Luxembourg has launched a sustainable finance strategy to encourage investments that have a greater positive impact on people and the planet. According to its coordinators, the initiative builds on priorities outlined by the Paris Agreement on climate change and the European Commission, while aligning with international commitments to “build back better” – and more sustainable – from the COVID-19 pandemic.

“What a financial center like ours can trigger is [a bump] from the billions to the trillions [in investments] in favor of issues such as the environment,” said Luxembourg’s finance minister Pierre Gramegna at the virtual launch event. “We can convene the private sector… and leverage our position within the European Union, which is a leader in sustainable finance.”

Luxembourg’s investment fund industry has EUR 4.7 trillion (USD 5.13 trillion) in assets under management but, as Minister Gramegna noted, only a small portion is channeled toward initiatives that comply with economic, social and environmental sustainability criteria. “The financial sector has to change because we need a lot of money to transform our economies,” said the Minister for the Environment, Climate and Sustainable Development Carole Dieschbourg.

The strategy will be implemented by the Luxembourg Sustainable Finance Initiative (LSFI), a not-for-profit association founded in 2020 by the government, an independent advisory body that represents civil society, and Luxembourg for Finance. The LSFI was born out of a roadmap for sustainable finance that Luxembourg published in 2018 in collaboration with UN Environment (UNEP).

Three pillars

The LSFI will act as a coordinating entity among different actors and sectors, from the financial industry to researchers, philanthropists, and civil society. Its work will be organized around the principles of promotion, unlocking potential, and measuring progress.

“We will raise awareness, facilitate synergies, and promote tools for sustainable finance among all of them,” said sustainability adviser of the LSFI Nicoletta Centofanti. The LSFI also intends to cement the country as an international hub for sustainable finance. Centofanti said there are likeminded initiatives in cities such as Toronto and Zurich, which are members of the Finance Centres for Sustainability network, or FC4S, but pointed out that Luxembourg has launched one of the first national-level strategies.

According to the Global Sustainable Investment Alliance (GSIA), USD 23 trillion, or 26 percent of all assets under management, were in investments that take into account environmental, social, and governance (ESG) issues.

Among other things, the LSFI will curate the latest news and resources on the topic; provide guidance on available tools, standards, and trainings; support existing working groups and, if necessary, the creation of new ones; and facilitate the exchange of knowledge and experiences to encourage the development of sustainable financial solutions.

“Topics such as biodiversity loss were not on the financial sector’s radar in the past, and we see our role as helping the willing transition as smoothly and rapidly as possible toward better social, environmental, and corporate governance,” said Centofanti.

The idea is that financial institutions increasingly support endeavors – public or private – that balance economic, social, and environmental outcomes. That could range from investing in schools that foster inclusivity to helping steel production plants transition toward greener operating models.

To measure progress on the integration of financial sustainability criteria, the LSFI plans to set up a monitoring framework in collaboration with public and private stakeholders. One of the first initiatives under that pillar will be coordinating a climate scenario analysis so that financial institutions understand to what extent they are contributing to the delivery of the Paris Agreement on climate change – in terms of, for example, reducing greenhouse gas emissions.

“We will start with that because measurement systems for climate change-related issues are amongst the most advanced,” said Centofanti, who noted the strategy is built around short-, medium-, and long-term targets to be achieved over the next decade.

For Minister Gramegna, the future of sustainable finance depends not only on the financial industry, but also on holistic societal change. “If you ask people in Luxembourg if they are in favor of clean energy, 95 percent will say ‘yes,’ but if you ask the ones that agreed whether they are ready to pay five more cents per kilowatt, a huge number will say ‘no.’ This is not coherent,” he said.

“We need everybody to realize that sustainability is a must for ourselves and for the planet.”