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Finance for the good of the climate

Using finance for the good of the climate

Luxembourg steps up as a leading financial centre for green finance.

Catherine Kurzawa, Lëtzebuerger Journal (Luxembourg)

 

At first sight, Luxembourg does not seem to be a country with strong green credentials. It imports electricity, locally producing only 13 percent of what it consumes, and only 9.25 percent of that from renewable sources. Moreover, it sells high volumes of fuel, boosted by low tariffs compared to its neighbours.

This small nation might not gain high marks with environmentalists, but it would be a mistake to write off the Grand Duchy’s ecological commitment. Luxembourg is a world-class financial center and a leader in innovation, so combining finance with environmental protection comes naturally.

The COP21 Paris Agreement, signed at the end of 2015, aims to limit global warming to below 2 degrees Celsius. Achieving this objective means mobilising vast financial resources. The Agreement text set out a collective goal of mobilising USD 100 billion per year globally by 2020, for a total of USD 1,000 billion by 2030.

Since this money doesn’t just fall from the sky, and public investment alone is not enough, Luxembourg offered its expertise in the form of a “Climate Finance Task Force,” which was set up prior to the Paris conference.

“It was vital that the private sector be involved from the beginning,” said Marc Bichler, ambassador-at-large for climate change in this country of 600,000 inhabitants. Private and public partners joined forces to create a green “toolbox” of financial products adapted to climate mitigation projects.

From green bonds to investment funds for sustainable development, a wide range of green financial products have been developed in Luxembourg, and the country has quickly become a key player in this new financial niche. Luxembourg boasts a 39 percent market share of the total responsible investment funds in Europe. According to Luxembourg for Finance, the Agency for the Development of the Luxembourg Financial Centre, 61 percent of assets under management in this type of fund are domiciled in the Grand Duchy.

A whole host of initiatives have emerged in Luxembourg since COP21, including a climate finance accelerator, a climate finance platform launched by the Luxembourg government in collaboration with the European Investment Bank (EIB), quality certification for green finance products, and most notably, an exchange platform dedicated exclusively to sustainable finance instruments.

The Luxembourg Stock Exchange is now home to the Luxembourg Green Exchange, where half of all the world’s green bonds are listed, for a total of approximately 100 billion euros (USD 116 billion). In just two years of activity, the volume of green bonds issued has tripled and the number of bonds displayed has more than doubled, currently standing at more than 220.

“We’re looking to the future,” Julie Becker, head of Luxembourg Green Exchange, said. Becker does not hide the fact that she would like to see all traditional financial products become responsible, noting: “The future of finance is sustainable and responsible, there’s no other option.”

Currently, green finance remains a niche product. Institutional issuers such as development banks dominate the market, starting with European ones, closely followed by their Asian – notably Chinese – counterparts.

Green finance is more than just a name; it’s also a set of principles. In 2016, the finance labelling agency LuxFLAG launched a quality label to guarantee that the resources raised by investment funds really are directed to climate mitigation measures. One year later, LuxFLAG created a similar label for green bonds.

At the Luxembourg Stock Exchange, green financial products are subject to a two-step evaluation process in order to be eligible for listing. “We ask the issuer to provide us with information both prior to the issuance and then again at a later stage,” Becker said. An independent third party has to submit a report certifying that the funds raised will be used to finance a climate action project. A second report is required at the end of the issuance. Doesn’t this put issuers off? No, according to Becker, who is proud to have “set the highest standards possible.” She explained, “Since the financial crisis, investors want to know where the money is going, what it’s being invested in and what concrete environmental or social impact it will have.”

The fact remains that the listing of green bonds does not constitute an additional source of revenue for the Luxembourg Stock Exchange. Nevertheless, it can take satisfaction in having consolidated its position as a pioneer in green finance and attracting so many issuers.

“The more we push green criteria, the more we ensure that all of the criteria guiding the economy, and everything it is based on, is sustainable,” said Nicolas Mackel, CEO of the Agency for the Development of the Luxembourg Financial Center.

The Grand Duchy intends to continue expanding in green finance and remains ahead of the game. “Competition is growing in terms of communication, I think there are a lot of people who want to carve out a position for themselves in this market,” Mackel noted.

Luxembourg can pride itself on having been one step ahead of the curve. In addition to green finance, the country’s financial sector has shown a wider commitment to sustainable development through its proactive stance in socially responsible finance and microfinance.

Lëtzebuerger Journal
Catherine Kurzawa
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