles under the stewardship of the International Capital Markets Association. That developed into the Sustainable Bond Market, which launched in October 2019 and brought together segments for social bonds and sustainability bonds linked to newer or newly established principles. The SBM enables issuers across the world to raise capital for green, social, sustainability and sustainability-linked purposes. In 2021, LSE also launched a world-first transition bond segment on its SBM, There are over 340 active bonds raising a total of US$142 billion on the SBM – with over 100 of these bonds issued in 2021. Investors with assets worth US$100 trillion have signed up to the UN principles for responsible investments, which needs to be channelled into sustainable activity.

The LSE has done a lot of work in this space, centering around four key themes:

developing the LSE’s “green economy mark” for London-listed equity issuers with more than 50% of their revenues being generated from green sectors, within a green taxonomy;
supporting better data and disclosure within sustainable finance through the launch of our model guidance in line with the work of the TCFD-Task Force on Climate-Related Financial Disclosures. Investors make better investment decisions when based on better data, which is created with better disclosure;
supporting the transition to a low carbon economy with tools available to issuers, including the transition bonds segment, climate transition guidance and governance courses available for issuers; and
convening the market by bringing together issuers who need the capital and investors who can allocate it at events such as our annual Debt Capital Markets Forum, which has had a sustainability theme for a number of years.

Dechert: It seems ESG considerations are becoming increasingly important; how does the LSE think this will affect markets in the longer term?

Shrey Kohli: We see ESG investing increasingly becoming “business as usual” across jurisdictions. This has been the case in Europe for a number of years, but we are now seeing a steady increase across the United States and Latin America. A significant amount of capital is being allocated to sustainability-linked loans in the banking market and, with over US$7 trillion required per annum to meet the goals of the Paris agreement, sustainable finance will continue to account for greater proportion of global debt capital markets and will be a theme that continues into the future.

The Development of the LSE's Dedicated Issuer Services Initiative

Dechert: The LSE has sought to offer additional value to issuers on its markets with its dedicated Issuer Services initiative. What level of engagement have you seen from issuers?

Shrey Kohli: A few years ago, we made significant investments in our digital infrastructure so that we could offer more to the LSE’s listed clients. By way of example, as of 2021, every LSE-listed client has access to ESG data and scores provided by Refinitiv, one of the most comprehensive databases covering over 10,000 companies across 76 countries. The client can log on to the issuer services portal and access the tool to compare itself to its peers using the ESG data. Issuers are using this valuable data in a few different ways.

We have also enabled issuers to upload their own bond documentation on the LSE website free of charge and in a manner that allows issuers to meet relevant regulatory requirements, whether that be under the UK prospectus regulation or the ISM rulebook.

Dechert: How might the LSE and issuers’ professional advisers assist issuers better when coming to market and subsequently as a listed company?

Shrey Kohli: We partner with over 40 different service providers in the Issuer Services marketplace, who offer services from investor relations and corporate advisory to ESG information to our listed clients. The LSE also has tools like “SparkLive”, which can be used by any company to engage with the market. For example, a company may be advising on a syndicated loan offering and the client may be setting up a meeting with its advisors and lenders that requires a private live-stream; or a company may wish to set-up a pre-recorded presentation and a live global investor call with the ability for participates to ask live written or verbal questions – this can be done on SparkLive.

The Issuer Services portal is also our genesis for digital innovation and, in partnership with Nivaura, a fintech firm, we are developing tools such as LSEG Flow. This tool is designed to help issuers negotiate term sheets and pricing supplements in a more automated manner, with agreed economics of a transaction populated through all documents and without the need to be manually copied, thereby reducing the risk of human error. This is a first of its kind product to be offered by an exchange. The idea is that a more streamlined process would allow companies such as law firms to focus on providing advice and reduce time spend on drafting documentation. The LSE’s aim with this and other product development is to work in partnership with the market by using technology to make things more efficient and streamlined rather than to change the nature of the roles in the market.

The Launch of Spark Live

Dechert: Coming back to SparkLive, the LSE launched this online platform in 2020 with the aim of assisting issuers in presenting their story to the investor community. What services does SparkLive provide? What has demand for SparkLive been like since it launched, and how has this product been welcomed by Issuers and market participants?

Shrey Kohli: SparkLive sits within Issuer Services, and any client issuing on the LSE can use the service for at least one event without any additional fee. SparkLive has supported over 200 events from issuers across the world, whether they be bond roadshows, investor days or capital markets days, and this has allowed issuers to communicate with investors at a time when travel has been significantly limited.

Refinitiv’s services also allow us to provide clients with easily consumable data alongside an event on SparkLive in a GDPR-compliant manner. We want the LSE to be at the forefront of innovation within capital markets.

Dechert’s International Capital Markets Team would like to thank Shrey Kohli and the team at the London Stock Exchange for their contributions to this piece.