Welcome to the podcast that shares the views of high-level leaders in the European and global financial services industry.
Nicolas Mackel . – “Welcome to Shaping Finance, a podcast which offers a platform to higher-level decision makers and shapers in international finance. My name is Nicolas Mackel, I’m the CEO of Luxembourg for Finance and the host of this podcast.
In 2016, Julie Becker initiated and implemented the creation of the Luxembourg Green Exchange, or LGX, as it is known in the industry. A platform dedicated exclusively to green instruments. This initiative, a first in global markets has been rewarded with numerous awards and recognitions worldwide. Among others by the invitation to participate in the EU high level expert group on sustainable finance. She is furthermore, one of the founders of the Capital Markets Association of Luxembourg, LuxCMA. Julie is a lawyer by education, but also an alumna of the Wharton Business School. Julie will take over as the CEO of Luxembourg Stock Exchange on April 21st, and she will be the first woman to lead the organisation. Congratulations on this well-deserved appointment.
Julie Becker . – “Good morning Nicolas, thank you again for inviting me to your podcast series and for your kind introduction.
Well, Julie let’s get started. What is the Luxembourg Stock Exchange today?
“Luxembourg Stock Exchange, or LuxSE, has always been and is still today an exchange unlike any other. Its development is tightly linked to the emergence and expansion of the international bond markets since the first ever Eurobond was issued and listed on our exchange in 1963. But today, LuxSE is not only a world leader in the listing of international debt securities. LuxSE is also recognised globally as a world in exchange for its positioning and contribution to pushing forward the sustainable finance agenda.
So today LuxSE is an exchange with purpose. If I would have to describe its ID count, I would add that date of birth 1928 and active from 1929, not the best year to start especially for an exchange. Parents still today, private investors and financial institutions. Main features: international agile. Core values: transparency, innovation, and commitment to reach excellence. What makes us different in my view is that LuxSE is pursuing excellence with purpose. In other words, an old lady with a millennial mindset.
Almost all exchanges are part of a wider group. What has caused this consolidation and where does the Luxembourg Stock Exchange fit in?
“Thank you Nicolas for such an easy question. Well, for some of this consolidation reduces the risk of a fragmentation of a European capital markets as pursued by the Capital Markets Union in Europe, but more concretely in many cases, scale is a key element allowing to keep cost under control while optimising necessary investments, and the exchange industry is no different. If you consider especially that size and depth of the markets are providing liquidity and sales trading flows. However, LuxSE is specialized in very specific market segments, such as listing and data management. And by using the Euronext Optiq Platform, we can focus our IT investments on our specific needs to serve our clients at best.
And let’s not forget that exchanges are a sort of symbol of national sovereignty. And as a pillar of the Luxembourg financial center, we need to be in control of our own destiny. And for LuxSE, its decision-making autonomy is very important as it allows us to be innovative, to decide swiftly and to move very quickly. And the creation of the Luxembourg Green Exchange in less than nine months is a very good example of what this actually means.
The pandemic and its economic impact have added a new found sense of urgency for the creation or the perfection of the Capital Markets Union in Europe. Will the plans for this Capital Markets Union be accelerated now after Brexit?
“Well, you know the pandemic has made inequalities and fragmentation much more visible. And in that sense, indeed, it’s economic, but also social impact have added a new found sense of urgency to CMU in Europe. And if you remember EC President Ursula von der Leyen state of the EU speech last September, its focus was obviously recovery, enhance economies and societies in general, but she also called for structural reforms in our economies and urged the member states to complete the CMU, Capital Market Union. A real CMU is a critical piece of the EU financial architecture. It is needed to drive long-term growth and fund and support other EU priorities in areas such as innovation, climate change, and digitalisation.
But what is needed to make this project a reality?
“Well, first I believe we need a greater regulatory reconvergence. Then we need a greater role of equity in financing the real economy. And we also need a cultural shift. A high level of savings should be turned into long-term investments. Retail investments should be made much easier in the EU and the Capital Markets Union should ensure easy access to invest in equities and bonds. In the US not only equities, but many more public bonds are available to retail investors. And lastly, we need a collective spirit to tackle fragmentation, which is the main issue of the Capital Markets Union. So all stakeholders need to agree on efficient, transparent, and workable solutions.
As a member of the initial EU high level expert group on sustainable finance and a co-founder of the Luxembourg Green Exchange. You have certainly seen the evolution of sustainable finance since it’s, not beginning, but when it really took off in 2016. How green has finance really become since then?
“Since 2016 and on the back of the Paris Agreement and the successful launch of the UN SDGs, so-called green finance, or today sustainable finance, has been growing exponentially. We knew that speed was of essence and that we needed to accelerate the shift to sustainable finance. And cumulative green bond issuances reached the first 1 trillion US dollars last October. This gross is promising. Post 2008 financial crisis, investors expressed a crucial need for transparency and sense of purpose in investing. Today, market participants increasingly demand that ESG targets also become a part of a company’s corporate finance strategy. And for these reasons, the last few years, I’ve seen the emergence of many green and sustainable finance instruments that relates to ESG topics or ESG targets in their structure and design.
And then COVID-19 acted as a trigger to add scale to this market. The pandemic has helped fast track the trust stakeholders have in ESG. And you may remember in the dark days of March and April 2020, many observers thought ESG would surely fade is a face of the overwhelming challenges of the pandemic, but incredibly the opposite happened. The pandemic increased the focus on sustainability. ESG principles provided the strategic and culture and roadmap for global organisations to navigate, adapt and emerge from the pandemic with their businesses, not only intact, but striving.
And what has, besides the pandemic, been driving this change towards sustainable finance?
“Well, I believe first investors are asking for transparency. They really want to understand where their money’s going and what impacts their investments will have. And they also now understand that climate risk is investment risk. Then regulation. Regulation has been driving this change with the new EU regulatory framework and mandatory reporting obligations. Thirdly the ECB. ECB is getting heavily involved in cgreen finance. Currently the ECB holds around 20% of all Euro denominated green debt. And lastly, I would say that EU new green deal is also driving this change and EU taxonomy that should support transition investment flows.
And what is needed in order to speed up this process and build back better?
“Well, you know Nicolas, green finance is blossoming. Globally the green bond market could be worth 2.36 trillion US dollars by 2023. And by that time, I believe that a company’s ESG profile will be the entry card to raise capital in financial markets, for sure. But to avoid losing investors in this process, education is key, to make sure investors can influence company’s decisions and make the best out of their investment power.
But we also need further standardisation of data, built on a robust, scientific and financial basis. And we need to ensure accessibility of meaningful, comparable, and usable data to support asset managers, investors, and other market players in their investment decisions, and to help them comply with their regulatory reporting. And that’s the reason why LuxSE launched, last September, a unique database of sustainability data offering up to a 150 data points for each security, initially covering all green social and sustainable bonds displayed on the LGX platform. And now extended to include almost the entire universe of green social and sustainability bonds listed worldwide, so well beyond LGX. In other words, more than 3000 sustainable bonds.
But to conclude, if we look at the latest developments in the sustainable finance sphere that are likely to shape sustainable financing in the coming months and years, I’d like to highlight transition finance. There’s an increasing understanding that all sectors and industries need to accelerate the green and energy transition and make their operations and business models more sustainable, including the high-polluting ones. New financial instruments have emerged to provide sources of financing to support these sectors in that transition efforts. And these new instruments consider the overall sustainability profile, ambition, and strategy of an issuer. And it is not linked to one specific green of social project. And to support this transition efforts, we also increased the scope of LGX to include sustainability-linked bonds, for instance.
Well, exactly talking about data, and if I may ask you to look into your crystal ball, what will ESG data look like in five years and in 10 years?
“Well, unfortunately I don’t have the crystal ball, but this is a very complex matter and there might not be one single good answer. However, you’re right, from what we can see there is still a wide variety of indicators that contrast with the need for standardisation expressed by investors, especially when it comes to impact measurement. Which is much more exotic than carbon emissions only. And for instance, we mapped 180 indicators from the position documentation provided by our thematic bond issuers, out of which only 30 are used more than once. So on the one hand, there’s this multiplication of standards, but on the other hand, there’s a clear wheel of convergence. And I refer here for instance to the ESG metrics and disclosure initiative led by the World Economic Forum, in partnership with their main community of CEOs and the Big Four accounting firms. But there’s also the Task Force on Climate-related Financial Disclosure, the famous TCFD by Financial Stability Board, FSB, which focuses on reporting linked to climate risks. There is also the network for greening the financial system, comprising 80 central banks and supervisors, all pushing towards better climate risk management and transparency.
And we need a global solution. And there I’m convinced central banks play a crucial role in this process and are increasingly driving the transition towards a sustainable economy. But to answer your question in five years, I think common metrics should exist for each sector along with harmonised frameworks to report. And in 10 years, these common metrics will be made easily accessible to allow structuring, comparison and assessment of this data. Calculation methodologies will hopefully be standardised and data certified, and trust me all the main audit firms are already on it. And all of these will lead to much more trustworthy ESG ratings.
You have mentioned the acceleration of sustainable finance by the COVID-19 pandemic. Another area that has certainly been accelerated by the current pandemic is that of digitalisation. How has it actually changed the way an exchange like yours works? What impact has it had on your work?
“Well, as for any company, the shift from manual processes to automation is now more than ever seen as critically important. And digital transition is part of our strategy, be it for operational workflows, for the cloud migration, but also to digitise our core business and increase our operational effectiveness in the distinct process of data dissemination activity. Data will no doubt be a crucial factor of our growth strategy. Data is a new gold and the demand for structured and meaningful financial data and sustainability data is growing every day.
We are currently exploring ways to use AI-based technology to ensure scale and speed when it comes to data extraction and management. Digitalisation has been around for quite some time, and we have used technology to strengthen, ease, simplify, and better secure our processes and make life easier for our clients. We also realised that technology would help us to expand our sphere of action, along the value chain of bonds and funds, and in this respect we are actively collaborating with Fintech companies to expand our business group and be a pioneer in the promotion of new technologies. In some of these, such as Origin in the UK, FundsDLT, StarTalers and recently Tetrao in Luxembourg, we have taken equity stakes to help these companies to move forward faster for our mutual benefits.
And what for instance, have you worked on in terms of projects with these companies?
“So we are a founding member, of FundsDLT, which aims to connect all intermediaries active in the fund distribution process by providing them with a DLT based platform. And the usage of a distributed ledger technology allows investors, distributors, asset managers, and custodian banks to share information and data in a more streamlined manner and significantly accelerate processes. So this investment exemplifies our vision to be a pioneer in the promotion of new technologies, in this case blockchain, within the financial industry. And this is another illustration of a millennial mindset of an old lady.
Before we conclude, let me ask you what has become our traditionally last question, namely, related to your free time and possible a book that you may recommend to our audience?
“Well, I would recommend the last book I read, Impact: Reshaping Capitalism to Drive Real Change, from Sir Ronald Cohen. As Bono from U2 said himself, ‘this book is an operating manual for those seeking to do good while also doing well.’ It’s a book about the new path we need to a new world and the world must change, but we cannot change it by throwing money at old ideas that no longer work. So this book is a surefire way to find out how you can play a role in changing the world. And to end let me quote the author, ‘it is time for us to raise our voices and make an impact through our choices.’”
Certainly very well put Julie, thank you very much for sharing your insights with our audience. I certainly wish you all the best with your new role as the CEO at Luxembourg Stock Exchange in April. Thanks also to our listeners who have tuned in again to our podcast. In our next episode, I will be speaking to Claude Marx, the Head of Luxembourg’s Banking and Securities Supervisory Authority, the CSSF. To stay up to date with our podcast, please feel free to subscribe on iTunes, Spotify, or Google. You can also find more information on our website, luxembourgforfinance.com.