Luxembourg-domiciled ESG funds reach €2.8tn in assets amid data challenge

Luxembourg-domiciled ESG funds have reached €2.8tn in assets but challenges concerning data standardisation and availability prevail in the sustainable finance domain, according to a new study by the Luxembourg Sustainable Finance Initiative (LSFI), in collaboration with PwC Luxembourg.

ESG funds accounted for 67.3% of Luxembourg's overall UCITS AUM as at the end of June 2023, while Article 8 funds represented 43% of Luxembourg-domiciled UCITS funds – a 34% increase year on year.

ESG Exclusion remains the most common strategy employed, making up 59.1% of ESG UCITS assets, the second edition of its Sustainable Finance study, 'Sustainable Finance in Luxembourg 2023: An expanded overview' revealed.

Among the management companies (ManCos), banks and insurance companies analysed, slightly more than half (57.2%) fulfilled the Sustainable Finance Disclosure Regulation (SFDR)’s "comply or explain" obligation in relation to reporting on the Principal Adverse Impacts (PAIs) of their investment decisions on sustainability factors, while a little over a third (35%) published a declaration not to report on the PAIs.

The new study presented an analysis of the current status of the Sustainable Finance universe within the Luxembourg financial industry.

In particular, it provided a comprehensive data-driven analysis looking at the primary ESG strategies employed, through sectoral analysis and asset classification breakdowns, with a focus on the investment funds industry.

The study also delved into how sustainable finance regulations at the EU level have been implemented by financial market participants (asset management, banking, and insurance segments) in the Grand Duchy – a new development compared to last year’s edition. In addition, it provides an overview of how key players in the Luxembourg financial centre have positioned themselves with respect to global climate initiatives and tools.

The key findings were:

● General remarks:
○ The investment fund industry remains the only sector for which accessible (paid) data is available.
○ ESG dimensions and data evaluated across industry studies heavily depend on data providers which typically have exclusive control over the collection and classification of ESG data.
● ESG funds overview:
○ ESG funds account for 67.3% of Luxembourg's overall UCITS AuM, reaching € 2.8tn in assets by the end of June 2023 and rebounding from the previous year.
○ ESG funds showed greater resilience than non-ESG funds, as the former saw net outflows of € 76.9bn in 2022, while the latter saw net outflows €98.6bn.
○ Asset managers headquartered in the United States and France remain the top ESG managers in Luxembourg, with US-based asset managers accounting for €756.6bn in AuM.

● ESG Strategies:
○ The majority (59.1%) of ESG UCITS assets belonged to funds that only applied the ESG Exclusions strategy. Of these, 72.8% applied at least three exclusions, predominantly to the weapons, tobacco, and fossil energy sectors.
○ The vast majority of ESG Involvement funds (82%) strictly adhere to a single sub-strategy. Notably, the Best-in-Class and SDGs sub-strategies were the most common within the ESG Involvement cluster, representing 37.7% and 37.5% respectively.
○ Best-in-Class funds saw the most net inflows from investors of all the sub-strategies in 2022 (EUR 3.5bn) and H1 2023 (EUR 2.5bn).
○ Microfinance was the least common sub-strategy, representing only 2% of ESG Involvement funds.

● SFDR and mandatory PAI reporting:
○ Article 8 funds represent 48% of Luxembourg-domiciled UCITS funds as of end-June 2023, an increase from the 34% recorded in June 2022.
○ The proportion in terms of AuM of ESG Involvement funds reporting under Article 9 compared to Article 8 decreased from 43% in Q2 2022 to 20% Q2 2023, reflecting the wider shift from Article 9 to Article 8 disclosure.
○ Only 57.2% of management companies, banks, and insurance companies analysed fulfilled the SFDR’s "comply or explain" obligation in relation to reporting on the Principal Adverse Impacts (PAIs) of their investment decisions on sustainability factors. Of these, only 22% published a PAI report, with significant discrepancies in the type and quality of data used.

● Adherence to climate initiatives and tools: A small proportion of Luxembourg-based firms adhere to one of the following climate initiatives or tools: The Glasgow Financial Alliance for Net Zero (GFANZ), the Partnership for Carbon Accounting Financials (PCAF) and the Science-Based Targets Initiative (SBTi), with PCAF being the least popular, with only 8% of all entities adhering to this.

Nicoletta Centofanti, CEO of the LSFI said: “The second edition of the “Sustainable Finance in Luxembourg Study” underscores the sustained growth and evolution of sustainable finance. Despite the current status of development, the efforts undertaken by financial market participants and the various global policies being introduced, this journey is only in its initial stages.

"Challenges and limitations persist, with a notable focus on data, standardisation and disclosure. Moving forward, crucial steps include further data availability and comparability. These are vital measures for the industry’s development, as well as to effectively measure and monitor progress.”

Frédéric Vonner, sustainable finance and sustainability leader at PwC Luxembourg also said: “In recent years, a significant paradigm shift has taken place, particularly following the official adoption of the United Nations' Sustainable Development Goals and the Paris Agreement. European Union policymakers have been at the forefront of advocating for sustainability, spearheading initiatives like the EU Action Plan on Sustainable Finance and the groundbreaking European Green Deal. These initiatives aim not only to position Europe as the inaugural climate-neutral continent, but also to play a pivotal role in fostering the worldwide shift toward a sustainable economy.”