Luxembourg ESG Funds Experience 12.3% Recovery

On Thursday 5 December 2024, the Luxembourg Sustainable Finance Initiative (LSFI) presented the report "Sustainable Finance in Luxembourg 2024: A Maturing Ecosystem" at a press conference, held at PwC Luxembourg, Cloche d'Or.

The report found that Luxembourg continues to solidify its position as a global leader in sustainable finance, with key developments in Environmental, Social & Governance (ESG) Undertakings for Collective Investments in Transferable Securities (UCITS) fund performance and ESG private markets growth. 

According to PwC, the report marked the third edition in its series and aimed to provide a picture of the state of sustainable finance in Luxembourg. It examined the core ESG strategies adopted by mutual funds based in Luxembourg, focusing on their evolution in terms of the number of funds and their Assets under Management (AuM) and delving into the ESG strategies employed. It also looked at ESG strategies within private markets and stewardship mandates of Luxembourg players. The study also provided other key updates, including Principal Adverse Impact (PAI) reporting, the use of the voluntary European ESG Template (EET), climate-related affiliations embraced by Luxembourg market participants as well as an overview of the key sustainable finance players in Luxembourg.

The report noted that retail investors showed a strong interest in ESG UCITS funds, pouring in €12.6 billion of net flows during H1 2024. Institutional investors, on the other hand, withdrew €7.8 billion during the same period.

The report also stated that Luxembourg-domiciled ESG UCITS experienced a substantial 12.3% increase in (AuM) from €2,893.1 billion in H2 2022 to €3,247.7 billion June 2024. This rebound reflects growing investor confidence and strategic advancements within the sustainable finance ecosystem. 

Private market accelerated with ESG private market funds demonstrating exceptional growth, achieving a Compound Annual Growth Rate (CAGR) of 95.2% from 2019 to 2023. Private equity remains the leading asset class, with €267.5 billion in AuM, followed by infrastructure (€188.9 billion), real estate (€107.7 billion), and private debt (€58.7 billion).

Referencing Sustainable Finance Disclosure Regulation (SFDR), the report stated that the majority (68%) of the AuM of Luxembourg-domiciled UCITS corresponds to funds disclosing as per Article 8 of the SFDR, followed by 27% for Article 6 and 4% for Article 9.

Of 440 financial market participants surveyed, 106 published a report on the PAIs of their investment decisions, while 195 issued an explanation as to why they do not consider PAIs.
The report observed that the updated European Long-Term Investment Fund (ELTIF) fund structure simplifies access for retail investors to participate in private markets, paving the way for new opportunities in sustainable and ESG-focused investments.

Commenting on the report, Nicoletta Centofanti, CEO of LSFI, stated: "Sustainable finance is essential for Luxembourg's financial centre to address climate and nature-related risks and take an active role towards the current social and environmental challenges. Sustainable Finance is also an opportunity for financial institutions related to funding, talent and reputation, among many others. In short, embedding sustainable finance is key to the future resilience and competitiveness of our financial centre. However, it is a complex journey requiring new skills, metrics and processes. This study aims to support the financial sectors in this regard, assessing Luxembourg's progress, trends and challenges in sustainable finance. Gaining this understanding is essential for financial market participants to fulfil their crucial role in driving the much-needed sustainable transition."

Frédéric Vonner, Advisory Partner, Sustainability at PwC Luxembourg, added: "The evolution of frameworks like ELTIF 2.0 and SFDR will open new doors for retail and institutional investors to align their portfolios with meaningful environmental and social goals. To maximise our impact, we must prioritise data quality, standardised reporting and effective impact measurement. Embracing innovation and technology, such as AI-driven data analytics and blockchain-based traceability, can unlock new opportunities and drive sustainable growth. By collaborating closely with international partners, Luxembourg can continue to set the standard for how financial markets drive the transition to a more equitable and sustainable world."

On the question of how sustainable finance actors in Luxembourg rate in terms of the transition towards increased sustainability compared to the rest of the world, and if there are specific sectors that are progressing faster than others, LSFI CEO Nicoletta Centofanti told Chronicle.lu: "Luxembourg is home to pioneering players such as the Luxembourg Green Exchange, the International Climate Finance Accelerator (ICFA), the International Social Climate Accelerator (ISFA), LuxFLAG, and various blended finance structures initiated by the government. The Global Green Finance Index (GGFI) consistently ranks it as one of the best green finance centres in the world in its annual assessments. These efforts have cultivated significant expertise and helped position Luxembourg at the forefront of sustainable finance."

"Our study indicates that Luxembourg continues to advance in this field. By the end of June 2024, ESG funds in Luxembourg saw a 12.3% rebound in AuM, and the growth of ESG private market funds domiciled in Luxembourg has been remarkable, achieving a CAGR of 95.2% from 2019 to 2023," she continued. "Looking ahead, it is crucial to address existing challenges related to data standardisation, regulation and impact measurement. By tackling these issues, Luxembourg can fully leverage the opportunities presented by sustainable finance to address social and environmental challenges and to ensure the resilience of its financial sector."