Luxembourg: A World Leading Pioneer In ESG And Sustainable Finance

As one of the world’s leaders in the investment fund industry, Luxembourg attracts most of the sustainable assets under management in Europe, with EUR 2.216trn assets held by Luxembourg-domiciled ESG funds at the end of June 2022.[i]

In this context, Luxembourg’s renowned labelling agency, LuxFLAG, has been active in the promotion of sustainable finance since 2006. By granting labels to eligible financial products that have a focus on impact and responsible investments, LuxFLAG supports transparency towards end-investors and contributes to increasing investors’ trust in sustainable investments.

At the end of Q4 2022, more than 300 worldwide products were labelled by LuxFLAG.

Over the last decade, Luxembourg has welcomed many more initiatives in sustainable finance and broader ESG matters, with the first green exchange of the world opening in 2016, the Sustainable Finance Roadmap being adopted in 2018 and awareness campaigns being led by public and private actors in 2023.  

Luxembourg is a pioneer in sustainable finance and aims to maintain this position by promoting ESG initiatives, notably through the following:

• The Luxembourg Green Exchange: an innovative player focused on impact

Since its creation in 2016 by the Luxembourg Stock Exchange, the success of the Luxembourg Green Exchange (LGX) has been recognised worldwide.

LGX displays securities listed on the Luxembourg Stock Exchange that comply with the requirements on sustainability and transparency of LGX.

The success of LGX has led to the hosting of, at the time of this article, over three thousand securities, including green bonds, sustainability-linked bonds, social bonds and sustainable bonds.

The eligibility to list a product on LGX is strictly controlled, requiring a framework that is subject to an external review (second party opinion). These requirements focus on transparency regarding the use of proceeds of the bonds or securities, giving comfort to the investors.  Issuers having bonds or securities listed on LGX are also subject to periodic reporting on the performance of their securities on non-financial factors.

LGX keeps on innovating and adapting to the market, with the objective of having a positive impact on the environment and society. LGX recently included the possibility to list climate-aligned issuer bonds, but also gender focused-bonds.

Gender-focused bonds are quite a unique type of ESG-related bonds and have already been met with great success on LGX. One year after its introduction in May 2022, more than 45 gender-focused bonds are listed on LGX. LGX accompanies the issuers to elect whether their securities would meet the criteria of gender finance, namely with reference to the Practitioner’s Guide to Using Sustainable Debt for Gender Equality of the UN Women.

With the aim of making sustainable finance accessible, LGX is also developing its services of trainings, access to relevant data, and assistance services to support the financing of new sustainable projects and adapt to market needs. Recently, the Luxembourg Stock Exchange was named the exchange of the year 2023 by Environmental Finance for the sixth time.

• The Sustainable Finance Roadmap: a governmental initiative in sustainable finance

In October 2018, Luxembourg adopted the Sustainable Finance Roadmap which sets ambitious forward-looking actions in term of the country’s contribution to sustainable development and climate action. Targets and initiatives covered by the roadmap are shared amongst Luxembourg’s key public, private and civil society stakeholders. The Sustainable Finance Roadmap was drafted in partnership with the United Nations Environment Programme and is part of Luxembourg’s commitment to achieving the UN Sustainable Development Goals by 2030.

The implementation of the Sustainable Finance Roadmap notably aims to (i) enhance transparency on sustainable investment opportunities; (ii) support actors of the financial sector in creating, managing, and promoting sustainable products; (iii) facilitate access to long-term financing for sustainable enterprises; and (iv) evaluate sustainable finance products to create clarity and confidence, while avoiding greenwashing.

The application of the roadmap requires key private and public actors to play a role in the transition to a sustainable economy.

In this context, the Luxembourg regulator of the financial services (the “Commission de Surveillence du Secteur Financier” or CSSF), contributes to the objectives followed by the Sustainable Finance Roadmap within the framework of its own powers, that notably consist in ensuring the soundness of the financial market. The CSSF makes sure that the entities under its supervision integrate ESG factors into their strategy and risk management process, in line with the applicable regulations and with the objective of protecting end-investors.

Four years after the adoption of the roadmap, Luxembourg has a leading position on the European market for sustainable investments. Every second investment fund being established in Luxembourg promotes ESG characteristics or has a sustainable investment objective, and an estimated 53 per cent of the assets in Luxembourg are invested in ESG-focused investment funds disclosing under Article 8 or Article 9 of SFDR.

The Sustainable Finance Roadmap has been setting the necessary guidelines for Luxembourg actors to unlock opportunities and innovation in sustainable finance. It has namely been the origin of the creation of several dedicated bodies that are today key players in the sector.

• Awareness campaigns on Sustainable Finance in Luxembourg

Within the scope of the Sustainable Finance Roadmap, the Luxembourg government created, together with Luxembourg for Finance (the agency for the development of the financial centre) and the High Council for Sustainable Development, the Luxembourg Sustainable Finance Initiative (LSFI), with the objective of raising awareness and setting the scope of sustainable finance matters.

LSFI was created in 2020 and has become a key central point of contact and information for sustainable finance actors in Luxembourg.  More than an information platform, LSFI also gathers and monitors data in the sustainable finance sector and produces clear and insightful reports on market trends. With selected Luxembourg experts in the field of sustainable finance, LSFI also regularly offers training accessible to everyone.

Despite having a worldwide impact, the size of Luxembourg’s financial sector is rather small. The concentration of market players and experts in the field of sustainable finance allows a constant proximity and exchange amongst the relevant stakeholders. This fosters innovation and enables to address challenges faced by the sector.

In that context, several public and private actors, including the Luxembourg government, the associations of Luxembourg bankers (ABBL), the association of the investment fund industry (ALFI), the LSFI and the CSSF, put in place an awareness campaign on sustainable finance between May 2022 and April 2023.

The main objective of the campaign was to provide useful support to consumers so that they have a better understanding of the impact of their commitments on sustainability factors, by way of increased communication on the topic, several events and seminars and trainings provided in several institutions (including schools).

This national campaign was able to help consumers to make a conscious choice when investing in sustainable products and to enhance their trust in the sustainable market.

• Promotion of innovative businesses in sustainability

Having a good social, economic and institutional local and European network, Luxembourg welcomes and supports innovative and sustainable business models.

Within this framework, the Luxembourg government grants subsidies to businesses joining its post-COVID-19 recovery programme and grants an additional 20 per cent subsidy to eligible businesses, provided they contribute to the establishment of a circular economy. In addition, Luxembourg regularly hosts events and conferences on the topic of circular economy, fostering knowledge and development of pilot projects on this issue.

Similarly, the “Sustainable Innovation Hub” developed by a governmental organisation aims at supporting companies in their sustainable transition. A business may indeed participate in the Fit4Sustainability programme to evaluate and produce a plan to reduce their environmental impact, and also have access to a range of guidance to integrate environmental issues into their business activities.

Other recent initiatives welcome start-ups active in sustainability-related matters, such as the launch of the International Climate Finance Accelerator (ICFA) by the Ministry of Finance, the Ministry of Sustainable Development and Infrastructure and private actors in June 2017. The ICFA supports innovation and high impact strategies to promote the future leaders in climate finance fund management.

• Luxembourg: an attractive place for non-profit organisations

In addition to the actors of the financial sector, Luxembourg’s sustainable initiatives are also led by a large network of non-profit organisations.

Many Luxembourg organisations are dedicated to social and environmental issues. For instance, “Plaidons Responsable” organises conferences, seminars, debates and discussions on human rights issues and how human rights are impacted by climate change, and advocates for a sustainable and inclusive society. The Luxembourg Institute of Science and Technology has also dedicated units to research climate issues and educate citizens on sustainability issues. Other organisations such as Greenpeace or Caritas are also very active in the country.

The size of the country allows initiatives to be heard and accessible to relevant stakeholders and citizens. In this way, Luxembourg’s professional and non-profit associations can have a concrete impact.

The multicultural features and situation of Luxembourg will continue to attract foreign investors and innovative players in the field of sustainability and ESG-matters. Luxembourg has the potential to unlock and support relevant initiatives in our common journey towards a sustainable future.

Footnotes:

[i] https://lsfi.lu/wp-content/uploads/2022/12/Sustainable-Finance-in-Luxembourg.pdf

Julie Pelcé
Julie is a Managing Associate lawyer at CMS in Luxembourg, where she specializes in sustainability and ESG strategies for investment products and vehicles. She also advises on the implementation of sustainability-related regulations, including SFDR and the EU Taxonomy. Prior to joining CMS, Julie worked in the Corporate & Capital Markets department of a top-tier law firm in Luxembourg. She holds a degree in ESG Investing (CFA) and an LL.M in Finance (ILF - Frankfurt). Julie has been admitted to the Paris bar since 2019 and to the Luxembourg bar since 2020.