As EU financial centres work to position themselves as hubs for certain post-Brexit activities, Luxembourg’s Minister of Finance looks to put his country at the center of green investment growth.
At a recent Luxembourg funds conference (ALFI) in London, Luxembourg’s Minister of Finance, Pierre Gramengna, announced that he aims to position his country as a hub for global asset managers looking to launch “green” funds. Lux is already a leader in green bonds – debt securities dedicated to financing or refinancing investment projects related directly to things like renewable energy and low carbon/low emission transportation. As UK-based asset managers are assessing locations for post-Brexit business activity, they may see Luxembourg as a natural home to cultivate the seeds of sustainable finance.
While Luxembourg is not the only financial centre looking for a piece of the rapidly growing sustainable investment pie, it may be the farthest along. In 2016, Lux launched the first dedicated platform for green bonds, the Luxembourg Green Exchange (LGX), where more than half of green bonds are listed globally. It has also enshrined legislation, implemented support structures, and established key strategic relationships in the space.
Listings to LGX are exclusive to issuers (and investment funds) with a green, social, or sustainable focus who must provide transparent disclosures and reporting on an ongoing basis. Luxembourg also signed strategic agreements on climate finance with the European Investment Bank (EIB), Chinese government agencies, banks, and stock exchanges, some of which have already issued green bonds through the LGX.
The EU Pursues Clarity
The absence of a common taxonomy complicates green and sustainable investment growth. Recently, the European Commission endeavored to address this issue and form consensus on definitions and standards in the sector. The Commission published an ambitious action plan on sustainable finance, representing the most tangible public policy attempt to date to align the financial system with long-term climate goals. Both Luxembourg and Ireland have been vocal advocates in framing this important policy initiative.
There are also proposals to introduce EU-wide green labels for bonds and investment funds, so that investors can trust a labelled product will meet certain criteria and compare products across member states.
Green advocates strongly maintain that it’s better to do well whilst doing good. An ever-increasing body of research supports the thesis that sustainable investment portfolios are capable of maximizing risk-adjusted returns over the longer term and further evidence that clients are willing to pay a premium for investment products that consider sustainability, ethical, and environmental issues.
Post-Brexit Green Hub
While the current lack of common standards and definitions has resulted in some cynics proclaiming that green investment is a short-term fad which ultimately harms investment returns, the UK’s Mark Carney, France’s Emmanuel Macron, and Blackrock’s Larry Fink have openly advocated otherwise. In fact, Larry Fink’s open letter to the CEOs of their investee companies urging them to look beyond profits toward social purpose ensured a watershed moment for sustainable investing.
At its core, sustainable investing is about appropriate risk management, data analytics, good governance, and long term financial stability and resiliency of investments. These are areas asset managers cannot afford to ignore.
It is also likely that within their ongoing post-Brexit assessments, many asset managers may look to Luxembourg and Ireland as hubs of green investment activity. Current listings appear to show a strong gravitational pull to Luxembourg for UK asset managers looking to expand in this area, but also to Ireland which is looking to benefit from the green and sustainable investment revolution. When summed up the mixture of political will, investor demand, and rapidly maturing regulatory framework points to a strong future for green and sustainable investing.