Luxembourg: the natural choice for international sustainable finance

The Euro area’s leading international financial centre, Luxembourg is today globally recognized as an ideal platform to assist companies, governments and investors around the world to meet their sustainable development targets.

In recent years, financial markets have developed instruments that are specifically designed to raise money for sustainable development aims. Luxembourg has been at the forefront of this development, thanks to close cooperation between the public, private and civil society sectors. The Luxembourg financial centre has developed an ecosystem that is uniquely suited to raising international capital for sustainable investment.

Luxembourg has a long-established track record as the location of choice for sustainable and impact investment funds, with a total market share of 39% of responsible investment funds in European, over 60% of European impact funds as well as over 60% of global microfinance assets, and has been a pioneer in the area of sustainable finance labels for more than a decade. Moreover, half the world’s listed green bonds are listed in Luxembourg, with the Luxembourg Stock Exchange offering a dedicated platform for green securities as well as social and sustainable bonds.

CLIMATE FINANCE

The COP 21 Paris Agreement signed by 185 countries in 2015 and ratified the following year in Marrakech, marked a turning point in the global fight against climate change. The Agreement was premised on the need to mobilise $100 billion annually between now and 2020 and a total $1 trillion by 2030 in order to keep global warming under 2°C.

In order to achieve this, public investment will not be sufficient: public and private funding will need to be aligned. By committing to sustainable finance, financial centres have an important multiplier effect. Responding to investor demand for social impact and ecological accountability, the financial sector plays a crucial role in helping to attract new pools of funding to projects that aim to mitigate and adapt to climate change. Thanks to the right market infrastructure and a tried and tested investment fund ecosystem to leverage both public and private investments, the Luxembourg financial centre is ideally placed to help intentional public and private investors and issuers make a real impact in the global fight against climate change.

A coherent climate finance strategy to leverage international private sector investment:

Since 2015, the Luxembourg government and Luxembourg’s financial services industry have been working together in a dedicated Climate Finance Task Force, implementing a coherent and fully integrated Climate Finance Strategy with the dual objective of contributing in a meaningful way to the international fight against climate change and cementing Luxembourg’s role as an international centre for climate finance.

The strategy is built on four key vectors:

1. to consolidate and leverage Luxembourg’s existing expertise in sustainable finance to drive and develop climate finance capabilities,
2. to enter into strategic partnerships with climate finance leaders such as the European Investment Bank and the International Finance Corporation,
3. to ensure quality control in the specific area of climate finance notably via standards and dedicated labels, and
4. to encourage innovation in climate finance.

This work has already resulted in several key initiatives, including:

The Luxembourg Green Exchange

In 2016, the Luxembourg Stock Exchange launched the Luxembourg Green Exchange (LGX), the world’s first platform exclusively dedicated to green securities, and today listing half the world’s green bonds. The LGX today also features a dedicated social and sustainable bond window.

Luxembourg-EIB Climate Finance Platform

Together with the European Investment Bank (EIB), the Luxembourg government launched a joint platform with the aim to mobilise investments for projects with a strong impact in the fight against climate change. It is the first time the EIB enters in such a partnership with a Member State. The Luxembourg government contributes 30 million euros as a first-loss guarantee to mitigate private sector investor risk, with the EIB as a co-investor in investment funds dedicated to finance climate change mitigation and adaptation, including in developing countries.

IFC Green Cornerstone Fund

As a strategic partner of the International Finance Corporation (IFC), the Luxembourg government contributes to a technical support facility of the Green Cornerstone Bond Fund, a Luxembourg based investment fund that targets green bonds emitted by banks in developing countries. The fund will buy green bonds issued by banks in Africa, Asia, the Middle East, Latin America, Eastern Europe and Central Asia and as such deepen new green capital markets in countries where such a market was non-existent so far.

Climate Finance and Green Bond labels

In 2016, the labeling agency LuxFLAG launched a dedicated Climate Finance quality label to ensure the effective climate focus of investment funds in the implementation of their investment policy. In the same spirit, the agency launched a specific Green Bond label in 2017.

Climate Finance Accelerator

The Luxembourg government and partners from the private sector will set up a Climate Finance Accelerator facility to help innovative fund mangers specialising in climate action by offering various forms of support, including support in fund raising with institutional and public investors as well as financial and operational support during the launch phase of a new fund structure.