LUXEMBOURG
SUSTAINABLE
FINANCEROADMAPA JOURNEY TOWARDS ASUSTAINABLE FINANCIAL SYSTEM

October 2018

ABOUT PARTNERS ANDRESEARCH TEAMDavide Dal Maso

Corinne Molitor, Lennart Duschinger, Felix Schadeck

United Nations Environment Programme - Finance Initiative
www.unepfi.org
United Nations Environment Programme – Finance Initiative
is a partnership between United Nations Environment andthe global financial sector created in the wake of the 1992
Earth Summit with a mission to promote sustainable finance.
More than 200 financial institutions, including banks, insurers, and investors, work with UN Environment to understand
today’s environmental, social and governance challenges,
why they matter to finance, and how to actively participate inaddressing them.

Innpact
www.innpact.com
Innpact leverages more than 10 years of experience inenabling impact investing play an active role in the achievement of the Sustainable Development Goals.
It has an unrivalled expertise in designing and structuring
impact investment funds and blended finance vehicles.
Innpact supports promoters and fund managers for impact
investment projects totaling more than USD 5 billion. With
its team of 30 experienced impact professionals, it serves awide range of clients from development finance institutions
to foundations, banks, NGOs, institutional investors and fundmanagers from all over the world.

STEERING COMMITTEETom Theobald
Luxembourg for Finance

Jennifer de Nijs
Ministry of Finance

Eric Usher
UNEP Finance Initiative

André Weidenhaupt
Ministry of Sustainable Development and InfrastructureTABLE OF CONTENTS
1. FOREWORD...................................................2

Minister of Finance: Pierre Gramegna................................................................2
Minister for the Environment: Carole Dieschbourg........................................... 3
Head of UN Environment: Erik Solheim............................................................. 4

2. ABOUT THIS ROADMAP................................5
3. EXECUTIVE SUMMARY.................................6
4. SUSTAINABLE FINANCE IN THE ERA
OF THE “GRAND TRANSITION”...................10
4.1.
4.2.
4.3.

Global macrotrends.............................................................................. 10
Key features of Luxembourg’s financial centre.....................................16
Stocktake of Luxembourg’s sustainable finance initiatives................ 18

5. A ROADMAP FOR A SUSTAINABLE
FINANCIAL SECTOR...................................22
5.1.
5.2.
5.3.

Need for collective action..................................................................... 22
Need for a phased approach................................................................ 25
Key recommendations......................................................................... 26

6. CONCLUSION.............................................38
7. REFERENCES..............................................39
8. TABLE OF ACRONYMS
AND ABREVIATIONS................................... 41
9. ACKNOWLEDGMENTS................................42

1. FOREWORD
Minister ofFinance
PierreGramegna

Climate change is the challenge of our time. Its consequences are global in scale and will affect all of us andour children. Therefore only a shared and collective
response as agreed in the Paris Agreement can succeed
in combating its effects. It acknowledges that financehas to play a key role in the transition to a low carbon
and climate smart future. Substantial investments fromthe private and public sector will not only finance thefight against climate change, but also help countries toachieve their Sustainable Development Goals.

As one of Europe's leading financial centres, Luxembourg
already plays an important role in mobilizing private andpublic capital, in order to assist governments and investors around the world to mitigate
climate change.
In 2016, the Luxembourg Stock Exchange launched the Luxembourg Green Exchange (LGX),
the world’s first platform exclusively dedicated to green securities. Today, Luxembourg is
the primary centre in the world for listing green bonds and the European leader in responsible investment fund assets, accounting for 30% of all funds and 40% of all assets undermanagement. Through LuxFLAG, Luxembourg has been a pioneer in the area of sustainablefinance labels for more than a decade. In the latest global Green Finance Index, Luxembourg
ranks 2nd when it comes to Green Finance penetration.
Based on this expertise, the Ministry of Finance and Ministry of Sustainable Development
and Infrastructure have been working hand in hand to further develop the financial
centre's sustainable finance ecosystem, in particular by leveraging private investments
for climate‑related activities. For instance, the International Climate Finance Accelerator,
a public-private partnership, is currently supporting its first-ever cohort of innovative fundmanagers looking to invest in climate projects all over the world.
Deepening its partnership with multilateral actors, the government is running a joint Climate
Finance Platform with the European Investment Bank, which uses first loss funding toleverage private sector investments. Furthermore, Luxembourg is a strategic partner of theInternational Finance Corporation’s technical assistance fund to the Amundi Planet Emerging
Green One Bond Fund.
Looking to next year, we are delighted to be hosting here in Luxembourg the UN Environment
Programme Finance Initiative’s Regional Roundtable for Sustainable Finance in Europe, as
well as the Global Landscape Forum, with the aim to help create new synergies between
different European stakeholders active in the field of sustainable and climate finance.
Building on these achievements, the Luxembourg government has commissioned UN
Environment Programme Finance Initiative to work out this Roadmap to look at how
Luxembourg can continue to consolidate its existing expertise in sustainable finance anddevelop new innovative capabilities. It constitutes a common vision on how to achieve
the objectives of the Paris Agreement and facilitate the financing of the Sustainable
Development Goals. I am pleased to see that all of the financial centre’s key stakeholders
have actively participated in establishing this document.
I am thus confident that this Roadmap will guide Luxembourg on its path to a fully sustainable financial centre and I hope that it will inspire other governments and financial centres
alike to better leverage their financial capacities in our common fight for a more sustainable
future. There is no time to lose!

2 | Luxembourg Sustainable Finance Roadmap | Foreword

Ministerfor theEnvironment:
CaroleDieschbourg

The world is changing! And by that, I mean not necessarily
in a sustainable way. Climate change, land degradation,
biodiversity loss, increasing air and water pollution,
poverty and migration are only some of the challenges
we all need to face today. To counter the immense burdenthat lies upon us and to take responsibility, in September
2015 the international community adopted the Agenda
2030 for Sustainable Development, closely followed by
the adoption of the Paris Agreement on Climate Change
in December 2015. The Paris Agreement is the first-everuniversal, legally-binding global climate deal. It entails
three major objectives.

The first one is to limit the global temperature increase to well below 2°C, with the aim oflimiting this increase even further to 1.5°C, which would significantly reduce the impactsof climate change. Second, the Agreement seeks to strengthen the ability of countries todeal with the unavoidable impact of climate change. Appropriate financial flows must be
put in place to reach these ambitious goals. This brings me to the third goal of the Paris
Agreement: climate finance and the decarbonization of our economies.
The Paris Agreement notably contains the commitment by developed countries to establish
a roadmap to reach USD 100 billion annually by 2020 in the field of international climate
finance in order to reassure developing countries. Furthermore, the Paris Agreement outlines
the main principles of the post-2020 finance regime, notably a more ambitious collective
finance target for 2025. It has been frequently pointed out that public finance alone will not
be sufficient – private investments will play a major role in achieving the annual USD 100
billion goal in 2020.
But investing in new climate finance is far from being enough. Trillions of USD/EUR need
to be shifted from high-carbon investments to low-carbon alternatives. This is why “making
finance flows consistent with a pathway towards low greenhouse gas emissions and climate
resilient development” is recognized as a key objective in the Paris Agreement. This isundoubtedly a strong signal from policymakers to businesses and investors.
Still, climate change and its adverse effects are only one of many issues that need to be
tackled in the context of the Agenda 2030. There is an urgent need to review existing financing models and vehicles and to start acting more sustainably. This is why Luxembourg has
already embraced green finance and is today a European leader in this field.
Luxembourg has all the prerequisites to establish itself as a frontrunner in the field ofsustainable finance, namely: by offering a familiar, trusted and responsive regulatory andlegal framework, through its well-established international finance centre, combining expertise and knowledge; by its willingness to face today’s challenges; and its capability to adapt
and identify innovative and successful solutions.
I am confident that this Roadmap will set the cornerstone for Luxembourg to develop astrong and robust sustainable finance framework.

Luxembourg Sustainable Finance Roadmap | Foreword | 3

Executive
Directorof UN
Environment
Erik Solheim

In 2018, the reality of climate change hit home. As many
countries broke heatwave records, others struggled withfloods and drought, and even the thickest parts of the
Arctic began to melt. We are living in unprecedented andunpredictable times.
Climate change is having a profound impact on humanhealth, the environment and the economy. As we struggle to grasp the magnitude of the change, it is clear that
financial systems need to be better equipped to deal
with climate risk. Profits made at the expense of theenvironment are doing more harm than good and are atbest, short-term.

Countries around the world are acknowledging thecritical role of sustainable finance in driving a sustainable future for the planet. With its emphasis on transitioning to a low-carbon economy,
the European Union Action Plan on Sustainable Finance is an important step in the right
direction.
I congratulate the government of Luxembourg for taking the lead on setting out a national
vision to make its financial sector more sustainable. With its importance as a centre forinternational finance, Luxembourg is well positioned to drive sustainable finance in theregion, and in the global financial system.
In March this year, more than USD 1 billion was raised on the Luxembourg Stock Exchange
for Planet Emerging Green One, a fund that will buy labelled green bonds issued by emerging
market banks. This platform, a joint venture between the International Finance Corporationand the French asset management giant Amundi, will increase the capacity of local banks tofund climate-smart investments. In June, the world’s first forestry-covered bond was issued
on the exchange to invest in sustainable forestry in Sweden. These remarkable achievements
send strong signals to the world that investments of this kind in nature can be both profitable and good for the planet. I trust the findings of this comprehensive study will provide
important guidance to other countries embarking on efforts to build a sustainable future.
Sustainable finance is absolutely critical to achieving the sustainable development goals
because it contributes to value creation which improves economic efficiency, increases prosperity and inclusion, and ensures that the planet continues to thrive.

4 | Luxembourg Sustainable Finance Roadmap | Foreword

2. ABOUT THISROADMAPThis Roadmap was commissioned by the Luxembourg Ministry of Finance and the Ministry of
Sustainable Development and Infrastructure (Department of the Environment). It was draftedin partnership with the United Nations Environment Programme (UN Environment) and withthe support of Innpact, a Luxembourg-based specialist in impact finance. It contributes tothe framework of the “Luxembourg 2030 – National Plan on Sustainable Development” of the
Luxembourg government, the various commitments taken by Luxembourg at international
level and is in line with the trend of leading financial centres’ efforts to boost sustainablefinance.
The Roadmap was drafted under the guidance of a Steering Committee composed ofmembers from both Ministries, UN Environment and Luxembourg for Finance (LFF). Input
from Luxembourg-based and international representatives from government, public institutions, business and financial communities, academia and civil society was obtained throughan open, creative and inclusive process involving various working groups and interview
sessions.
The aim of the Roadmap is to set a vision and lay the groundwork to establish a comprehensive and far-reaching sustainable finance strategy contributing to the Agenda 2030
and towards the objectives of the Paris Agreement. This Roadmap is ambitious in terms of
Luxembourg’s contributions to sustainable development and climate action, it is forward
looking in terms of future opportunities and challenges, and it is shared in terms of achieving buy-in from key public, private and civil society stakeholders.
This Roadmap outlines recommendations on how to reach this vision over time. It is not to
be understood as an Action Plan. The various recommendations need to be complemented
by further analyses in order to develop an actionable plan of concrete measures to be realised over time, considering the specificities and the competitiveness of Luxembourg as afinancial centre.

Luxembourg Sustainable Finance Roadmap | Foreword | 5

3. EXECUTIVE SUMMARY
Sustainable finance as a new paradigm considers environmental, social and governance issues
that traditionally have not been included in financial and economic parameters. The new international consensus is that making profits is compatible with sustainable growth of our economies, an inclusive society and the protection of our ecosystem. In the context of challenges
such as climate change, there is also an appreciation that change is urgently needed.
By leveraging its strengths as an international financial centre, Luxembourg can make anoutsize impact on the development of sustainable finance worldwide. Thanks to its specificculture and areas of expertise, Luxembourg can be a frontrunner in pushing for the mostadvanced solutions, experimenting and implementing new approaches to ensure that sustainable finance products are easy to access, expertly managed, serving a purpose and credible.
This Roadmap sets out the steps needed to achieve this goal.

Macrotrends at the global level
In 2015, several epochal events marked a turning point in the debate on sustainable development: the UN 2030 Agenda for Sustainable Development, including its 17 Sustainable
Development Goals, the Paris Agreement on Climate Change and the UN conference in Addis
Ababa on Financing for Development.
These important achievements stem from a new level of awareness about the need topromote radical changes in our institutional, economic and financial models. While public
and private actors are engaged in a vast process of redefining basic paradigms, the wider
financial system is reflecting on its core purpose, which is to ensure that resources flow to
support the long-term needs of balanced and sustained growth. This is happening alongside
growing institutional demand for ESG products and retail clients more actively questioning
the environmental and social effects of their investment choices.
In this context, policy interventions at the national and international levels have been particularly prevalent over the past five years. Internationally, the most ambitious programme is the
EU Action Plan on Financing Sustainable Growth (European Commission [EC] 2018).1
The EU Action Plan is built on three pillars to:◼◼ reorient capital flows towards sustainable investment◼◼ mainstream sustainability into risk management◼◼ foster transparency and long-termism.

Luxembourg can build on its position
to drive sustainable finance
These drivers present an unprecedented opportunity for Luxembourg as one of the wealthiest countries in the world and a successful financial centre serving the European andglobal economy.
Luxembourg enjoys a close and mutually beneficial working relationship between public andprivate actors, offers a legal and regulatory framework tailored to serving international financial actors and investors, along with excellent recognition and distribution channels for its
investment funds across the globe.
These factors have attracted international banks, asset managers, fund promoters, insurancecompanies, pension funds, sovereign wealth funds and other financial service providers fromaround the world, turning Luxembourg into a leading hub and gateway for international finance.
Through its involvement in a number of initiatives at international and EU level, Luxembourg
has the potential to forcefully drive the agenda for sustainable development.

1

eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018DC0097&from=EN

6 | Luxembourg Sustainable Finance Roadmap | Executive summary

Three recent initiatives illustrate Luxembourg’s pioneering role in using finance to meetsustainability ambitions. It has developed a climate finance strategy to help leverage international public and private sector investments. The Luxembourg Green Exchange is the firstplatform exclusively dedicated to sustainable securities, listing almost half of the world’s
green bond volume and an estimated third of sustainability and social bonds. The Forestry
and Climate Change Fund has a €7.5 million first-loss tranche guaranteed by the Climate
and Energy Fund as well as a €5 million investment by the Ministry of Finance. And in July
2018, Luxembourg established a legal framework for green covered bonds – the first of its
kind globally.
Building on its strengths and expertise, Luxembourg can be a test market, a standard setterand a multiplier on an international scale. Its multi-stakeholder approach allows market forces
to innovate and develop their potential and it has proven strong expertise in investment funds,
blended finance vehicles, bonds and sustainable labels.

Priorities for making a successful transition
to a sustainable economy and society
In the near future, our economy and society will experience a profound transformation. It
is not just how we produce goods and services, but also how value is created and distributed. Finance has a key role to play, channelling the trillions of dollars of annual investments
needed to achieve the SDGs and the Paris Agreement commitments. There are two key priorities for a successful transition to this future: the need for collective action and the need fora phased approach.
Coherent, consistent actions must be taken at the same time, by both the public and private
sectors. The public sector has to set a clear vision and create consensus around it, whileproviding a stable regulatory framework that supports experimentation. It is for private
actors to identify market needs, develop innovative ideas and grow tested models.
Alongside collective action, the need for a phased approach is key. The concept of a roadmap
encapsulates the need for gradual change with that of definite objectives: the shift must beplanned to allow the system time to adapt without shocks. A phased approach must be
adopted to address potential reduced competitiveness over the short term, but also create
beneficial ripple effects over the long term.

Conclusion
The EU Action Plan has three high-level aims: reorienting capital flows, managing financial
risks linked to climate and other ESG topics, and fostering transparency and long termism.
Luxembourg can be a frontrunner in pushing for the most advanced solutions, experimenting
with and implementing new approaches to ensure that sustainable finance products are:◼◼ easy to access: investors should be able to find a complete and transparent offer ofsustainable investment opportunities◼◼ expertly managed: asset managers should be supported in setting up, managing anddistributing their sustainable products◼◼ serving a purpose: sustainable enterprises should be supported in accessing long-term
funding◼◼ credible: the impact of sustainable financial products should be evaluated in order tocreate clarity and confidence, and avoid greenwashing.
The key recommendations on the following pages have been identified throughout the different working groups and interview sessions, grounded in the spirit of a collective effort. They
range from the need to formalize a strategy and set up a coordinating entity to promoting
innovation, developing expertise, ensuring proof of concept and measuring progress.
Following this Roadmap will allow Luxembourg to take advantage of its specific culture
and areas of expertise and make a meaningful contribution to the financing of sustainable
development.

Luxembourg Sustainable Finance Roadmap | Executive summary | 7

Summary of main recommendations

AMBITION

RECOMMENDATIONSFormalize and communicate an ambitious, tailormade and clear sustainable finance strategy◼◼ Formalize an ambitious, coherent, consistent and transparent Sustainable Finance
Strategy, reflecting the distinctive features and added value of Luxembourg◼◼ Ensure endorsement by all stakeholders involved as well as transparent
communication

Set up a coordinating
entity◼◼ Set up a Sustainable Finance Initiative as a coordinating entity, in the form of apublic-private partnership, as well as sector and/or theme-specific task forces withdefined roles and responsibilities

Leverage financial sector
expertise◼◼ Develop a toolkit for sustainable investment funds and other financial products bycombining existing tools and tailoring them to sustainable finance◼◼ Increase the offer of liquid products, such as sustainable UCITS, listed green andsustainable bonds, savings accounts and insurance products◼◼ Analyse how Luxembourg can leverage its framework and expertise in blended
finance to better connect investors and investees to mobilize finance for sustainable
development

Raise awareness andintegrate sustainability
into education andprofessional training◼◼ Organize regular events, conferences and meeting points on sustainable finance toraise awareness and showcase sustainable finance initiatives and products◼◼ Integrate sustainability into national branding, in order to promote it across the wholeecosystem: sustainable development is a creator of social cohesion, an economic
opportunity and a differentiating factor◼◼ Integrate financial literacy and sustainable finance into school curricula and tertiary
education◼◼ Integrate sustainable finance into all financial sector training◼◼ Consider criteria for ESG fitness assessment of Board members

Promote innovation◼◼ Forge close links between incubators, schools and research centres to attract talentand build human capital◼◼ Promote innovation at the service of the SDGs and explore better leveraging of financial technology to achieve sustainable objectives

8 | Luxembourg Sustainable Finance Roadmap | Summary of main recommendations

Develop expertise and bestpractice◼◼ Promote research programmes on blended finance to finance sustainable
development◼◼ Set up Master and PhD programmes in sustainable finance, such as asset management and impact management and measurement◼◼ Build, strengthen and extend existing expertise in assessing and measuring socialand environmental impact investments◼◼ Develop effective reporting systems and guidelines for ESG reporting

Analyse and redesign thesystem of incentives andtaxation◼◼ Redesign investment incentives to promote long-term investments at the level ofproduct developers, investors and investees◼◼ Analyse how direct tax incentives could be linked to sustainable finance activities andbusiness models◼◼ Analyse whether the scope of reduced indirect taxes should be broadened for sustainable companies and business models

Lead by example andensure proof of concept◼◼ Screen public investments for their ESG soundness and carbon footprint◼◼ Develop and communicate clear guidelines for sovereign funds and public pensions◼◼ Use the influencing power of public funds through active shareholder engagement◼◼ Leverage public funding to ensure proof of concept (for example, through creating asocial and environmental impact fund) and seed-fund these initiatives

Measure progress◼◼ Participate in the elaboration of best practice and indicators with initiatives such as
the International Network of Financial Centres for Sustainability◼◼ Identify stakeholders to ensure the definition and implementation of a controlling
framework◼◼ Organize data collection, measure and communicate on progress over time◼◼ Take corrective actions if necessary

Luxembourg Sustainable Finance Roadmap | Summary of main recommendations | 9

4. SUSTAINABLE FINANCE IN
THE ERA OF THE “GRAND
TRANSITION”
The Luxembourg Sustainable Finance Roadmap (LSFR) is part of a broader movement.
National roadmaps for sustainable finance and the increasing number of financial institutions worldwide adopting sustainable financing and investment practices are clear signalsthat change is taking place.
A growing consensus is building around the following ideas:◼◼ There is no sustainable development without sustainable financing for development, be it
public or private.
◼◼ Implementing the Sustainable Development Goals (SDGs) requires tremendous amountsof money.
◼◼ Making finance flows consistent with a pathway towards low greenhouse gas emissions
and climate resilient development is recognized as a key objective in the Paris Agreement.
◼◼ Public financing alone cannot turn the tide. It must be complemented by the private
sector.
◼◼ Sustainable development projects and programmes need the right financing at the rightmoment.
Sustainable finance as a new paradigm considers environmental, social and governanceissues that traditionally have not been included in financial and economic parameters. The
new international consensus is that making profits is compatible with a sustainable growthof our economies, an inclusive society and the protection of our ecosystem.

4.1. GLOBAL MACROTRENDS
The current debate on sustainable development has its roots in the 1970s and has evolved
along with the growing social and environmental crises. In parallel, the financial market has
experimented with different approaches (using several labels such as “ethical”, “socially
responsible”, “sustainable investment”) to integrate non-financial issues into asset management processes.

A change in political climate
In 2015, several epochal events occurred that marked a turning point: the UN General
Assembly decision on the SDGs, the Paris Agreement on Climate Change and the UN conference in Addis Ababa on Financing for Development.
These important achievements were possible thanks to a new political climate. The level ofawareness on the need to promote radical changes in the institutional, economic and financial models is now widespread, and both public and private actors are engaged in a vast
process of redefining the basic paradigms. That is why we are witnessing initiatives at alllevels driving the renovation of how our economic and financial markets work.

10 | Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition”

Sustainability makes business sense
The integration of environmental, social and governance (ESG) aspects into financial
decision-making processes is increasingly widespread. With solid evidence2 that shows apositive correlation between companies’ ESG and financial performance, both specialisedand “traditional” investors are systematically using pieces of the sustainability analysis to
manage their assets.
More importantly, investors now recognize the importance of sustainability as a strategiccompetitive factor.3 They are pushing investees to define and communicate long-term plansthat consider new challenges and explain how they will cope with them.
This concern shifted the focus from managing specific ESG criteria to a more comprehensive
analysis of the company’s contribution to achieving sustainable development as a whole.
Today, the boundaries between green, social, climate or other types of finance make little
sense, as it is clear that performing well in one ESG area may be insufficient in terms ofsustainability if other areas perform poorly. The Positive Impact Initiative, led by UNEP FI, is
one of the most advanced examples of the approach that business and finance should adopt
to achieve the SDGs (United Nations Environment Programme - Finance Initiative 2017).

An increased focus on impact
This explains the growing interest in impact assessment. Impact finance4 differs from ESG
investment, choosing to focus on the intentional, measurable outcomes of funded activities.
Impact investors are increasingly aware that the real value of sustainable finance is in theextent to which it contributes to generating real change in the economy and in society.
The renewed attention to the actual effects of investments goes hand in hand with the debate
on the real economy and the importance of involving small- and medium-sized businesses(SMEs) as well as large corporates. The financial system is reflecting on its core purpose,
which is to ensure that resources flow to support the long-term needs of a balanced andsustained growth. This is why commercial banks are also trying to integrate sustainability
aspects into their lending policies and credit risk models.5

2

The subject has been extensively investigated by both scholars and practitioners. One of the mostcomprehensive reviews of the literature can be found at austinpublishinggroup.com/business-administration-and-management/fulltext/ajbam-v1-id1016.php

3

A remarkable example of investor engagement is the letter to CEOs sent by Blackrock Chairman
Larry Fink in 2017 www.blackrock.com/corporate/literature/press-release/2017-ldf-ceo-letter.pdf
and 2018 www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

4

Impact investment is defined by the Global Impact Investing Network as “Investments made into
companies, organizations, and funds with the intention to generate social and environmental impact
alongside a financial return”. thegiin.org/assets/GIIN_AnnualImpactInvestorSurvey_2017_Web_Final.pdf

5

See as an example the UNEP FI Guide to Banking and Sustainability www.unepfi.org/wordpress/
wp-content/uploads/2017/06/CONSOLIDATED-BANKING-GUIDE-MAY-17-WEB.pdf
Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition” | 11

Respond to a growing demand
In terms of market dynamics, the most relevant change is the continuous strengthening of
demand.6 In its early stages, sustainable and responsible investment was mostly a supplypushed market: asset managers would offer ESG products as a marketing tool to differentiate their offer. In the last decade, institutional demand grew stronger and retail clients are
more actively questioning the environmental and social effects of their investment choices.
This change is part of a broader societal phenomenon that also affects other markets andhas to do with the level of information and awareness of consumers.

Policy interventions
The other side of this coin is the role of public policy. Citizens’ preferences and expectations
are translated into purchasing and investment choices, but also result in political orientation.
Over the last five years, many institutional initiatives started addressing both market andpolicy failures, trying to redefine the financial system’s “rules of the game”. Overall, the justification for these interventions is linked to the need to better price externalities, to promote
innovation, to ensure financial stability and to ensure policy coherence (UN Environment2018). These initiatives can be either national or international.

National initiatives
National initiatives tend to review different types of fiscal and policy interventions, thencreate a framework. The framework may be used to diagnose market failures and identify
responses at the national level, or to incorporate sustainability considerations into national
fiscal frameworks, which may include:◼◼ reviewing the effectiveness of fiscal interventions and subsidies supporting green
activities,◼◼ reviewing expenditure on unsustainable activities, such as fossil fuel subsidies, or◼◼ designing roadmaps to support long-term strategic plans at national level.
National initiatives, with different characteristics and levels of political commitment, havebeen undertaken in both industrialised and developing countries. Examples include China’s
Guidelines for Establishing a Green Financial System – a comprehensive set of national
commitments, covering priorities across banking, capital markets and insurance (People’s
Bank of China and UN Environment 2015). Similarly, the UK Green Finance Taskforce
suggested a number of structural reforms, ranging from incentives for sterling issuers ofgreen securities, to sustainability-related disclosure, facilitating long-term investments byincreasing allocations into illiquid asset classes, removing barriers to sustainable investment,
and a prudential regime for banks and insurers (UK Green Finance Taskforce 2018).

International initiatives
International initiatives typically target coordination at a global level. They may involve:◼◼ defining common principles to promote including sustainability considerations into
global financial sector oversight, or◼◼ agreeing methodologies and standards to measure results or to include sustainability
data in global financial reporting frameworks.
Internationally, the most ambitious programme is the EU Action Plan on Financing
Sustainable Growth (European Commission 2018). In 2016, the European Commission set up
the High-Level Expert Group on Sustainable Finance (HLEG) to map out options for community-wide action. This laid the foundations for a comprehensive action plan on sustainablefinance proposed by the Commission.

6

A complete market survey is published every two years by the European Sustainable and Responsible Investment Forum (Eurosif). The most recent edition was issued in 2017 www.eurosif.org/
wp-content/uploads/2016/11/SRI-study-2016-HR.pdf

12 | Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition”

Released in early 2018, the EU Action Plan is built on three pillars, each articulated into a setof actions:◼◼ Reorient capital flows toward a sustainable investment◻◻ Classification system for sustainable activities (EU Taxonomy)◻◻ Standards and labels for sustainable financial products◻◻ Promote investment in sustainable projects◻◻ Integrate sustainability in the provision of financial advice◻◻ Develop sustainability indices and benchmarks◼◼ Mainstream sustainability into risk management◻◻ Integrate sustainability in market research and credit ratings◻◻ Clarify institutional investors’ and asset managers’ fiduciary duties with regards tosustainability◻◻ Integrate sustainability into prudential requirements for banks and insurers◼◼ Foster transparency and long-termism◻◻ Strengthen disclosure and reporting on sustainability and the development ofaccounting standards◻◻ Promote sustainable corporate governance and mitigate short-term vision in capital
markets.

At intergovernmental level, the two fora that have done most in this domain are the G20 and
the G7. In 2017, the G20 (then under Chinese presidency) identified key options for member
countries to consider adopting voluntarily. These are:◼◼ Provide strategic policy signals and frameworks◼◼ Promote voluntary principles for green finance◼◼ Expand learning networks for capacity building◼◼ Support the development of local green bond markets◼◼ Promote international collaboration to facilitate cross-border investment in green bonds◼◼ Encourage and facilitate knowledge sharing on environmental and financial risk◼◼ Improve the measurement of green finance activities and their impacts.
More importantly, the G20 established the Green Finance Study Group. It has issued numerous input papers on a range of themes,7 many of which have been put forward by the German
and the Argentinian presidencies.
The Italian presidency of the G7 has given priority to sustainable finance, focusing in particular on financing SMEs and launching a global network of financial centres for sustainability(G7 Environment Ministers 2017), which has included Luxembourg since the beginning.

7

For example, see their 2017 synthesis report unepinquiry.org/wp-content/uploads/2017/07/2017_
GFSG_Synthesis_Report_EN.pdf
Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition” | 13

In 2017, the Task Force on Climate-related Financial Disclosures (TCFD), created by the
Financial Stability Board, issued a set of recommendations for corporate and financial
institutions to assess and disclose climate-related risks and opportunities (TCFD 2017). The
recommendations focus on governance, strategy, risk management and metrics and targets.
The report’s main contribution is to classify risks as well as opportunities, and guidance toadopt a forward-looking, scenario-based approach to identify the financial impacts of climatechange. In practice, implementing the guidelines is quite complex. Assessing the impact
of climate change on business and representing that impact through reporting remains achallenge for the financial community. To help address this, UNEP FI is working with banks,
insurers and investors to pilot implementation.
Another important signal came from a group of key actors that had been absent from thedebate until recently. In 2016, a collaboration between UNEP FI’s Principles for Sustainable
Insurance, UN Environment’s Inquiry into the Design of a Sustainable Financial System, andinsurance regulators and supervisors launched UN Environment’s Sustainable Insurance
Forum for Supervisors (SIF), an international network of some 20 national insurance
regulators and supervisors that aims to promote cooperation on critical sustainability challenges and opportunities. A few months later, the Central Banks and Supervisors Network
for Greening the Financial System was launched, with a specific focus on microprudential/
supervisory issues, macroprudential matters and activities to scale up green finance(Network for Greening the Financial System [NGFS] 2018).
The European Systemic Risk Board (ESRB) and the three European Supervisory Authorities(ESAs)8 also warned against financial stability risks related to the transition to a low-carbon
economy and to climate change (ESRB 2016).
The activism of public actors shows once more that systemic changes require collective
action. The pioneering role of private sector players has paved the way for a more comprehensive approach, and the role of policymakers is becoming increasingly relevant. This does
not undermine the importance of voluntary initiatives, which in fact reinforce regulation.

8

The European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) andthe European Insurance and Occupational Pensions Authority (EIOPA).

14 | Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition”

Towards a sustainable financial system
Five approaches should be taken simultaneously to align a financial system to sustainable
development (UN Environment Inquiry into the Design of a Sustainable Financial System 2015):◼◼ Transforming culture◼◼ Upgrading governance◼◼ Enhancing market practice◼◼ Harnessing public balance sheet◼◼ Directing finance through policy.

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While these approaches are mutually reinforcing, they are insufficient on a stand-alone basis.
The recommendations in this Roadmap aim to follow this five-fold approach.

Direct private
capitalirrespectiveof immediate
impacts on
returns

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Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition” | 15

4.2. KEY FEATURES OF LUXEMBOURG’S
FINANCIAL CENTRE
Luxembourg is one of the wealthiest countries in the world, continuously enjoying a steadyAAA credit rating and experiencing a yearly average GDP growth rate of 3.5% over the
past five years. It is one of the world’s best performing countries in terms of international
benchmarking.

Reasons for success
Luxembourg’s success as a financial centre serving the European and global economy isfounded on:◼◼ historic social, economic, financial and political stability◼◼ a close and mutually beneficial working relationship between public and private actors◼◼ being a complete ecosystem (or one-stop shop) with experts across all financial sector
activities, providing national and international clients with complete solutions and allowing them to do business effectively◼◼ a talent for predicting new trends and adapting quickly to market needs◼◼ the ability to attract and retain highly skilled human capital◼◼ a legal, regulatory and tax framework tailored to serving international financial actors andinvestors◼◼ decades of experience as a cross-border platform linking international suppliers andcustomers◼◼ a solid international expertise, with a wide-ranging toolbox of investment vehicles andexcellent recognition and distribution channels for its investment funds across the globe◼◼ excellent infrastructure ensuring connectivity, reliability, speed and security to the business community (and financial industry in particular) sound anti-money-laundering policies, and a long-standing culture of investor protection.

Luxembourg holds a significant
position in the financial world
These factors have attracted international banks, asset managers, fund promoters, insurance companies, pension funds, sovereign wealth funds and other financial service providers
from around the world, turning Luxembourg into a leading hub and gateway for international
finance. Its financial system has a key role to play in driving economic development. The
capital deposited in Luxembourg-based banks, insurance companies and investment funds
boost liquidity across the European continent. The redistribution of capital supports theliquidity needed for businesses as well as households to be able to borrow, invest and ultimately grow.

Luxembourg has a significant multipliereffect and an important role to play inproviding transparency establishing bestpractices and ensuring compliance

16 | Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition”

As an open international financial centre specializing in certain key parts of the global financial services value chain and acting as a platform allowing banks, insurers, issuers and asset
managers to connect with investors across the globe, investment decisions are for the mostpart taken either at corporate level (in the case of issuers) or in the traditional asset management hubs such as London, New York or Hong Kong.
However, being home to the regulatory and compliance nerve centre of these global financial
institutions and the actual investment products themselves, as well as being one the world’s
most important securities listing and fund distribution hubs, Luxembourg has a significant
multiplier effect and an important role to play in providing transparency, establishing bestpractices and ensuring compliance with current and forthcoming rules in the area of sustainable finance.

Key features of Luxembourg’s financial centre:◼◼ Luxembourg is the second largest fund centre in the world and the most popular
domicile for Undertakings for Collective Investment in Transferable Securities(UCITS).
◼◼ Luxembourg is the leading hub for global fund distribution and international
investors. It handles 65% of distribution of cross-border funds worldwide andfunds are registered in more than 70 countries.
◼◼ Around 27% of all investment funds in the EU are domiciled in Luxembourg –roughly 4,000 umbrella funds with 14,700 sub-funds, and net assets of €4.2 trillion as of April 2018.
◼◼ Luxembourg has a performing securitization framework, allowing transformationof predictable cash flows into a vast range of investable securities.
◼◼ The Luxembourg Stock Exchange (LuxSE) lists more than 35,000 securities in 59
currencies from approximately 2,300 issuers. 26% of all bonds listed in the EU arelisted at LuxSE including sovereign bonds from 17 EU Member States.
◼◼ Luxembourg has €360 billion in assets under management (AUM) in private banking, with 60% of clients from the EU, and 40% from the rest of the world.
◼◼ Luxembourg is a hub for European life insurance assets, with large national andinternational insurance and reinsurance companies managing €21 billion of written premiums.
◼◼ 75% of the Luxembourg financial centre’s income comes from internationalcustomers.
◼◼ Of the 46,000 people working in Luxembourg’s financial sector, 81% are of
non-Luxembourg origin.
◼◼ Luxembourg is home to the European Investment Bank and the European
Investment Fund, investing roughly €80 billion per year in the European and global
economy.
◼◼ Luxembourg increasingly plays the role of a gateway from and to China. Chinesebanks present in Luxembourg not only serve China-based clients (enablingthem to invest in Europe), but also provide European clients with the expertiseand opportunity to invest in China. The Luxembourg Stock Exchange’s Chinese
domestic Green Bond Channel bridges the information gap between Chinese issuers and international investors.
(Luxembourg for Finance 2017)

Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition” | 17

These conditions mean that
Luxembourg currently benefits
from a first-mover advantage insustainable finance initiatives
4.3. STOCKTAKE OF LUXEMBOURG’SSUSTAINABLE FINANCE INITIATIVESThe Luxembourg financial centre has created an ecosystem well suited to raising international capital for responsible investments. It is at the forefront of developing initiatives andfinancial instruments that are specifically designed to support sustainable finance. It offersa limited but highly expert, responsive and committed number of actors, with flexible andshort decision-making processes.
These conditions mean that Luxembourg currently benefits from a first-mover advantage insustainable finance initiatives. Acting promptly will be necessary to maintain this position.
As a platform for international finance, the Luxembourg financial sector can also have an
important multiplier effect by committing to sustainable finance.

Driving the sustainable development agenda
Through its involvement in a number of initiatives at international and EU level, Luxembourg
has the potential to drive the political agenda for sustainable development:◼◼ Luxembourg is a member of the International Network of Financial Centres for
Sustainability.
◼◼ The Banque Centrale du Luxembourg (BCL) is a member of the Central Banks andSupervisors Network for Greening the Financial System.
◼◼ The Luxembourg government is actively engaged in discussions at EU level as a memberof the EU Member States Expert Group on Sustainable Finance.
◼◼ The Luxembourg Stock Exchange actively contributes to various working groups at EU
level, such as the EU Technical Expert Group on Sustainable Finance, and also chairs the
UN Sustainable Stock Exchanges Initiative’s Green Finance Advisory Committee.
◼◼ LuxFLAG has been engaged in the technical group for convergence of green labels.
◼◼ The Luxembourg Banks and Bankers Association (ABBL) chairs the EU Banking
Federation Group on incentives and disincentives for sustainable finance working group.

A climate finance strategy
Luxembourg strives for complementarity and cooperation between the financial centre
actors, its climate policy and Luxembourg Development Aid (Direction de la coopération audéveloppement et de l’action humanitaire and Lux-Development). As well as the principle ofpolicy coherence, Luxembourg distinguishes itself on the international scene through strictly
applying the additionality principle between its International Climate Finance (ICF) and its
Official Development Assistance (ODA).
Luxembourg’s commitment to international climate finance targets mitigation, adaptation
and REDD+ actions in developing countries, with a particular focus on least-developed
countries and small island developing states among the ODA partner countries. These
funds are new and additional to Luxembourg’s ODA (reaching 1% of its GNI since 2009).
Disbursements related to ICF are being carried out by the Climate and Energy Fund of the
Luxembourg government.

18 | Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition”

Luxembourg has developed its climate finance strategy to help leverage international public
and private sector investments. The strategy (including criteria guiding the allocation of
Luxembourg’s ICF pledge) was published in 2017 (Luxembourg, Ministère du Développement
Durable et des Infrastructures Département de l’Environnement [MDDI] 2017). The ICF is
being provided in the form of donations, equities, special capital (at risk, initial, patient)and guarantees (e.g. first loss), and complements the technical support provided by
Luxembourg’s official development aid.
The Luxembourg government, the financial services industry and a number of actors in thesustainable finance ecosystem collaborate in a Climate Finance Task Force (CFTF), with thedual objective of contributing in a meaningful way to the international fight against climatechange and cementing Luxembourg’s role as an international centre for climate finance.
The strategy is built on four key vectors (Luxembourg, Ministère des Finances 2018):
1. Consolidate and leverage Luxembourg’s existing expertise in sustainable finance todrive and develop climate finance capabilities with the Green Exchange:
In 2016, the Luxembourg Stock Exchange launched the Luxembourg Green Exchange(LGX), the world’s first platform to list exclusively 100% green bonds. With its strong experience in layered funds, Luxembourg can provide an ideal platform for blended financing
and thus channel both public and private investment to sustainable projects.
2. Enter into strategic partnerships with climate finance leaders such as the European
Investment Bank (Luxembourg – EIB Climate Finance Platform) and the International
Finance Corporation (Amundi Planet Emerging Green One Fund).
The Luxembourg government contributes a first-loss guarantee to mitigate private sector
investors’ risk. It is to be co-invested with the EIB in investment funds dedicated tofinance climate change mitigation and adaptation, in particular to developing countries.
As a strategic partner of the International Finance Corporation (IFC), the Luxembourg
government contributes to the IFC’s Green Cornerstone Bond Fund Support Programme.
The IFC manages this technical assistance programme to complement the Amundi
Planet Emerging Green One Fund – the world’s largest green bond fund focused on
emerging markets. The fund will be labelled by LuxFlag and displayed on the Luxembourg
Green Exchange.
3. Ensure quality control in the area of climate finance through standards and dedicatedlabels.
In 2016, the labelling agency LuxFLAG launched a Climate Finance quality label (in addition to their existing labels) to acknowledge the effective climate focus of investment
funds in the implementation of their investment policy.
4. Encourage innovation in climate finance.
The Climate Finance Accelerator set up as a public-private partnership in 2017 supports
innovative fund managers specializing in climate action by offering various forms of
support, including financial and operational support during the launch phase of a newfund structure.

Luxembourg embraces a multistakeholder approach that allows
market forces to innovate

Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition” | 19

Climate Finance Task Force

Consolidation
Luxembourg Green
Exchange
Structured Climate
Funds

Strategic Partnerships
Luxembourg/EIB
Climate FinancePlatform
Luxembourg/IFC
Partnership

Quality control
Climate Financelabel for investment funds
Green Bond label

Innovation
Climate FinanceAccelerator for
innovative, climate
savvy fundmanagers

Luxembourg Climate Finance Strategy

Enabling legal and regulatory environment

Coordinated promotion and communication
Source: www.climatefinancetaskforce.lu/435829813

Layered funds
Layered fund structures have proven a most successful way to gather sufficient assets
from all types of investors and thus achieve their mission. Layered funds can differentiate
between different shareholder classes, with different risk/return profiles, making them welldesigned for public and private investors. A first-loss liability by public investors attracts
private investment by creating a low-risk environment. There are more than USD 6 billion ofassets invested in layered funds domiciled in Luxembourg.
The Forestry and Climate Change Fund is the latest initiative launched by the Luxembourg
government with a first-loss tranche guaranteed by the Climate and Energy Fund as wellas an investment by the Ministry of Finance. This pioneering impact fund aims to demonstrate that sustainable forestry within secondary and degraded tropical forests generates
economic, ecological and social value and contributes to healthy landscapes, climatechange mitigation and adaptation and local economic development.
And in July 2018, Luxembourg established a legal framework for green covered bonds – thefirst of its kind globally (Luxembourg for Finance 2018).

Luxembourg’s strengths
Building on these initiatives, Luxembourg can build upon these strengths:◼◼ It can have an important effect as a test market, a standard setter and a multiplier on aninternational scale. While products are often located in Luxembourg, they are managed
by asset managers mostly located outside of Luxembourg, and often outside of the EU.
◼◼ It has access to the expertise of large international groups and players through theirbranch networks in Luxembourg.
◼◼ It has an extensive, performing framework of regulation and tools that can be easily used
to scale green finance.
◼◼ It embraces a multi-stakeholder approach that allows market forces to innovate anddevelop their potential.
◼◼ It has a proven strong expertise in terms of investment funds, blended finance vehicles,
bonds and sustainable labels.

20 | Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition”

Luxembourg’s key contributions to sustainable finance:◼◼ Green and sustainable market infrastructure:
the Luxembourg Green Exchange (LGX)

Early expertise in micro and inclusive finance

Luxembourg’s early development in the 2000s of
The world’s first green bond was listed in Luxembourg.
exceptional expertise in microfinance has provided theLaunched in 2016, LGX was initially a platform focusing
foundation for its development of impact finance andonly on green bonds. Encouraged by its success, it latersustainable finance as a whole.
expanded to encompass social and sustainable bonds,
As of today, 31 microfinance funds accounting foras well as socially responsible investing (SRI) funds.
50% of all global Microfinance Investment Vehicles
The LGX is the world’s first platform dedicated exclu(MIV) assets are based in Luxembourg. Luxembourg
sively to sustainable securities, a platform to connect
has been at the origin of internationally-recognizedissuers and investors listing almost half of the world’s
networks such as InFine (Inclusive Finance Network)green bond volume and an estimated third of sustainand the European Microfinance Platform.
ability and social bonds. Today, the platform displays
more than 200 green, social and sustainability bonds◼◼ Sustainable finance labellingfrom issuers across the globe, amounting to more than
Luxembourg is home to LuxFLAG. Created in 2006
USD 110 billion as well as 16 SRI funds. All securities
as the first independent labelling agency, LuxFLAG
displayed on LGX are contributing to achieving the UN
provides quality labels and thus clarity and confidence
SDGs.
to investors in sustainable investment funds and financial instruments. Labels are available for microfinance,
LGX has also launched a Chinese domestic Green
environment, climate finance and broad ESG funds
Bond Channel in partnership with the Shanghai Stockas well as for green bonds. LuxFLAG currently labels
Exchange (SSE). China boasts one of the world’s
74 funds and 21 green bonds with a clear growing
largest bond markets, valued at USD 9 trillion, with atendency.
production of green and sustainable bonds in excessof RMB 250 billion (about €33 billion). However, the◼◼ Philanthropy
market may appear off-limits to the international
The Fondation de Luxembourg, a public-private partnerinvestor community due to the difficulties of accessing
ship, provides a platform to set up private philanthropic
the right level of information on the traded bonds. The
foundations, including advice and guidance to donors.
partnership aims at bridging this information gap. The
cooperation between the two exchanges focuses on ◼◼ Financial knowledge transfer
The House of Training – ATTF (Agence de Transfert
providing relevant information in English about Chinesede Technologie Financière) co-finances training
domestic green bonds to offshore investors.
programmes around the world. Working mostly in◼◼ Leading European sustainable investment funds
developing countries, it helps strengthen financial
domicile
structures, build capacity and support sustainable
Over the years, Luxembourg has strengthened its posidevelopment in 40 markets.
tion as the leading domicile for responsible investing
funds in Europe in general and in each of the underlying ◼◼ Additionality, avoidance of double counting andtransparent criteria
strategies, accounting overall for 30% of funds and 40%
Luxembourg
lives up to the principle of additionalityof total assets under management (KPMG 2017). ESG
betweenODA
and ICF as set out in the Kyoto Protocol.
cross-sectoral funds applying positive and negative
Indeed,its
ICF
funds come on top of its ODA funds,
screening strategies remain the biggest category withratherthandisplacingthem. As a consequence,
1,687 funds and €423.3 billion assets under manageLuxembourg
subscribestothe principles of avoiding
ment. Luxembourg market shares for ESG cross-secdouble
counting
when
tracking
and reporting climate
toral funds, ESG environmental strategies, ESG social
finance.
Since
2017,
the
allocationof ICF funds is done
strategies and ESG ethics strategies range from 42%
based
on
a
transparent
strategy
andcriteria.
to 57%. Two out of three impact investment funds in
Europe are Luxembourg funds.

Luxembourg Sustainable Finance Roadmap | Sustainable finance in the era of the “Grand Transition” | 21

5. A ROADMAP FOR
A SUSTAINABLE
FINANCIAL SECTOR
5.1. NEED FOR COLLECTIVE ACTION
All the signals and trends described above converge to a point: in the near future, our economy and society will experience a profound transformation. It is not just about the way we
produce goods and services, but also about the way value is created and distributed. Financehas a key role to play, channelling the trillions of dollars of annual investments needed toachieve the SDGs and the Paris Agreement commitments.

A successful transformation requires
a number of coherent, consistentactions to be taken at the same time
Luxembourg ranks among the largest green financial centres. Yet, as for all its competitors,
sustainable finance still represents a fraction of Luxembourg’s business and some of its initiatives are not fully financially sustainable on a stand-alone basis at this stage.
Becoming a sustainable financial system means more than growing the niche. It alsomeans harnessing flows of capital currently allocated to so-called “brown” activities
towards those that demonstrate good sustainable/ESG practices. This can be done byimplementing a number of coherent actions, such as increasing the quality of information
on ESG aspects and showing that sustainable business models can be less risky—and more
profitable—financially.
From a financial centre standpoint, sustainable finance can be an additional market in the
short term that progressively becomes mainstream as market opportunities related tosustainable finance develop.
Neither the carrot, nor the stick, nor sermons alone can change the status quo. We must use
all these means, in a balanced way. We cannot rely only on the enthusiasm of a prophetic
minority nor leverage only on the power of regulation. A successful transformation requires
a number of coherent, consistent actions to be taken at the same time, from both the public
and the private sector.
This is why the process for creating the Luxembourg Sustainable Finance Roadmap has
been designed as a collective one. The idea was to gather as many stakeholders together as
possible, to share a common vision – knowing that a public agenda can be successful only if
all societal actors are on board.

22 | Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector

A role for both the public and private sectors
The dialogue has identified a number of expectations and conditions that must be fulfilled tocreate the right environment for the growth of a sustainable financial system.
Public and private actors are called to:◼◼ Participate at the forefront of international initiatives (such as the working groups
related to EU Sustainable Finance, the International Network of Financial Centres for
Sustainability, the Central Banks and Supervisors Network for Greening the Financial
System) in order to lead multilateral and public-private dialogue, push the international
agenda (for example, integrating sustainability risks into the mandate of national regulators, and discussions around green supporting factor) and to ensure that regulatory
frameworks are adapted and expertise is built up in light of international developments.
◼◼ Raise awareness and support education at all levels – a cultural change is necessary.
While information is largely available, the ability to elaborate on it is not. In order tocreate the consensus, we need a new mindset. New generations are already sensitive
to sustainability. Sustainability must be integrated into school and university curriculaand lifelong training programmes must be supplied to professionals across all economic
sectors. Campaigns for the general public can pave the way for a new social acceptance.
In particular, the role of the public sector is to:◼◼ Set a clear vision and create consensus around it. This is the fundamental pre-requisite
for all other activities. Only the government can steer the transition in an ordinate way. Allother actors can play their role only if the ultimate goal is clearly identified and set withina coherent strategy. Inconsistent signals disorientate market operators and incentivize
speculation and free riding.
◼◼ Acknowledge international commitments and identify national priorities for implementing them.
◼◼ Assure continuity and participation at national level. The coordination of various actors
in the market and society in general does not come naturally; it has to be managed. The
policymaker can use its convening power to maintain momentum, increase the participation of new stakeholders and guarantee the constant adjustment of objectives and alignment of long-term interests, as well as visibility and reactivity with regard to international
initiatives and trends.
◼◼ Provide a credible, reliable, predictable and stable regulatory framework. Structuralchange requires long-term investments, whose inherent risk can be taken only if theframework is reasonably predictable. If uncertainty is too high, risk aversion will prevail
and resources will not be mobilised.
◼◼ Ensure proof of concept and de-risking of innovative and more risky ideas and projects.
Failures cannot be fixed by the market itself. When new models have to be validated, thepublic sector can take the risk of innovation. Public support of research and experimentation can accelerate the diffusion of new business models and the growth of new markets.
◼◼ Create incentive-based models. The State can create a coherent framework of disincentives to define the context conditions where economic actors operate. In this regard,
fiscal policies (covering both direct and indirect taxes) play a crucial role by rewarding
activities whose outputs are aligned with the objectives of public policies (or penalising those that work against them). This redefines the objective function of consumers,
producers and capital providers.
◼◼ Lead by example and support new markets. The government is not only a regulator, it
is a market actor itself: it is an employer, an entrepreneur, an investor, a supplier and apurchaser of products and services – very often, the biggest. By using its power in asustainable way (for example, introducing strict green criteria in public procurement), it
can make a significant difference. This will reinforce the conviction that the change isreal, and also, more concretely, increase the demand for sustainability in the market andcreate opportunities for niche players.

Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector | 23

◼◼ Reduce costs of transactions. Innovation implies new risks that need to be identified
and managed. In practice, they become additional upfront costs that can jeopardize
transactions. Supporting the intermediaries, who often bear the burden of these risks,
can increase market liquidity. The incubation and acceleration structures that have beencreated over the last years are an important part of this equation. They will need longterm public support to reach their full potential and ensure predictability in planning.
On the other hand, private actors are needed to:◼◼ Identify market needs and gaps and develop innovative ideas. While the public sector
can support innovation, it does not necessarily have the needed market, sector andtechnical expertise, and may not be flexible enough. Financial actors can be protagonists
in identifying market needs or gaps that can be satisfied or filled by new products andservices. The innovation process can be fully internal or, as it happens more and more
frequently, open to the contribution of external partners.
◼◼ Grow tested models. Once an innovation has proven to be effective, market forces needto scale it up and make it mainstream practice. The financial market is mostly demand
driven, but a greater supply of “sustainable money” can transform latent needs into
market demand and encourage the growth of new sustainable businesses.
◼◼ Develop and manage actors who serve as aggregators. Today’s market is small andfragmented. In particular, the demand side is populated by businesses that are often too
small to be picked up by large investors’ radar. And even when they do meet, transaction
costs are too high in relation to the size of the operation. The value chain needs to be
integrated with new players that can aggregate the demand, standardize financial instruments, reduce asymmetries and increase market liquidity.
◼◼ Serve as a relay between retail investors and the real economy. The move towards
more sustainable finance cannot happen without the key intermediary role of banks,
insurance companies and their ecosystem. Financial institutions intermediate between
economic agents and interact with the environment and society in multiple ways:◻◻ as lenders, supplying or guaranteeing the funding needed to develop sustainablebusinesses◻◻ as innovators, developing financial products to enable sustainable investments◻◻ as investment advisors and managers◻◻ as valuers, estimating and pricing risks and returns for companies and projects◻◻ as stakeholders (shareholders and lenders), wielding extensive influence over the
management of companies◻◻ as service or market infrastructure providers◻◻ as fiduciaries.
Banks and life insurance companies offer a diversity of savings and investment solutions
that substantially contribute to the shift to sustainably invested assets. When they operate in
the retail market, they also play a social and educational role. By raising the right questions,they can help retail clients to better understand the new market dynamics and orientatethem towards sustainable investments.
◼◼ Manage climate-related risks. Insurance companies are at the forefront of integratingclimate-related risks in their business models, products and pricing structures.
All these actions are important; none, alone, is sufficient. The strategic objective can beachieved only if they are all pursued in a coordinated way. This gives the sense of what wecall a “collective effort”. Every actor has its part and, if they all act together, the costs ofchange will be shared. A new social contract has to be signed in the name of a common,shared interest, which is higher than the sum of individual interests.

24 | Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector

The shift must be planned to allow thesystem time to adapt without shocks
5.2. NEED FOR A PHASED APPROACH
Rome was not built in a day. The same holds true for the implementation of the Luxembourg
Sustainable Finance Roadmap (LSFR).
A substantial change requires a long-term approach, but this does not necessarily mean
delaying immediately actionable initiatives. The concept of a roadmap encapsulates theneed for gradual change with that of definite objectives. The shift must be planned to allow
the system time to adapt without shocks. At the same time, clearly identifying the ultimate
goal and the intermediate steps provides clear guidance on the strategic direction and helps
measure progress against targets.
A phased approach, with short-, medium- and long-term actions and initiatives must be
adopted in order to address potential reduced competitiveness over the short term, but also
beneficial ripple effects over the long term. Integrating key characteristics of the financial
centre and striking the right balance between competitiveness and sustainability will ensurethat the LSFR is both realistic and ambitious.
At the same time, we have to realize that:◼◼ Sustainable finance is an additional market that will become mainstream sooner rather
than later, and will enlarge the pie.
◼◼ The oft-used argument of the trade-off between sustainability and financial return will
become obsolete as soon as climate-related risks and externalities are priced within
financial products.
◼◼ There is a sense of urgency. We have to start acting now, and thinking for the long term.

Implementing new approaches
The EU Action plan has three high-level aims: reorienting capital flows, managing financial
risks linked to climate and other ESG topics, and fostering transparency and long-termism.
Luxembourg can be a frontrunner in pushing for the most advanced solutions, experimenting
with and implementing new approaches to ensure that sustainable finance products are:◼◼ easy to access: investors should be able to find a complete and transparent offer ofsustainable investment opportunities◼◼ expertly managed: asset managers should be supported in setting-up, managing anddistributing their sustainable products◼◼ serving a purpose: sustainable enterprises should be supported in accessing long-term
funding◼◼ credible: the impact of sustainable financial products should be evaluated in order tocreate clarity and confidence, and avoid greenwashing.

Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector | 25

Sustainable development requires
changes in the deployment andrelative value of financial assets
5.3. KEY RECOMMENDATIONS
The following recommendations have been identified throughout the different working
groups and interview sessions and are grounded in the spirit of the EU Action Plan on financing sustainable growth.
The ambition is not to develop a Luxembourg taxonomy for sustainable investments, butrather to base the recommendations on work currently being done on this topic in various
EU-level working groups.

5.3.1. Formalize and communicate an ambitious,
tailor‑made and clear sustainable finance strategy
Sustainable development requires changes in the deployment and relative value of financial
assets and in their relationship to the creation, stewardship and production of real wealth. A
sustainable financial system is, therefore, one that creates, values, and transacts financial
assets, in ways that shape real wealth to serve the long-term needs of an inclusive, environmentally sustainable economy (UN Environment 2015).
The aim of this Roadmap is to ensure that Luxembourg’s financial centre gradually moves
towards a sustainable financial system by 2030, which is at the service of a sustainableeconomy, for future generations and according to the broadest possible definition of sustainable finance as illustrated below:9
Three definitions of sustainable finance9

As adapted from the EU Interim Report July 2017 By the High-Level Expert Group on Sustainable
Finance, ec.europa.eu/info/sites/info/files/170713-sustainable-finance-report_en.pdf

26 | Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector

In the broadest sense, a financial system needs to be sustainable from several perspectives:
From a systemic perspective, a sustainable financial system must be sound and contribute to long-term financial stability. First and foremost, it should be at the service of the real
economy, nationally and internationally. In addition, it should be viable in itself as well associally and environmentally responsible. Moreover, it should be built and managed for thelong run, in a competitive international context and ready to draw lessons from positive pastexperiences. It should also be open to exploring new business opportunities, including thosewith non-traditional partners and clients, and embrace technological innovation.
From an operational perspective, a sustainable financial centre must increasingly provide
steady, reliable funding and financing. This needs to be accessible at the right moment
and over a prolonged period of time (lifecycle dimension); available to a broad spectrum of
projects and programmes that are economically viable and produce positive social and/or
environmental impacts; and able to meet different needs and stages for funding, with anadequately equipped toolbox (including grants, subsidies, equity, debt, and other financial
instruments, including blended finance).
From a functional perspective, the Luxembourg financial centre is a facilitator, primarily at
the service of international product developers and investors, and has an important multiplier effect.
An international financial centre must be sustainable in itself before it can contribute tosustainable growth. Financial service providers must acknowledge that economic viability
and profitability and positive environmental and social impact are not mutually exclusive,
but can combine to generate new opportunities for added value and ultimately sustainablegrowth.
Financial service providers need to adopt a “generational perspective”, with long-term
commitment and the ability to adapt their services and financial products to the varying
needs of sustainable projects and to the demand of the sustainability-savvy Millennials andGeneration Z.
In 2015, Luxembourg engaged in a deep collaborative initiative on the outlook and positioning of the country in an era of a smart green Third-Industrial Revolution. This strategic reflection process culminated in The 3rd Industrial Revolution (TIR) Strategy Study, covering eight
key areas and sectors, including finance (Third Industrial Revolution Consulting Group 2016).
The Finance Working Group in the TIR Strategy Study has sketched out the following vision:“Luxembourg: a sustainable, world-class financial hub at the vanguard of the digital revolution
making transformation happen”, and prioritized the following key elements:◼◼ A resilient, diversified international financial sector, serving customers in Luxembourg,
Europe and the world.
◼◼ A worldwide leading hub for financial innovation, socially responsible investments, trust
and transparency where impact and socio-economic sustainability go hand-in-hand.
Building on the work done in the context of the TIR Finance Working Group, the Climate
Finance Task Force, the Conseil Supérieur du Développement Durable, Luxembourg’s
Agenda 2030 (Luxembourg 2017a; Luxembourg 2017b) and the National Plan for Sustainable
Development (Luxembourg, Ministère de L’Environnement 2018), a coherent, consistent andtransparent Sustainable Finance Strategy should be formalized. This strategy should also
take into account international and EU developments and be adjusted accordingly.
The formalized vision and strategy need to be shared widely and supported at all levels of
the financial centre.

Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector | 27

RECOMMENDATION:◼◼ Formalize an ambitious, coherent, consistent and transparent Sustainable Finance
Strategy, reflecting the distinctive features and added value of Luxembourg◼◼ Ensure endorsement by all stakeholders involved as well as transparent
communication

5.3.2. Set up a coordinating entity
Coordination between all actors involved in sustainable finance is key to formalize, ensurebuy-in, and communicate the Sustainable Finance Strategy, ensure visibility internationallyand coherent implementation, execution and follow-up nationally.
A small ecosystem of very committed and experienced actors has developed a number ofinnovative and promising initiatives. There is a need to better coordinate these initiatives andto get all actors on board.
The Climate Finance Task Force (CFTF) has played the role of an informal coordinating entity
for climate finance. A new Sustainable Finance Initiative (SFI), building on the work of the
CFTF, should take over integrating and enlarging its scope of activities to all areas of sustainable finance.
The SFI should be approved at the highest political level, be incorporated as a public-private
partnership (PPP)—which has proven to be the most efficient solution—and be co-chaired athigh level by the Minister of Finance and the Minister for the Environment.
The SFI should have the following roles and responsibilities:◼◼ Formalize an ambitious, coherent, consistent and transparent Sustainable Finance
Strategy, ensuring buy-in from all stakeholders and transparent communication◼◼ Follow-up on the implementation of the LSFR by the various public and private
stakeholders◼◼ Broaden, deepen and consolidate existing initiatives◼◼ Coordinate and liaise between various actors and organizations and promote sharedknowledge and expertise◼◼ Integrate existing initiatives, international trends and developments and analyse theirimplications on the Sustainable Finance Strategy and the LSFR◼◼ Recommend ongoing strategic amendments and developments to the LSFR to ensure
the 2030 vision is achieved◼◼ Ensure visibility of the LSFR internationally, attract sustainable finance actors to
Luxembourg and serve as a focal point for requests for information or cooperation frominternational organizations◼◼ Coordinate capacity development, research activities and data collection, ensure measurement of, and report on, progress.
The Sustainable Finance Initiative should seek to join international initiatives, such as Eurosif,
in order to be connected to international trends and developments and ensure visibility.
Regular meetings, jointly moderated by public and private sector actors to underline the PPP
dimension, should integrate relevant forces in the financial and sustainable finance sectors.
This collaborative approach would ease implementation with the various sector members,
develop shared vision, priorities and expertise and highlight specific opportunities or hurdles
for each sector.

28 | Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector

The SFI should coordinate the creation of various sector- and/or theme-specific task forces
whose role would be to:◼◼ Define specific roadmaps and/or Action Plans for sectors or themes10◼◼ Work on the practical implementation of these sector roadmaps, designing ideas andsolutions, implementing actions and adapting to sector needs and requirements◼◼ Identify how favourable policies and regulatory frameworks may incentivize new initiatives, products and actors to create their sustainable products in Luxembourg◼◼ Manage the risk of greenwashing of future products and tools offered to safeguard
Luxembourg’s good reputation in this field◼◼ Design and promote the adoption of new standards that support sustainable finance.
Cross-cutting themes such as governance, fintech, impact indicators and standards, as wellas knowledge sharing and education, should be covered across all task forces.

RECOMMENDATION:◼◼ Set up a Sustainable Finance Initiative, as a coordinating entity, in the form of apublic-private partnership, as well as sector and/or theme specific task forces withthe roles and responsibilities as defined above.

5.3.3. Leverage financial sector expertise
In order to steer the flow of public and private capital towards sustainable investments,
Luxembourg can leverage the expertise it has built over the last decades.

Develop a toolkit for the design, set-up, management and administration ofsustainable investment products:
Luxembourg, as a hub for international finance, has an important role to play in providing
guidelines and designing tools that make it easy for asset managers to set up their products,
manage sustainable investment strategies and market these products throughout the world.
One of the strengths of the Luxembourg financial sector is the large variety of existing frameworks and tools covering listed and unlisted investments that can be managed under a variety of vehicles, such as investment funds, unit-linked insurance products and securitisation.
In order to meaningfully scale sustainable finance, a toolkit should be developed to makeit easier to use existing solutions and to tailor them to the specific needs of sustainablefinance:◼◼ a modular toolbox for designing and structuring investment funds or unit-linked insurance products, which can be used for multiple sustainable investment strategies (listed
or unlisted) and various sectors (for example, circular economy, intelligent mobility, or
agricultural value chain financing)◼◼ a framework for the valuation and accounting of sustainable investments◼◼ additional sustainability labels (as offered by LuxFLAG) covering various areas ofsustainable finance◼◼ a display on LGX to promote information and transparency for investors◼◼ state-of-the art reporting of financial and non-financial information◼◼ guidelines for extra-financial risk management as well as climate-related financial risk
management◼◼ guidelines to integrate principles such as the Principles for Responsible Investment (PRI),
Principles for Sustainable Insurance (PSI), and forthcoming Principles for Responsible
Banking (PRB).

10 One example of a high-level strategy document that can lead to a roadmap for the banking sector
can be found at www.abbl.lu/2018/04/27/the-abbl-perspective-on-sustainable-finance/
Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector | 29

Over the past couple of years, new frameworks specifically designed for green finance havebeen developed, such as green bonds, green covered bonds, sustainable labels and positive
impact finance. Additional tools are currently being analysed. The development of new legislation responding to existing gaps should be further explored and encouraged.

Increase the offer of listed and liquid sustainable products:
Today, sustainable investments are mainly driven by institutional investors. Retail investors
lack a broad spectrum of investment opportunities, as regulatory barriers largely prevent
them from accessing products investing in unlisted instruments.
As a major centre for listed green bonds and investment funds that are distributed worldwide, listed and liquid investment products should be developed to provide access to andencourage investments from retail investors, and to address liquidity issues for institutional
investors when investing into unlisted assets.
Additional sustainable investments need to be developed to increase the overall market, suchas savings accounts, funds investing in listed green equities or bonds, unit-linked insurance
products and second- and third-pillar pension products.
Inspiration can be drawn from specialist sustainable banks in Europe, who offer a range ofsustainable investment products at a competitive rate of return.

Better connect investors and investees:
Sustainable projects often do not find financing at the right moment and under the rightconditions. On the other hand, investors willing to finance sustainable projects lack information on projects or investment opportunities that suit their profiles and expectations.
Blended finance has proven effective at financing sustainable development. Analysis of
how it could be extended to mobilize additional financing for sustainable development andLuxembourg’s potential role in this should be carried out.

RECOMMENDATION:◼◼ Develop a toolkit for sustainable investment funds and other financial products bycombining existing tools and tailoring them to sustainable finance◼◼ Increase the offer of liquid products, such as sustainable UCITS, listed green andsustainable bonds, savings accounts, and insurance products◼◼ Analyse how Luxembourg can leverage its framework and expertise in blended
finance to better connect investors and investees to mobilize finance for sustainable
development.

5.3.4. Raise awareness and integrate sustainability
into education and professional training
Designing a roadmap for a sustainable financial system is an important exercise, especiallyin a country where the financial sector, in aggregate, contributes 25% to the GDP. Thus, thevision for a more sustainable financial system at the service of a sustainable economy
needs to be embraced by decision makers, citizens and workers alike, in their private andprofessional lives and on a daily basis.
There are a number of ways to share this vision broadly:

Information and awareness raising:
Corporate social responsibility has been effectively driven through networks such as IMS
and INDR. Meeting points, conferences and events aimed at national, international, retailand institutional investors are needed to create a similar level of information and awarenessabout sustainable finance and showcase the products available.

30 | Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector

Luxembourg-based banks and insurance companies need to market more sustainable financial products for retail, private banking and institutional clients in order to start a meaningful
shift of assets into sustainable investments and provide the necessary track record andcredibility.
In addition to organizing events, meeting points and conferences, sustainability should be
integrated into national branding: sustainable development is a creator of social cohesion,an economic opportunity and a differentiating factor.

Sustainability in education:
Financial literacy needs to go hand in hand with education on sustainable finance. To fostera meaningful change in mentality, the link between finance and the real economy and theway environmental and social considerations integrate with banking, insurance and investment activities and business models needs to become an integral part of education. This
recommendation has already been highlighted by the TIR report.
There needs to be smooth interaction between developing the financial centre and training
and educating local resources.

Sustainability in professional and governance training:
All actors in the value chain—from product development and management to asset servicing,
administration and auditing—need ongoing training on what sustainable finance is and how
it adds value for society. Luxembourg already has sound expertise in this, and existing initiatives should be coordinated, further developed and mainstreamed.
An adequate level of training for financial advisors (for example, in banks and insurancecompanies), as well as proactive advice on sustainable financial products is indispensable toensure that sustainable finance becomes the norm.
Integrating environmental, social and good governance considerations in strategic and operational decisions and processes is part of sound management. This means that the level ofexpertise in sustainability needs to be extremely high, particularly for decision takers, board
members and managers.
Embracing sustainability at the top level of companies, institutions and organizations isessential to ensure that all financial system actors own their sustainability strategy andprocesses and ESG is not just a box-ticking exercise.
Sustainability should be an integral part of professional training – for example, House ofTraining for the financial sector, ILA (Institut Luxembourgeois des Administrateurs) for Board
members, and IRE (Institut des Réviseurs d’Enterprises) for auditors.
The assessment of the ESG “fitness” of Board members will be a natural consequence andshould become part of their overall “fitness assessment”.

RECOMMENDATION:◼◼ Organize regular events, conferences and meeting points on sustainable finance toraise awareness and showcase sustainable finance initiatives and products◼◼ Integrate sustainability into national branding, in order to promote it across thewhole ecosystem: sustainable development is a creator of social cohesion, an
economic opportunity and a differentiating factor◼◼ Integrate financial literacy and sustainable finance into school curricula and tertiary
education◼◼ Integrate sustainable finance into all financial sector trainings◼◼ Consider criteria for ESG fitness assessment of Board members.

Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector | 31

5.3.5. Promote innovation
Attract talent and build human capital:
Start-up entrepreneurs are attracted to Luxembourg because they find it a supportive environment to develop and scale their activities. The ecosystem, connectivity and inter-connection between private and public actors also appeal.
Incubation and acceleration structures have been created that focus either on a company’s
maturity or sector (such as social business, mobility, financial technology, ecotechnology,
innovation, design, or climate finance). These accentuate the link between actors of the real
economy and the financial sector.
Innovation hubs (and the entrepreneurs they support) feed their expertise, knowledge andnetwork into the landscape of existing companies to create a virtuous innovation circle. They
can help grow the sustainable finance sector intrinsically, underlining the movement fromniche to critical mass.
Further efforts should be made to link these start-ups and entrepreneurs to the financial
sector, as well as to schools, universities and research centres. Children should be encouraged and motivated to experience entrepreneurship and look for learning opportunities ininnovative areas, such as social or green start-ups and fintechs.
Showcasing new business models in conferences and events across all financial sectors will
attract new talents to sustainable businesses and business models. A culture of managedrisk and failure needs to be supported to encourage innovation.

Use innovation and the power of financial technology to foster sustainablefinance:Financial technology has the power to disrupt entire fields of services, and thus thepotential to create synergies for sustainable finance, for example by linking sustainability
and smart data management. Financial technology can have a disruptive effect on “knowyour customer” (KYC) processes—integrating sustainability preferences in investor profiles,
robo-advising on sustainable financial products, or promoting shareholder engagement byblockchain integration—and thus foster better governance.
The numerous incubator and accelerator structures created in recent years provide an important infrastructure to attract fintech companies developing new solutions for sustainablefinance.
As an example of the support provided to fintechs, the Luxembourg House of Financial
Technology (LHoFT) has integrated financial inclusion as one of its core strategies. The
LHoFT provides acceleration services in terms of support and advice to several impact funds
and supports financial inclusion through fintechs in Africa.
Further exploration is needed to effectively link financial technology with the sustainable
development goals. Leveraging financial technology to achieve sustainable objectives, suchas the fight against climate change or the empowerment of women, will make the wholefinancial system more sustainable.

RECOMMENDATION:◼◼ Forge close links between incubators, schools and research centres to attract talentand build human capital◼◼ Promote innovation at the service of the SDGs and explore better leveraging of financial technology to achieve sustainable objectives

32 | Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector

5.3.6. Develop expertise and best practice
Build expertise in structuring, asset management and measurement:
Blended finance—the efficient combination of public and private funding, encompassing
investments and grants—is necessary to respond to the huge financing need for sustainable
development.
Luxembourg has an efficient regulatory framework in place to allow such innovative, valuable
financing mechanisms and consider various types of investor profiles and requirements.
Further research and expertise, by the University of Luxembourg among others, is neededon how to best integrate sustainability into the design and structuring of financial products.
Managing assets sustainably requires integrating environmental, social and governancerelated criteria with traditional financial criteria. The University of Luxembourg, School ofFinance and House of Training should collaborate with international and national research
centres, such as Luxembourg Institute of Science and Technology (LIST), to develop additional expertise in sustainable finance, for example in sustainable asset management. Thismight mean creating new Masters programmes, adding PhD or post-doc opportunities insustainable finance research, or creating an expert programme in impact management andmeasurement.
Existing expertise needs to be further developed, together with institutions such as the EIB,
as well as with universities and research institutes. The European Commission TechnicalExpert Group on Sustainable Finance and the development of a taxonomy for sustainable
investments, to which Luxembourg actively contributes, is expected to guide this topic.
In recent years, actors such as LuxFLAG have gained valuable expertise in assessing andmeasuring the environmental and social impacts of investments. Mainstreaming green
investments bears the inherent risk of greenwashing, and a more in-depth assessment of
extra-financial performance ensures transparency and trust.
As a platform for international finance, it is important to share expertise with actors thatmight not be at the same level of understanding and expertise. This can be done throughorganizations such as:◼◼ ALFI, ABBL and ACA providing guidance and best practice to support asset managers
and financial product developers in areas such as integrating financial and extra-financial
criteria in risk management, and the use of sustainable benchmarks and indices.
◼◼ House of Training – ATTF (Agence de Transfert de Technologie Financière) providing
training and support in adopting best practice in sustainable finance, including genderequality, predominantly in developing countries.

Develop best practice and provide guidance on ESG reporting:
One of the recommendations of the EU Action Plan is to strengthen the transparency ofcompanies’ ESG policies in order to make the right information available to investors.
The proposed regulation requires institutional investors and asset managers to disclose
how they integrate environmental, social and governance factors in their risk processes.
Requirements to integrate ESG factors in investment decision-making processes, as partof their duties towards investors and beneficiaries, are being further developed. The EU
Commission also contemplated integrating ESG considerations into the advice that investment firms and insurance distributors offer to individual clients.
As a leading distribution platform for financial products worldwide, Luxembourg has a realopportunity to contribute actively to developing effective reporting systems and guidelines
for ESG reporting. Such guidelines could include examples of standardized impact metrics
with supporting methodologies and calculation tools.

Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector | 33

An endorsement by the Sustainable Finance Initiative of the recommendations of the Task
Force on Climate-related Financial Disclosures would have an important signalling effect.
Resources to develop a commonly accepted reporting framework for sustainable financial
products are needed. It is also necessary to build up expertise across the ecosystem, to beable to support the wider international financial sector to collect such data, analyse it andproduce meaningful reporting for investors. This is of particular relevance for the investment
fund sector where Luxembourg has a leading global position.

RECOMMENDATION:◼◼ Promote research programmes on blended finance to finance sustainable
development◼◼ Set up Master and PhD programmes in sustainable finance, such as asset management and impact management and measurement◼◼ Build, strengthen and extend existing expertise in assessing and measuring socialand environmental impacts◼◼ Develop effective reporting systems and guidelines for ESG reporting

5.3.7. Analyse and redesign the system
of incentives and taxation
Incentives can lead to a meaningful increase in the supply of, and demand for, sustainablefinance products. Incentives can motivate product issuers and investors to learn about thevarious types and characteristics of sustainable investments, encourage new actors to comeon board and generate a massive shift of money into sustainable investments.
Incentives should be analysed in a transparent and open-minded way, in light of international initiatives and in the spirit of the EU Action Plan on sustainable finance. Clear criteria
to access and benefit from such incentives are necessary and an adequate approval andfollow-up by a certifying body is essential.

Analyse and redesign incentives:
Incentives could be designed to encourage long-term, sustainable investments and discourage unsustainable investments. This includes assessing the nature of the incentives (thetype of investment for which they are granted), and the conditions for accessing them (forexample, minimum holding periods for exoneration of capital gains, or minimum durationof unit-linked insurance contracts). Furthermore, the multiplying effects of incentives at thelevel of the product issuer, investor and investee need to be integrated into this assessment.
Incentives could be linked to specific investment models. For example, the financial performance of an investment could be linked to its environmental or social benefits. Sound expertise in extra-financial performance measurement is needed for such innovative incentive
schemes.

Subscription and direct taxes:
Direct taxes have an important multiplier potential, both at the level of the investee and of
the investor.
Waiving subscription taxes for microfinance funds has driven significant growth in this
sector. Analysis should be conducted to determine under which conditions the same measures could be implemented for sustainable investment funds at large.
The Ministry of Labour, Employment and the Social and Solidarity Economy has started certifying commercial companies that comply with strict criteria around their business model,
performance indicators, auditing and reporting. These social impact companies (SIS) enjoy
tax advantages and greater access to public procurement.

34 | Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector

Similar advantages could be provided to a broader range of companies or business practices
under the condition that they comply with strict ESG conditions and make reference to thetaxonomy currently being developed at EU level.
Investors could be granted tax relief on personal or corporate income tax against a sustainable investment made, for example in a sustainable-labelled investment fund or SIS company.

Indirect taxes:
Indirect taxes also have the potential to incentivize socially and environmentally oriented
business models. Today the list of activities eligible for a reduced VAT rate covers a numberof essential sectors and products (from a social point of view), but mostly does not consider
environmental aspects.
Reduced VAT rates could include more generally sustainable business models and activities,
a measure that would support the growth and development of these—often small—start-ups.

RECOMMENDATION:◼◼ Redesign investment incentives to promote long-term investments at the level ofproduct developers, investors and investees◼◼ Analyse how direct tax incentives could be linked to sustainable finance activities
and business models◼◼ Analyse whether the scope of reduced indirect taxes should be broadened forsustainable companies and business models

5.3.8. Lead by example and ensure proof of concept
To credibly lead the path towards sustainable finance, it is crucial to have an ambitious
sustainable finance strategy and a consistent approach. Other key factors include coherent
integration of sustainability criteria in investment strategies, as well as transparent reporting on financial performance and social or environmental impacts. The same holds true forpublic procurement.
Public investments should be screened for their ESG soundness and carbon footprint. Clear
guidelines for public investments, sovereign funds and public pensions need to be elaborated and communicated.
In addition, public funds should use their tremendous influencing power by exercising theirvoting rights and practicing active shareholder engagement. This is consistent with commitments made through international treaties and conventions.
One of the roles of government is to use public means to ensure proof of concept for innovative and more risky investments. The Luxembourg EIB climate finance platform is an excellent example. Public funding is invested in sectors, countries or risk tranches with the aim oftaking additional risks and pulling in commercial, private funding. Other projects should beconsidered, such as the creation of a social and environmental impact fund or the provisionof seed funding for these types of investments.
Public financing also has a leading role to play in terms of green lending. Public credit institutions should complement government efforts and integrate social and environmental criteria
into their financing policies and lending conditions to improve access to funding for thriving
sustainable and green businesses and meaningfully boost their growth.

Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector | 35

RECOMMENDATION:◼◼ Screen public investments for their ESG soundness and carbon footprint◼◼ Develop and communicate clear guidelines for sovereign funds and public pensions◼◼ Use the influencing power of public funds through active shareholder engagement◼◼ Leverage public funding to ensure proof of concept (for example through creating asocial and environmental impact fund) and seed-fund these initiatives◼◼ Elaborate and implement green lending policies in public credit institutions

5.3.9. Measure progress
Implementing the various recommendations of this Roadmap requires designing and setting
up a controlling framework:◼◼ What is the current situation (quantifiable)?
◼◼ What are planned actions (input provided over the short, medium and long term) tochange the current situation?
◼◼ What social and environmental indicators are integrated into policy planning measures?
◼◼ What are meaningful indicators to measure change over time?
◼◼ How to ensure data collection and reporting?
◼◼ How to follow-up on indicators and make adjustments if necessary?
◼◼ How to follow-up on planned actions and implementation process and make adjustments if necessary?
Detailed data gathering, measurement and reporting tools will allow the progress made by
all actors in the sustainable finance spectrum to be evaluated. Communicating on progress
made is crucial to reinforce buy-in and cohesion.
The Sustainable Finance Initiative has an important role to play in ensuring the contributionof the financial sector, as well as actors such as the National Statistics Agency, the Central
Bank, the financial and insurance sector regulators and associations, universities andresearch institutes.
Indicators could be defined in line with the taxonomy foreseen in the EU Action Plan onsustainable finance, the technical specifications of which will be worked out in the coming
months. It should then be ensured that:◼◼ these indicators are integrated into the data collection process◼◼ there is a consistent reading and interpretation of data and results◼◼ there is a continuity and coherence of these statistics over time.
Below are examples of relevant indicators, inspired by the work of the International Network
of Financial Centres for Sustainability, among others. These indicators are a work in progress.
◼◼ The volume of sustainably managed AUM issued or deposited in Luxembourg comparedto overall AUM:◻◻ by public, institutional and retail investors◻◻ by resident and international investors◻◻ by type of products: such as bonds, investment funds, savings accounts, insurance
and pension products.

36 | Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector◼◼ The number of green bond issuers, green loan providers, asset owners or managers who
have signed the PRI, PSI or other principles promoting sustainable investments◼◼ The number and amount of green loans disbursed by banks compared to traditional loans:◻◻ For private clients◻◻ For corporate clients◻◻ For institutional clients◻◻ For public entities◼◼ The number of labelled sustainable investment products:◻◻ Private equity and/or debt funds◻◻ Listed equity and/or debt funds◻◻ Green bonds◼◼ The number of training courses focusing on sustainable finance◼◼ The number of certified directors including ESG fitness assessment◼◼ The number of listed companies and investment funds publishing their carbon footprint◼◼ The volume of public procurement following sustainability criteria compared to traditional criteria.
Monitoring progress over time will ensure that corrective actions can be taken. Furthermore,monitoring and reporting on progress has important snowball potential and increases
ownership of all stakeholders.

RECOMMENDATION:◼◼ Participate in the elaboration of best practice and indicators with initiatives such as
the International Network of Financial Centres for Sustainability◼◼ Identify stakeholders to ensure the definition and implementation of a controlling
framework◼◼ Measure and communicate on progress over time◼◼ Take corrective actions if necessary

Luxembourg Sustainable Finance Roadmap | A roadmap for a sustainable financial sector | 37

6. CONCLUSION
The Luxembourg financial centre as a hub for European and international finance is in agood position to meaningfully contribute to the financing of sustainable development. Beinga frontrunner in sustainable investment funds, green bonds and sustainable finance labels,
important expertise has been built over the last years, but a lot of work still lies ahead.
Luxembourg is committed to contributing to the international debate and the development offrameworks and guidelines that leads towards a more sustainable financial system. Actions
need to be coordinated, nationally and with our EU partners, and wisely planned over time.
Ensuring progress is assessed and measured is crucial to attaining the vision of a sustainable financial system at a horizon of 2030.

38 | Luxembourg Sustainable Finance Roadmap | Conclusion

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8. TABLE OF ACRONYMS
AND ABBREVIATIONSABBL

Association des Banques et
Banquiers, Luxembourg
ACA
Association des Compagnies d’Assurances et deRéassurances du Grand-Duché de Luxembourg
ALFI
Association of the Luxembourg Fund Industry
ATTF
Agence de Transfert de Technologie Financière
AUM
Assets under management
BCL
Banque Centrale du Luxembourg
CFTF
Climate Finance Task ForceCSSF
Commission de Surveillance du Secteur Financier
EIB
European Investment Bank
EIF
European Investment Fund
ESA
European Supervisory Authorities
ESBR
European Systemic Risk Board
ESG
Environmental Social Governance
EU
European Union
Eurosif European Sustainable Investments Forum
Fintechs Financial technology companies
GDP
Gross Domestic Product
GNI
Gross National Income
HLEG
High-Level Expert Group
IFC
International Finance Corporation
ILA
Institut Luxembourgeois des Administrateurs
IMS
Inspiring More Sustainability
INDR
Institut National pour le Développement
Durable et la RSE
InfineInclusive Finance Network Luxembourg
IRE
Institut des Réviseurs d’Entreprises
KYC
Know Your Customer

LFF
Luxembourg for Finance
LGX
Luxembourg Green Exchange
LHoFT
Luxembourg House of Financial Technology
LIST
Luxembourg Institute of Science and Technology
LSFR
Luxembourg Sustainable Finance Roadmap
LuxFLAG Luxembourg Finance Labelling Agency
LuxSE
Luxembourg Stock Exchange
ODA
Official Development Aid
PPP
Public private partnership
PRI
Principles for Responsible Investment
PSI
Principles for Sustainable Insurance
REDD
Reduced Emissions from
Deforestation and Degradation
SDG
Sustainable Development Goals
SFI
Sustainable Finance Initiative
SIS
Société d’impact sociétal
SME
Small and medium enterprises
TCFD
Task Force on Climate-related
Financial Disclosures
TIR
Third Industrial Revolution
UCITS
Undertakings for Collective Investmentsin Transferable Securities
UNEP
UN Environment
UNEP FI United Nations Environment
Programme Finance Initiative
VAT
Value added tax

Luxembourg Sustainable Finance Roadmap | Table of acronyms and abbreviations | 41

9. ACKNOWLEDGMENTS
We are particularly grateful to the people who supported this Roadmap process
throughout many working group meetings and interview sessions:

Institutional
Enrico Benetto
Luxembourg Institute of
Science and Technology
Daniele Berna-Ost
Commission de
Surveillance du Secteur
FinancierMarc Bichler
Ministry of Foreign andEuropean Affairs
Cedric Crelo
Banque Centrale duLuxembourg

Cherryl Dentzer
Ministry of Sustainable
Development andInfrastructure
Florian Eisele
UN EnvironmentFrank Elderson
Dutch National Bank
Isabelle Goubin
Ministry of Finance
Serena Garelli
Banque Centrale duLuxembourg

Lucien Hoffmann
Luxembourg Institute of
Science and Technology
Pascale Junker
Ministry of Sustainable
Development andInfrastructure
Robert Kieffer
Fonds de compensation
commun au régime généralde pensions
Christopher Knowles
European Investment Bank

Katalin Ligeti
University of Luxembourg
Claude Marx
Commission de
Surveillance du Secteur
FinancierAlexandra van Selm
Social and Economic
Councilof the Netherlands
Christian Tock
Ministry of the Economy

Private sector
Anouk Agnes
ALFI

Christopher Flensborg
SEB

Hedda Pahlson-Moller
Tiime

Pierre Ahlborn
Banque de Luxembourg

Arnaud Gillin
Innpact

Stephan Peters
Tiime

Julie Becker
Luxembourg Stock
Exchange

Laetitia Hamon
KPMG

Tom Pfeiffer
Deloitte

Pit Hentgen
Lalux

Nathalie Roth
4Climate

Fabio Mandorino
ABBL

Tom Seale
LuxFLAG

Michel Maquil
InfineCarina Silberg
AlectaMario Mantrisi
LuxFLAG

Robert Scharfe
Luxembourg Stock
Exchange

Veronique Faber
Cercle de cooperation

Norman Fisch
INDR

Tonika Hirdman
Fondation de Luxembourg

Alexander Feldmann
Etika

Diogo Guia
Greenpeace

Martina Holbach
Greenpeace

Magnus Billing
AlectaClaire de Boursetty
ACA
Anne Contreras-Muller
Arendt & Medernach
Nathalie Dogniez
PWC

Jakob Thomä
2 degrees investing
initiative
Denise Voss
ALFI
Sachin Vankalas
LuxFLAG
Kaspar Wansleben
Investing for Development
Jane Wilkinson
Luxembourg Stock
Exchange
Nasir Zubairi
LHoFT

Civil society

42 | Luxembourg Sustainable Finance Roadmap | Acknowledgments

Claudine Lorang
National Council for
Sustainable Development
Raymond Schadeck
ILASPONSORS
The Luxembourg Sustainable Finance Roadmap has been financed by the"Climate and Energy Fund" of the government of Luxembourg
Ministry of Financewww.mf.public.lu

ISBN No: 978-92-807-3716-5

Ministry of Sustainable Development and Infrastructure
Department for the Environmentwww.mev.public.lu

Job No: DTI/2196/GE