A few weeks ago, the second edition of the Sustainable Finance Forum was held in Luxembourg on June 26th by the Agency for the Development of the Financial Centre, Luxembourg For Finance (LFF). It is rather hard to find a better suited moment to review the role that Luxembourg, both as a country and an economy, has played in the development and implementation of politics and strategies focused on fomenting the growth of a sustainable finance market.
It is worth noting some important events have taken place during this Forum, such as the LFF and the Toronto Finance International (TFI), renewing their commitment to pursue a strategic partnership with the signature of a Memorandum of Understanding; or an information exchange agreement signed with the Shanghai Clearing House connects the Luxembourg Stock Exchange (LuxSE) to the China Interbank Market (CIBM), enabling investors easy access to current price data on green bonds traded in Shanghai and Shenzhen. Luxembourg Stock Exchange also recently won the 2019 Green Bond Pioneer Award from the Climate Bonds Initiative (CBI).
The nature of this interest in sustainable finance lies in a new societal trend, where financial actors have become more eco-aware, adopting investment strategies according to ESG (environmental, social and governance) criteria in an effort to reduce risk by limiting the economic impact future technological transitions will have when adapting existing industries to increasingly strict environmental regulations. This is evidenced in a 2017 study by Novethic and the Principles for Responsible Investment (PRI) where 42 % of the investors planned to reduce their portfolios’ exposition towards fossil energies.
Sustainable finance is reaching new depths and creating a need for inclusion of ESG in all investment decisions and for consideration of climate risks in portfolio management – Laetitia Hamon, senior manager (KPMG).
Now, what role does Luxembourg have in all this?
Luxembourg is one of the top 5 financial centre in Europe (according to the GFCI 25), and is the country with the largest market share of listed green bonds worldwide, The Luxembourg Green Exchange (LGX), launched in 2016 by the LuxSE. In the same year, they also partnered with the European Investment Bank (EIB) for climate investments, being the first EU member country in doing so. Being members of the International Network of Financial Centres for Sustainability, the Central Banks and Supervisors Network for Greening the Financial System, among others they project as world leaders in respect to sustainable finance.
More specifically in this regard, we will focus our attention on the main challenges defined by the Luxembourg Bankers’ Association (ABBL, for its acronyms in French) that are to be overcome, and what actions have Luxembourg engaged to address them.
The strategy of the banking sector in contributing to mainstream sustainable finance
We can summarize the main points of the strategy that were delivered by the Ministry of Finances of Luxembourg:
1. Driving and developing climate finance capabilities
By focusing on the creation of green funds, blended financing can be achieved to deliver the capital needed for the transition towards sustainable finance. The LGX, for example, is a part of this strategy, as it only lists 100 % green bonds. The International Climate Finance Accelerator (ICFA), a fund initiated in 2018 by both public and private financial institutions, has already secured notable investments in, such as a USD 3.2 million investment from Empower New Energy. Another one, The Forestry and Climate Change Fund (FCCF), has already begun sustainable forest management operations in Costa Rica, in association with local entrepreneurs, to broaden their financial portfolio by investing abroad. Adding economic value to natural resources has a positive environmental and social impact, which is the goal of sustainable finance. Finally, more than USD 1 billion were raised for Planet Emerging Green One, a fund created between the International Finance Corporation (IFC) and Amundi, for buying labelled green bonds issued by emerging market banks.
2. Creating strategic partnerships
China and Europe are the world two largest green bond markets, according to the CBI. It is no secret that Luxembourg is Chinese investors preferred gateway to Europe, being Luxembourg the place the People Republic of China chose for their first international operations, back in 1979. The LuxSE partnered in 2017 with the Shenzhen Stock Exchange (SZSE) the Shanghai Stock Exchange (SSE), two of the most prominent and important Chinese financial institutions. The agreement signed between the LuxSE and the CIBM eases the availability of information between both markets, thus fomenting investing.
The barriers: lack of policy, education, and training at all levels (bond issuers, service providers, investors)
Government policies need to exist to guarantee safe investing, and at the same time be flexible enough to ensure attractive investment. In this regard, the Luxembourg Sustainable Finance Roadmap was created in order to gather as many stakeholders (public and private) together as possible sharing a common, public agenda. This initiative depicts one of the actions the government has taken towards the fulfillment of the objectives fixed at the Paris Agreement.
Public finance alone will not be sufficient – private investments will play a key role in achieving the annual USD 100 billion goal in 2020 in the field of international climate finance in order to reassure developing countries – Carole Dieschbourg (Minister for the Environment)
Luxembourg is also home to LuxFLAG, the first independent labelling agency, created in 2006. It provides quality labels and thus clarity and confidence to investors in sustainable investment funds and financial instruments.
All this and more leads to the conclusion that, as a country, Luxembourg could establish itself as a world leader in the field of sustainable finance, based on their accumulated expertise, solid and trusted financial institutions, and their regulatory legal framework.