Sustainable finance is coming to the fore on the agendas of financial institutions, governments, decision-making bodies and corporates, among others. What started as a niche field has ramped up over the last years, triggered by the regulatory agenda, increased investor demand and the apparent effects of climate change. The development of sustainable finance indeed suggests that a paradigm shift is taking place within the financial industry, and financial risk considerations now need to be complemented with those of ESG risks, and ESG criteria now stands at the forefront of financial players’ investment decisions across the industry.
Luxembourg has long been a pioneer in the sustainable finance landscape – being home to leading and innovative solutions in this space. In 2020, the country launched the Luxembourg Sustainable Finance Initiative (LSFI) in order to have a coordinating entity in the field of sustainable finance, to find synergies among the different players, and raise awareness on this very relevant matter with the ultimate goal of advancing the sector’s transition.
Today, following its mission, LSFI embarked on an undertaking with PwC Luxembourg to analyse the status of sustainable finance in Luxembourg. We sought to complement the extensive and hard work of financial players over the last years in the area of sustainable finance and further deep dive into it by having a closer look at the extent to which sustainable finance is applied as well as how it is applied. Thus, with this study, we aim to provide a baseline for the financial industry, bring transparency and clarity, and identify strengths and gaps in order to help find improvement actions and appropriate solutions for the advancement of sustainable finance.
Some key takeaways from the report
- ESG fund AuM represents more than half of Luxembourg UCITS assets
- Asset allocation is well-diversified
- Active management is the primary management strategy for ESG UCITS AuM
- Applied ESG investment strategies
- Assessing impact
ESG fund AuM represents more than half of Luxembourg UCITS assets
Despite the economic uncertainty and market turmoil during the first half of 2022, Luxembourg-domiciled ESG funds registered EUR 2.2tn in total assets at the end of June 2022. This ESG fund AuM represents approximately 54.6% of the country’s overall UCITS fund assets, which surpassed EUR 4.0tn by the same period.PwC estimates the AuM of ESG UCITS funds domiciled in Luxembourg will surpass EUR 3.3tn by 2026. In terms of number of funds, ESG funds correspond to 4,022 out of the 9,656 funds in our sample, highlighting the far-reaching extent of sustainability integration within the Luxembourg fund investment framework.
Asset allocation is well-diversified
Luxembourg-domiciled ESG UCITS funds are relatively well-diversified in terms of asset allocation. In terms of leading sectors, the Software and Services sector held the highest asset allocation sitting at 9.7%, followed by Pharmaceuticals at 9.1%, and finally Capital Goods at 8.4%.
Active management is the primary management strategy for ESG UCITS AuM
93% of ESG funds’ AuM in Luxembourg is actively managed, hinged on the notion that intentional and proactive ESG integration is preferably executed actively. Nevertheless, we are seeing a growing attraction towards passive ESG investments by investors who are drawn in by its low costs, reduced risks and diversification benefits. Further, the expanded adoption of the EU Climate Transition benchmarks EU Paris-aligned benchmarks could see a rise in ESG passive investments.
Applied ESG investment strategies
The study showed active management to be the predominant strategy for 92% of Luxembourg’s mutual fund. In the ESG segment, three core strategies emerge from the study:
- ESG Exclusion Strategy - ESG Exclusion funds, i.e., funds that apply one or more exclusion criteria were the most predominant fund type in Luxembourg accounted for 54.8% of the ESG UCITs. Out of these funds, 27% apply up to 2 exclusions while 21% apply up to 3 exclusions – mainly from the weapons, tobacco and fossil energy sectors. The largescale use of this strategy is linked to the exclusion of companies in controversial sectors from their portfolios being the preliminary step for asset managers who are beginning to take a stand towards sustainability.
- ESG Screening Strategy - ESG Screening funds, i.e., funds which only apply ESG factors into their overall screening process was the second most applied strategy, with 31% of fund assets.
- ESG Involvement Strategy - ESG Involvement funds i.e., funds that cover Best-In-Class, Positive Tilt, Thematic, Microfinance, Sustainable Development Goals or Sustainable Bonds within their ESG strategy was the least applied, accounting for 18% of funds in the research sample and 14% of ESG fund assets.Some of these funds in this cluster were also found to implement ESG exclusion, with 66.6% of them excluding at least one sector from their universe of investable assets, and 11% excluding up to 5 sectors.
Assessing impact
The lack of standardisation among ESG data providers, as well as a lack of generally accepted, standardised and utilised impact measures make it particularly difficult to assess the impact of sustainable finance investments on the real economy at this stage. To achieve a greater understanding of overall investment ESG approaches and investments’ impact, an additional look at the underlying companies and their ESG dimensions – collected in a standardised and comparable way – should be further explored.
Contact us
Frédéric Vonner
Advisory Partner, Sustainable Finance & Sustainability Leader, PwC Luxembourg
Tel: +352 49 48 48 4173
Partner, Global AWM Market Research Centre Leader, PwC Luxembourg
Tel: +352 49 48 48 2191