In fixed income, the London Stock Exchange’s Sustainable Bond Market helped issuers raise more than £52 billion in 2021, with the total number of bonds listed on the platform rising to 342 (see Box). “We saw more than three times the amount of capital raised on the Sustainable Bond Market compared with 2020,” says Shrey Kohli, head of debt capital markets and funds at LSEG.

Landmark transactions last year included the listing of the UK’s first Green Gilts, which raised £10 billion for the UK Treasury, and the issuance by the Bank of China of the first-ever sustainability re-linked bond, the coupon payments of which are linked to the ESG performance of a portfolio of underlying sustainability-linked loans (see Table).

The third role, Hoggett said, is helping the rest of the economy move towards net zero. “The only way we get to net zero and stay there is if the entirety of the economy moves on a global basis … we need to make a much more radical shift to what I describe as ESG as BAU [business as usual],” she said.

Hoggett’s vision is, ultimately, for its ESG-orientated activities to effectively be absorbed within its wider businesses, as ESG and the net-zero transition are embedded within the global economy and financial system.

“Important as the disciplines are that we’ve created around the Green Economy Mark and the Sustainable Bond Market, we need to build a platform and a roadmap to deconstruct the very segmentation that we’ve created. We need to embed that analysis of climate impacts into every asset, and embed those disciplines into every investment decision, so that we’re really thinking about a full-economy transition,” she said.

As part of that effort, last year the London Stock Exchange began listing a new category of sustainable finance instrument, the climate transition bond, on a specifically designed segment of the Sustainable Bond Market. Those bonds, which are aligned with the International Capital Markets Association’s Climate Transition Handbook, can be used by companies in carbon-intensive sectors to help fund credible net-zero transition strategies.

“We now have the building blocks within the Sustainable Bond Market to cater to the full range of innovations within sustainable debt financing,” says Kohli. “We have labels for pure-play bonds, a climate-transition segment, a sustainability-linked bond segment. Together with our offering in the equity capital markets, we can enable a coherent sustainable finance strategy across the funding curve.”

This focus on supporting the net-zero transition also involves the exchange stepping into a new arena – the voluntary carbon market. At the COP26 climate talks last November, amid a flurry of initiatives from LSEG and its partners, the exchange announced plans for a “Voluntary Carbon Markets Solution” that will help channel finance towards projects that help mitigate climate change.

The voluntary carbon market is set to become a much more important part of the net-zero ecosystem because, as Hoggett observed, it is becoming much less voluntary. The market has “got the wrong name”, she said. Given that companies are increasingly pledging to become net-zero emitters, they are effectively committing to some sort of carbon offsetting due to the challenges many large companies face to entirely decarbonise in the near term given the nascent nature of some technologies.

“The idea that this is voluntary, once they’ve made that commitment to their shareholders, is a misnomer,” she said.

This imperative will create growing demand for carbon credits and for financing for the projects that will create them, which is where the London Stock Exchange solution comes in, Hoggett said. Rather than providing a market for carbon credits, the exchange plans to set up a fund market, where the listed funds can either pay dividends in cash, or in specie – in this case, in carbon credits.

Crucially, listing funds rather than credits brings the investments within the UK’s existing regulatory regime. “Because these will be listed funds, the disclosure standards fall within the scope of the Market Abuse regime, the transparency regime, the listing rules and everything else that we have in the UK,” she said. “We don’t need to wait for the regulator to bring voluntary carbon credits into scope of the Market Abuse regime, because this basically brings them in immediately.”

In addition, investing in funds will enable companies to access a diversified forward supply of carbon credits, from projects in particular regions, sectors or technologies that are particularly relevant to them, she adds.

Putting the voluntary carbon market on to a transparent, high-profile marketplace will help to tackle some of the issues that it has faced regarding its credibility, Hoggett said. “I think we can address some of the brickbats around trust that the voluntary carbon markets have faced, because these are often quite small, bespoke OTC [over-the-counter] activities,” she said. “We can address these because we’re using the disciplines of the public markets.

“I hope that, by coming up with this solution, we’re able to help transform the way the voluntary carbon markets work, and the amount of trust that is embedded in them as well.”

LSEG’s work on the voluntary carbon markets represents an important part of a holistic sustainable finance offering that links the exchange’s customers with the emerging regulatory and policy landscape, explains Claire Dorrian, LSEG’s head of sustainable finance, capital markets. With the government announcing that transition plans will ultimately become mandatory and more companies committing to science-based net-zero strategies, investors will expect them to explain how they will deliver on those objectives.

“Seventy-five per cent of the FTSE 100 by market cap have committed to the Race to Zero,” she notes, observing that many of them are likely to look to offset part of their emissions as well as raise finance to help them decarbonise their businesses. “There’s a big mobilisation of resources that companies are looking at as they build out their transition plans … We are at a critical juncture.”

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