The world’s first legal framework for green covered bonds

In June 2018, Luxembourg became the first country in the world to establish a legal framework for green covered bonds, a new type of covered bond (known as the renewable energy covered bond or letter de gage énergies renouvelables) to roll out the next generation of green bonds.

Previously, Luxembourg law specified four categories of covered bonds: public covered bonds, mortgage backed bonds, movable asset-backed bonds and mutual bonds. Now there is a new category – renewable energy bonds.

“The cover pool will be defined by law on renewable energy assets. We cannot source brown and green bond issues out of the same cover pool – which is different in other countries”, explains Thorsten Schmidt, Member of the Board of Directors NORD/LB Luxembourg S.A. Covered Bond Bank. Over the years, he has witnessed how NORD/LB bank evolved from a northern German wind energy pioneer to a specialist for project financing in the renewable energy sector around the globe.

The range of assets that can be financed under the new law is broad, including energy production projects, storage, transport, transmission – as long as more than 50% is related to renewable energy.

“The covered bonds can be backed by renewable energy assets such as wind, solar, geothermal, hydrothermal, hydropower and biomass projects”, adds Schmidt.


Revitalization of the covered bond market

Luxembourg is the birthplace of green bonds. The first green bond, the Climate Awareness Bond, was issued by the EIB in 2007. Since then, international capital markets have been one of the most successful ways for raising capital to combat climate change.

“In order to limit global warming to clearly below two degrees, different calculations suggest that enormous investments of billions of USD will have to be made in the energy sector worldwide by 2035. This demonstrates that, without the participation of institutional investors, it will be impossible to reach the ambitious climate protection goals. And there is still an investment gap. Financing of clean energy is part of the strategic business of many banks, so it’s worthwhile for them to rethink how to finance its lending to renewable energy projects, now that the new framework in Luxembourg is in place”, says Schmidt.


Clear rules of the game

With this legal framework for green covered bonds, Luxembourg is responding to investors’ demands for clear rules.

Without the participation of institutional investors, it will be impossible to reach the ambitious climate protection goals

Issuers will be obliged to channel revenue from issues into the renewable forms of energy as indicated in the law. The definition in the bill defines strict criteria and reflects the understanding of renewable energy taken from the EU Directive 2009/28 Art. 2 (a) on the “use of energy from renewable sources”. In addition, risks are mitigated by loan-to-value rules that will be dealt with in an accompanying circular to the law, yet to be published.

“This legally binding framework for a new covered bond product, backed by renewable assets, makes Luxembourg a pioneer in the development of green financial products. You can’t change a bill overnight – that’s the beauty of it. So, investors can rely on the law”.


First green covered bond issuance

NORD/LB aims to become the first bank in the world to issue the new Lettre de Gage Renewable Energy, which will concentrate on financing wind projects.

“This global début will hopefully be followed by many more green Luxembourg covered bonds. We are still in the early stages of preparing to issue a deal and would like to issue the first lettres de gage énergies renouvelables early in 2019”, concludes Schmidt.

LEO Mag September 2018, Luxembourg for Finance, Lynn Robbroeckx.

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