One big “hot topic” at the moment is ESG and sustainable finance. Investors now recognise the importance of sustainability as a strategic competitive factor. Both millennials and pensioners are looking for their money to be invested in accordance with environmental, social and governance (ESG) principles and in investments which create an impact on society. Luxembourg has long been positioning itself in the field of ESG and sustainable finance.
Luxembourg has an enormous opportunity to build upon its existing experience and expertise in finance and investment funds to ensure that there are suitable products on the market to meet the demand for these types of investments. Indeed many steps have already been taken in this direction.
In October 2018 the Luxembourg government published its Sustainable Finance Roadmap. One of its recommendations was to develop a toolkit for sustainable investment funds and other financial products.
The Luxembourg Finance Labelling Agency (LuxFLAG) was created in 2006 and aims to promote the raising of capital for the Responsible Investment sector by awarding a recognisable label to eligible investment vehicles. They now offer investment funds, a Climate Finance, Environment, and ESG as well as the original Microfinance labels. They also offer the green bond label. As of December 2019 the total number of investment products granted a LuxFLAG label was 183.
The Luxembourg Stock Exchange launched the Green Exchange in 2016, a dedicated platform for green, social and sustainable securities.
Another trend is the continuing search for yield in low interest rate and volatile equity markets, a trend that is likely to continue given recent turbulence.
Low interest rates and volatile equity markets are leading pension funds and other investors to invest in alternatives in their search for yield. Luxembourg has proven itself in the fields of private equity and real estate, two of the stars in the alternative assets field. With its huge toolbox of available structures and its strong regulatory framework Luxembourg is ideally situated to provide investors with a wide choice in a known and recognised jurisdiction.
The specialised investment fund in risk capital offers investors the opportunity to invest in alternatives in a structure that is regulated and supervised. The Reserved Alternative Investment Fund offers a solution for those not needing a regulated structure but wanting the comfort of having the vehicle managed by a fully authorised manager. It is also a popular solution for those funds wishing to get to market more quickly than they might do with a regulated structure.
Alternative assets have in addition become more attractive to retail investors. Structures, such as Part II Funds under the Law of December 17, 2010 without the well informed investor restrictions, are being set up to allow retail investors to access to these type of assets. There is an opportunity for Luxembourg to build upon this trend. Of course investment in such assets is generally illiquid but we are seeing more and more funds being structured and managed in a way that offers investors limited redemption possibilities. Transparency and disclosure on the nature of the investment in such circumstances are essential.
One further trend that offers opportunities is the push towards personal pension products. In an effort to increase the number of European citizens enrolled in a pension product, the EU regulation 2019/1238 on a pan-European Personal Pension Product entered into force in the summer of 2019. The drive to give savers more choice and provide them with more competitive personal pension products when saving for retirement is an opportunity for Luxembourg.
Given the stable regulatory environment and the strong infrastructure around funds in Luxembourg there is a real opportunity for Luxembourg to attract financial providers such as insurance companies, asset managers, banks, investment firms and occupational pension funds. Added to that is the experience Luxembourg has in passporting funds across borders - the PEPP is intended to be a portable product, enabling savers to transfer the benefits earned in a Member State to another when moving between them. A certain number of delegates and implementing will need to be established but it is expected that the first PEPPs will appear in late 2021 or early 2022.
Another trend is the continuing search for yield in low interest rate and volatile equity markets, a trend that is likely to continue given recent turbulence.
