The goal of the study, a joint undertaking between the Luxembourg Sustainable Finance Initiative and PwC, was to analyse key trends and to assess the impact of sustainable finance on the real economy.
It focused on the grand duchy’s investment fund industry, and on Luxembourg-based Ucits in particular, as it provided the only set of “exhaustive data” that was available and workable, explained Frédéric Vonner, sustainable finance and sustainability leader at PwC.
€2.216trn in ESG funds
The results showed that Luxembourg-domiciled ESG funds counted €2.216trn in assets at the end of June 2022, representing more than 50% of the country’s Ucits fund assets (€4.060trn).
Most of these funds were in equity and bonds, which could be explained by the fact that it is easier to select investments and issuers that commit to a certain level of ESG criteria.
53% of assets in Article 8 or 9
As of June 2022, over 53% of the total Luxembourg Ucits assets were invested in Article 8 or 9 funds. Funds classified as Article 8 contained the largest share of assets (47%). The report finds that the “observed popularity” of Article 8 funds is likely due to the “less stringent nature of this segment’s disclosure requirements.” It has been used as a “starting point” to develop sustainable fund options.
Article 8 funds use sustainable criteria in their investment process, Article 9 funds have a sustainable objective for their investments, while Article 6 funds make no sustainability claims.
In response to a question as to whether Article 8 or 9 funds might be “downgraded,” Vonner said there were approximately 40 funds that had been downgraded from Article 9 to 8 in the EU [editor’s note: Morningstar reports that 41 funds were downgraded in Q3 of 2022]. For Vonner, the rationale could be that “certain asset managers might have been a bit too optimistic” for the 2021 deadline and they are now faced with the reality of data not being available or the evolution of regulators’ approaches.
ESG screening, exclusions and involvement
The study found that ESG exclusion was the most common strategy followed in Luxembourg-domiciled ESG funds (54.8%). This means that assets are chosen by excluding certain types of investments, such as weapons, tobacco or fossil energy.
ESG screening, meaning that funds were labelled as ESG because they included ESG factors in their screening process, was the second-most common strategy.
The third category was ESG involvement funds. These funds consider companies that “actively employ best ESG practices” or have a “high level of ESG integration within their governance and integration.” This could include working towards the UN’s Sustainable Development Goals or a specific theme, like microfinance. The study found that there were much higher stakes of equity in terms of asset structure (64%) for ESG involvement funds, perhaps because it is easier to achieve a given objective, compared to, for example, money market funds, according to Vonner.
Largest allocation to software and services sector
The top three sectors with the highest allocation of ESG fund assets were software and services (9.8%), pharmaceuticals, biotechnology and life sciences (9.1%), and capital goods (8.4%).
Over half of assets allocated to funds with global focus
The study found that 55.4% of Luxembourg-domiciled ESG assets are allocated to funds with a global focus, 18% are allocated to Europe-focused funds, 8.7% to US-focused funds and 8% in funds that invest in emerging markets.
The study also explored qualitative aspects of sustainable finance in the grand duchy. Luxembourg is very active in the field of blended finance, added Maria Tapia Rojo, communication manager for the LSFI, and has launched several initiatives, such as the Luxembourg-European Investment Bank Climate Finance Platform or the International Climate Finance Accelerator. The ICFA, for example, supports first and second-time fund managers in the field of climate finance.
In addition, the Luxembourg Green Exchange has grown considerably since its establishment in 2016--from 106 to 1450 bonds.
Multiple methodologies were employed to try to assess the impact of sustainable finance on the real economy, but in fact, “the study concludes that at the moment, it is not possible to assess the impact of sustainable finance on the real economy,” said Tapia Rojo. This is because there is a “lack of standardised and widely used and widely known ways to measure sustainable finance impact.”
Read the full report here.