Sustainable finance in Luxembourg: what you need to know

It’s no secret that Luxembourg aspires to be a global leader in sustainable finance. That ambition led the government in 2020 to launch the Luxembourg Sustainable Finance Initiative (LSFI). One pandemic later and already the young organisation is making important strides to help coordinate the many moving parts of sustainable finance in the grand duchy. 

In this latest Q&A from VitalBriefings Sustainability Matters series, Nicoletta Centofanti, Interim General Manager and Sustainability Adviser at LSFI, assesses the state of play in Luxembourg and the LSFI’s role in driving progress in sustainable finance.

The LSFI was formally established two years ago to devise and implement a sustainability strategy for the country’s financial industry. What can this achieve that is not already taking place as a result of international initiatives and EU legislation?

Indeed, EU regulations play a pivotal role regarding disclosure and standardisation. However, sustainable finance is a complex beast that involves a wide variety of actors, strategies, decisions and actions. As such, coordination is key. That’s one of the reasons the LSFI was created: so that Luxembourg has a coordinating entity on sustainable finance-related matters.

Published in 2018, the Luxembourg Sustainable Finance Roadmap identified the need for a coordinating entity in the Grand Duchy that could help draft and implement a Sustainable Finance Strategy. That’s where this initiative comes from.

It’s not that the LSFI is making things happen that EU legislation and other international initiatives couldn’t. Rather, our organisation supports the financial sector’s effective and efficient transition towards increased sustainability by coordinating key stakeholders. It is truly the best way to unlock the industry’s potential, finding synergies, defining best practices and measuring progress, all of which are necessary for the transition of our financial centres.

Raising awareness of sustainable finance is also a key remit for the LSFI. Despite the efforts by international organisations, governments and NGOs, there is still a need to raise awareness among finance professionals and the larger public. We do this through many different initiatives designed to drive attention where it is needed, such as technical webinars, informative sessions, newsletters or videos, among other actions.

Simply put, we complement and enhance the existing regulatory legislation by coordinating sustainable finance actors in order to leverage synergies, raise awareness, identify benchmarks and support the creation of a framework to measure and track progress.

LSFI cites governance among the criteria that should be incorporated in investment decisions. Does this really belong with environmental and social impact considerations? Shouldn’t governance be a key factor for any investor, even those that make no claim to sustainability?

Nicoletta Centofanti, LSFI

Sustainable finance is not about taking just one of the three ESG factors into account. Rather, it refers to the process of taking all three criteria – environmental, social and governance – into the investment decisions process.

For instance, most people still associate sustainable finance specifically with green or environmental matters. However, the fact is that we can’t speak about it without also considering the other two factors. They are all interconnected and dependant on one another.

Most of all, the three dimensions together represent the complexity of the term ‘sustainability’. While I understand your point that governance should be a key factor for all investors, including those who make no claim to sustainability, I would provide a counter: any governance issue, such as corruption or bribery, can have a social and/or environmental impact and vice-versa.

This is why the aspiration is ultimately for all ESG dimensions to be embedded and duly considered by every organisation.

How should members of Luxembourg’s financial community cope with divergences between the country’s sustainability roadmap and the prescriptions of other international bodies, particularly where – as with investment funds – asset management and strategy decisions are often made outside the country?

One of the key sustainable finance triggers at the moment is regulation, which encompasses several goals. These include: standardisation, promoting transparency and disclosure, and creating convergence. Indeed, policymakers and international bodies are currently striving to align the sustainability and sustainable finance requirements to the standards metrics used by practitioners.

Fortunately for Luxembourg’s financial community, being in the EU comes with an important advantage: regardless of where the fund is domiciled or where the asset manager is based, the rules applied are the same for all investments across Europe. In addition, European regulations are leading the way for green finance, which means that these legislations are seen as best practices, serving as an inspiration and sometimes even as a model for other countries, all of which supports convergence.

Of course, governments can have different approaches, and it will take some time to fully adjust all financial institutions’ processes and procedures to the different national regulations. However, by following best practices and having policymakers and regulators pushing for global harmonisations, these new ways of working will eventually become the new normal for the industry.

Microfinance is an area of sustainable finance in which Luxembourg has been a pioneer, also giving rise to the financial product certification and labelling agency LuxFLAG. Are there risks that the commercial imperatives of microfinance providers may affect its social impact, or conflict with environmental goals?

Luxembourg is a hub for microfinance and microfinance investment vehicles (MIVs). It hosts key players that have a global impact on the ground due to their expertise and work. By definition, microfinance is an impact investment that pursues not only financial returns but also an intentional positive impact on the society that must be measured, monitored and reported against in a transparent way.

The focus of microfinance – which is where great expertise has specifically been developed – is mainly on the social side. This is due to the objectives of the microfinance industry as a whole.

Currently, however, microfinance players are very focussed on also incorporating environmental dimensions when making investment decisions. As mentioned above, the social and environmental dimensions inherently are closely interlinked. Therefore, it is imperative to ensure both are considered in order to effectively accomplish a positive impact for the community or the individuals the MIV is targeting.

Although this creates a new challenge for the sector – which now has to identify key metrics and relevant data to collect on the ground among its very unique targets – I don’t observe a conflict here.

Over the past year, Luxembourg has slipped from 5th to 7th in the Global Green Finance Index (GGFI). Does this mean it is falling behind other international and European jurisdictions as a leader in sustainability?

Despite falling two positions in the GGFI, Luxembourg still ranks 3rd in the EU for depth of Green Finance. This is because the Grand Duchy is a very active player in the field.

According to the recently published “European Sustainable Investment Funds Study 2022”, Luxembourg maintains its market leader position with about a third of the assets managed by sustainable funds in Europe being domiciled here. Moreover, the country holds 21% of global ESG AUMs, and almost a third of global Microfinance Investment Vehicles are based here.

The GGFI is of course important, but these are equally relevant numbers to consider when looking at the Luxembourg financial centre in terms of sustainable finance development. In other words, I would not say that Luxembourg is falling behind.

The GGFI aims to encourage a race-to-the-top among financial centres, and to provide an opportunity to share best practices. However, I would also draw attention to the fact that before the new sustainability-oriented normal becomes mainstream, the necessary shift of our financial centres will require joint efforts developed and implemented within a transition period.

In other words, although it is important to look at other countries’ advancements, sustainable finance should not be seen as a race. Instead, it should be approached as a common undertaking to ensure the financial sector has the correct tools and guidelines to transition and allow our society to reach the Paris Agreement goal and the Sustainable Development Goals.

At present the sustainable finance transition is dogged by the absence of universal standards and measures as well as a lack of data. Can the LSFI do anything about this, or is the grand duchy dependent on co-operation with partners and international organisations?

The main obstacle in the way of sustainable finance is not actually the lack of data per se. There is a lot of data available nowadays — more than ever, in fact.

The real issue is the lack of a joint agreement or standardised metrics that can be used to collect and provide easy access to said data. In addition, companies that are looking for financing – either via equity or debt – are often not accustomed to collecting, monitoring and disclosing all this much-needed data, which is especially true of smaller firms.

So, although the data might be available, the process and skillset needed to collect that information simply isn’t in place.

At the LSFI we seek to support the financial sector in facing this challenge through the “Take Action” section of our website, which targets financial professionals (and will soon target also retail investors and savers). There, we have mapped frameworks, standards and tools available that can help. We have optimised the navigation and search by classifying them with appropriate filters.

A major challenge for financial organisation is understanding how to best implement all these instruments within their operations. Even just figuring out which one to choose can be daunting as it is highly dependent on each individual organisation’s commitments, resources and willingness to transition.

Beyond that, the LSFI will also soon work with all its stakeholders to foster discussions through working groups.

Finally, we believe training and capacity-building is critical to get practitioners to fully embrace and implement all the relevant instruments and to overcome the data challenge described above. A key first step we have taken has been to map relevant trainings in the sustainable finance and sustainability field. The idea is to provide website access to information in a simplified and centralised way via our website.

Through its coordination and awareness activities, together with the provision of toolkits and easily accessible information as well as best practices sharing, the LSFI aims to support the financial sector to fully embrace this transition and have impactful sustainable finance becoming mainstream.

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Nicoletta Centofanti is an environmental engineer and holds an Executive MBA from Bocconi university in Milan. She has extensive experience with in-depth Corporate Social Responsibility review and implementation within companies around the globe. Nicoletta is committed to enhancing individual and corporate sustainability and is enthusiastic about impact investing, social businesses, and Environmental Social Governance drivers. In short, anything that contributes to a better world.

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