Sustainable finance in Luxembourg: A maturing ecosystem

The Luxembourg Sustainable Finance Initiative (LSFI), in collaboration with PwC Luxembourg, has unveiled the third edition of its annual study, “Sustainable Finance in Luxembourg 2024: A Maturing Ecosystem“. This comprehensive report provides a detailed analysis of the state of sustainable finance in Luxembourg, offering key insights into the trends, challenges, and opportunities shaping the financial sector.

For the ABBL, this study is particularly relevant as it confirms the growing alignment of Luxembourg’s financial sector with sustainability objectives, while also highlighting areas that require further refinement to ensure long-term success.

Key findings from the study

The report presents a wealth of data and trends, including:

• Rebound in ESG UCITS funds: ESG funds in Luxembourg saw a 12.3% growth in Assets under Management (AuM) during the first half of 2024, reaching €3247.7 billion. Retail investors drove this growth with €12.6 billion in net inflows, while institutional investors withdrew €7.8 billion during the same period.
• Dominance of SFDR Article 8 funds: Of the Luxembourg-domiciled UCITS funds, 68% disclose under Article 8 of the Sustainable Finance Disclosure Regulation (SFDR), while 27% fall under Article 6 and 4% under Article 9.
• Exceptional growth in private markets: ESG private market funds domiciled in Luxembourg have experienced rapid growth, with a compound annual growth rate (CAGR) of 95.2% from 2019 to 2023. Private equity dominates this space, accounting for €267.5 billion in AuM, followed by infrastructure (€188.9 billion), real estate (€107.7 billion), and private debt (€58.7 billion).
• PAI reporting challenges: Among the 440 financial market participants surveyed, only 106 have published reports on the Principal Adverse Impacts (PAIs) of their investment decisions, while 195 have issued explanations as to why they do not consider PAIs. This highlights persistent challenges in data accessibility and quality.

Broader implications for the financial sector

This study underscores several critical points for the financial sector:

1. Growing role of banks in sustainable finance: Banks are essential players in driving the transition to sustainable capital markets, as highlighted by the continued growth in ESG investment products and strategies.
2. Retail investor engagement: The significant net inflows from retail investors into ESG UCITS funds indicate a shift towards more sustainability-conscious investment preferences, which presents opportunities for product innovation.
3. Need for simplified frameworks: Despite the positive momentum, the complexity of SFDR-related disclosures and the reliance on estimates and proxies remain key obstacles. Simplifying these requirements and improving data quality are necessary to build investor trust and enhance adoption rates.