Introduction

The Grand Duchy of Luxembourg’s Coalition Government aims to develop a responsible, sustainable and innovative financial sector that supports social cohesion and equity. One of the ways this will be achieved is through sustainability bonds issuance, with proceeds that support green and social categories in accordance with the criteria and objectives set out in the Framework.

Rationale for sustainability bonds issuance

To achieve the ambitions and social cohesion, significant investments are needed, making a green, social and sustainability capital market essential. The Grand Duchy of Luxembourg is the world’s second-largest investment fund centre, and so plays a prominent role in the development of this market globally.

Use of proceeds

The State Treasury, with support from relevant ministries, coordinates the evaluation, selection, and approval of eligible expenditures to be allocated to green, social and/or sustainability bonds. Expenditures are selected based on compliance with guidelines on eligible green and social categories, the evaluation and selection process, environmental and social regulatory frameworks, and the management of proceeds.

Eligible green categories

Eligible green categories include green buildings, energy transition, and low-carbon transport, with related benefits such as the reduction of GHG emissions, climate change mitigation, and the protection of the environment. The construction of new buildings and acquisition of buildings are also eligible, provided they meet EU environmental objectives and benefits.

Eligible social categories

Eligible social categories include affordable basic infrastructure, essential services, socio-economic advancement and empowerment, and affordable housing. Related benefits such as the development of social infrastructure, job creation, and increased social equity are considered.

Process for evaluation and selection

A Sustainability Bond Committee oversees the implementation of the Framework, evaluating the State Treasury’s initial list of potential eligible expenditures, verifying compliance with the criteria and objectives set out in the Framework and selecting eligible expenditures to be included in green, social and/or sustainability bonds.

Environmental and social regulatory framework

Programmes and projects financed by eligible expenditures under the green, social, and/or sustainability bonds are subject to strict governmental regulation and procedure. Criteria include pollution prevention, reduction of GHG emissions, the protection of healthy ecosystems, and the sustainable use and protection of water resources and quality.

Management of proceeds

To ensure compliance with the evaluation, selection, and approval process, an amount equivalent to the green, social and/ sustainability bond’s net proceeds is allocated and tracked by the State Treasury, with full allocation committed to within two years of issuance.

Recommendations

Following the evaluation of initial allocated green, social and/or sustainability bonds proceeds, there is a need to make regular reports and reviews of the impact of these categories on environmental and social impacts. This includes the establishment of an impact recording and monitoring system to effectively manage sustainability risks.

Conclusion

The publication of the Grand Duchy of Luxembourg’s Sustainability Bond Framework attests to the leadership role the country plays in the global green and social bonds market, emphasising its commitment to promoting environmental and social impacts and objectives.