More stock exchanges around the world are exploring using green equity labels to help companies position their ESG stories to meet increasing demand from investors and regulators as IPO activity returns.
Only the London Stock Exchange and Nasdaq offer green equity designations, and more exchanges are expected to launch green equity classifications as activity starts to pick up after a marked slowdown last year in IPOs and follow-on offerings.
"We are seeing more exchanges engage with the idea of recognising green equities in their markets," said Amy Smith, a manager in London Stock Exchange Group's sustainable finance capital markets team.
Despite lower uptake last year, some encouraging signs are emerging about how issuers are using the labels as new issuers step forward – primarily green funds, real estate companies and, increasingly, innovative “cleantech” companies.
LSE’s green economy mark has 108 companies signed up with a market capitalisation of £156bn, while Nasdaq has 10 companies under its green equity designations, which it is now planning to extend to non-listed companies in Europe in a move to allow private companies to show that they are meeting public market standards.
Discussions are ongoing about how to develop green equity labels, including how to create a possible green “use-of-proceeds” label, where funds are earmarked for specific purposes, and also how to accommodate companies that are in transition to a low-carbon future.
The lack of a global standard means that issuers and their revenues are currently assessed for green equity designations rather than their transactions – unlike the green bond market – and work is underway on a global standard that will help investors to identify green companies.
The World Federation of Exchanges has developed green equity principles to standardise the way that exchanges measure and classify green equities, although this is complicated by the proliferation of taxonomies globally.
“It would be a lot easier if exchanges agreed a standard on a global level. The core and principles of the way that exchanges assess green companies should be very fairly aligned," said Adam Kostyal, head of listings for EMEA at Nasdaq.
The ability to show taxonomy alignment is potentially the biggest growth driver for green equity labels, along with allaying greenwashing concerns, but financial advisers are also encouraging other exchanges to look into the processes and standards that the LSE and Nasdaq have put in place.
"I think there is a real usefulness to having green equity recognition and we could see other exchanges picking up on this idea," said Christa Clapp, managing director of sustainable finance at S&P Global Ratings and co-founder of Shades of Green, an approved external reviewer for Nasdaq's labels along with Moody's ESG.
Encouraging uptake
In October 2019, the LSE became the first major exchange to launch a dedicated green economy classification for equities. Its green economy mark recognises issuers with green revenues of 50% or more and uses the green revenues taxonomy developed by FTSE Russell. IFR is owned by LSEG.
The LSE is seeing significant demand from green funds, which make up around a third of the green economy mark cohort. Managers such as Gresham House and Impax have labelled their funds, while Foresight has green equity labels for its funds and the company as a whole.
The funds are typically renewable energy vehicles focusing on infrastructure, such as energy storage and efficiency, wind and solar, but fast-growing new funds such as I(X) Net Zero are coming back to the market to raise capital to invest in new products and technologies.
"Hydrogen was one of the bigger areas of development last year and you're also seeing through the fund structure that public markets funds are beginning to finance climate change technology. Newer funds are looking at more innovative technologies and we see they are often coming back to market to raise new capital to invest into new products," Smith said.
Nasdaq launched green designations in July 2021 for issuers on the Nordic markets with more than 50% green revenue or investments and also includes a green equity transition designation. The green equity designation has seen interest primarily from Swedish real estate companies and Nasdaq expects another 10 companies to join this year. No companies have signed up for the green equity transition designation as yet, but Kostyal is hopeful they will.
"This is a long-term game, we're not just doing this opportunistically. We see that these standards will evolve in the long term and hope to see more momentum around the transition designation and green equity designation," he said.