Almost six in 10 Luxembourg management companies, banks and insurance companies fulfilled the Sustainable Finance Disclosure Regulation’s (SFDR) “comply or explain” rules, according to a report, but discrepancies were found in the reporting of principal adverse impacts (PAIs)
The study, Sustainable Finance in Luxembourg 2023: An expanded overview, by the Luxembourg Sustainable Finance Initiative (LSFI) and PwC Luxembourg, found 57.2% of the country’s 485 financial institutions it reviewed met the obligation in relation to reporting on the PAIs of their investment decisions on sustainability factors.
However, of these, only 22% published a PAI report, with significant discrepancies in the type and quality of data used. A little over a third (35%) published a declaration not to report on the PAIs. Additionally, 180 entities (37%) did not manage to meet the reporting or declaration requirements.
Overall, PAI reports in Luxembourg firms are highly heterogeneous, the report found, with entities designing their own reports without referring to a standardised methodology across industries.
A small proportion of Luxembourg-based firms adhere to one of the following climate initiatives or tools: the Glasgow Financial Alliance for Net Zero (GFANZ), the Partnership for Carbon Accounting Financials (PCAF) and the Science-Based Targets Initiative (SBTi). Of these PCAF is the least popular, with only 8% of all entities adhering to this.
Super management companies, which are UCITS firms that are also appointed to manage an alternative investments fund, have the most overall adherences, with 42% adhering to at least one of the three initiatives or tools.
Overall the report found ESG funds account for a majority (67.3%) of Luxembourg’s UCITS assets under management, reaching €2.8tn in assets by the end of June 2023.
Article 8 funds represent 43% of Luxembourg-domiciled UCITS funds, a 34% increase year on year. ESG exclusion remains the most common strategy employed, making up 59.1% of ESG UCITS assets.
ESG funds managed by Luxembourg firms showed greater resilience than non-ESG funds, the report found. ESG funds saw net outflows of €76.9bn in 2022, while the latter saw net outflows €98.6bn.
Asset managers headquartered in the US and France remain the top ESG managers in Luxembourg, according to the research, with US-based asset managers accounting for €756.6bn in assets under management.
The investment fund industry remains the only sector in Luxembourg for which accessible (paid) ESG data is available, the study found, with ESG data evaluated across industry studies heavily dependent on data providers which typically have exclusive control over the collection and classification of ESG data.
Nicoletta Centofanti, CEO of the LSFI said the study “underscores the sustained growth and evolution of sustainable finance”, but added “this journey is only in its initial stages”.
“Challenges and limitations persist, with a notable focus on data, standardisation and disclosure. Moving forward, crucial steps include further data availability and comparability. These are vital measures for the industry’s development, as well as to effectively measure and monitor progress,” she said.
Frédéric Vonner, sustainable finance and sustainability leader at PwC Luxembourg said “a significant paradigm shift has taken place”, particularly following the official adoption of the United Nations’ Sustainable Development Goals and the Paris Agreement.
Vonner said: “European Union policymakers have been at the forefront of advocating for sustainability, spearheading initiatives like the EU Action Plan on Sustainable Finance and the groundbreaking European Green Deal.
“These initiatives aim not only to position Europe as the inaugural climate-neutral continent, but also to play a pivotal role in fostering the worldwide shift toward a sustainable economy,” he added.