First Legal Framework For Renewable Energy Covered Bonds

On 22 June 2018, Luxembourg adopted a law introducing the option for Luxembourg covered bond banks to issue a new type of asset: renewable energy covered bonds or lettres de gage énergies renouvelables (the Renewable Energy Covered Bond) into the existing framework of covered bonds issued by Luxembourg covered bond banks (the Law of 2018).

Various covered bonds labelled as green have already been issued in the last years, such as the Green Pfandbrief issued by Berlin Hyp in 20151 , backed by mortgages over commercial properties which received a green label. While these instruments combined existing covered bond legislation with a certification that the underlying assets qualified as green, no legal framework existed before the Law of 2018. The Law of 2018 establishes for the first time a real legal framework by introducing the Renewable Energy Covered Bond into the Luxembourg legislation governing Luxembourg covered bond banks.

Luxembourg is also pioneering in other green finance areas. The world's first green bond listing was on the Luxembourg stock exchange in 2007 and the "Luxembourg Green Exchange", which launched in 2016, is still the only trading platform dedicated to green finance products and is the largest platform globally2 .

By introducing the Renewable Energy Covered Bond, Luxembourg intends to foster the development of the renewable energy industry and demonstrate its commitment to fight climate change3 .

Latest EU recommendations on covered bonds incorporated

The Luxembourgish legislator also used this opportunity to amend the Luxembourg covered bond framework to incorporate the recommendations from the European Banking Authority (EBA) in 2016. Following the amendments enacted by the Law of 2018, the Commission de Surveillance du Secteur Financier (CSSF) adopted three related circulars on 19 December 2018, which are discussed below.

The recommendations put forward by the EBA were also the basis for a legislative package proposed by the European Commission in March 2018 aimed at introducing European Union (EU) level rules for covered bonds. Currently, covered bonds are mainly regulated at a national level and the European Commission considers alignment in certain areas necessary to implement the Capital Markets Union action plan and develop the use of covered bonds as "a stable and cost-effective source of funding for credit institutions, especially where markets are less developed, in order to help finance the real economy"4 .

Although the European Commission's initiative has been endorsed by various political decisions and also by stakeholders, concerns have been...