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Investment
Are institutional investors and financial intermediaries legally required to consider ESG factors when making investment decisions? Must any additional non-financial principles and objectives be considered?
At this stage, institutional investors and financial intermediaries are not expressly required to consider ESG factors when making investment decisions.
Nevertheless, financial market participants and financial advisors – as defined in the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088 of 27 November 2019 (SFDR)), which has been directly applicable in Luxembourg since 10 March 2021 – are required to disclose whether they consider sustainability risks in their investment decisions and advice, and, if so, how they consider the principal adverse impact on sustainability factors of their investment decisions or advice.
Market participants may, on a voluntary basis, adhere (in addition to their statutory obligations further to the SFDR legislative package) to various types of relevant text that outline how they can take into consideration ESG factors in their investment activities, and generally incorporate ESG factors in their financial planning, such as the United Nations (UN) Principles of Responsible Investments (PRI) and the Principles of Responsible Banking.
What voluntary standards and best practices are commonly followed in your jurisdiction with regard to integrating ESG factors and other non-financial principles into investment decisions?
Luxembourg financial actors usually refer to internationally recognised voluntary standards and best practices to integrate ESG factors and other non-financial principles into investment decisions, including those developed by development finance institutions such as the UN PRI (having 87 signatories in Luxembourg), the World Bank’s International Finance Corporation (IFC) Performance Standards and the UN Social Development Goals.
Regarding the integration of governance factors, Luxembourg financial actors may refer to the 10 Corporate Governance Principles of the Luxembourg Stock Exchange or the codes of conduct published by financial associations and agencies.
Regarding social factors, the Ministry of Foreign Affairs, together with the National Institute for Sustainability and Corporate Social Responsibility, adopted the national pact Companies and Human Rights on 20 July 2021, which provides voluntary guidelines for the respect of human rights by corporations across their supply chain.
What voluntary and statutory measurement, reporting and disclosure frameworks are followed in your jurisdiction with regard to ESG and other non-financial factors?
Mandatory measurements and reporting, set out by the applicable European legislative framework, are followed in Luxembourg, including:
Voluntary frameworks for disclosures and measurements are also applied by the Luxembourg actors of the financial sector, including:
A European set of sustainability reporting standards are currently being prepared by the European Financial Reporting Advisory Group and are expected by 2022. The standards are expected to complement the existing framework, with a focus on European actors.
What ratings, indices and guidelines are used to benchmark adherence to ESG principles and other non-financial factors in your jurisdiction?
Financial participants may refer to the guidelines established by the UN Global Compact or by the UN Conference on Trade and Development’s Guidance on Good Practices in Corporate Governance Disclosure to address the concerns of investors and other stakeholders in disclosures provided in various documents, including annual reports.
Regarding adherence to ESG and other non-financial factors, internationally recognised guidelines are used in Luxembourg, such as:
In addition, labels delivered by LuxFLAG and ESG ratings assessed by Morningstar are commonly applied to Luxembourg-domiciled funds.
Are any fiscal incentives or other benefits available in your jurisdiction to encourage institutional investors and financial intermediaries to integrate ESG and other non-financial factors into their investment decision-making?
The Luxembourg legal and regulatory framework does not provide per se fiscal incentives or benefits specifically encouraging institutional investors and financial intermediaries to integrate ESG and other non-financial factors into their decision-making.
However, the New Budget law 2021, adopted on 17 December 2020, reduces subscription tax rates for undertakings for collective investments (UCIs) or individual compartments of UCIs that invest a specific portion of their net asset value in determined sustainable economic activities, as defined in the EU Taxonomy Regulation, from 0.05 per cent gradually down to 0.01 per cent if 50 per cent of their net asset value is invested in qualifying sustainable economic activities.
In addition, since the tax year 2010, investment funds that have been granted the ‘microfinance’ label by the Luxembourg fund-labelling agency LuxFLAG are exempted from paying the subscription tax.
The Luxembourg Sustainable Finance Roadmap, published in October 2018, sets out the objective to redesign investment incentives in relation to the integration of sustainability considerations in finance activities and business models; therefore, the Luxembourg framework is expected to evolve over the next few years towards providing additional fiscal incentives and benefits in this sector.
In addition to ESG factors, what considerations and practices are commonly integrated into impact investment strategies?
Impact investments have existed alongside ESG-focused investment for the past few years in Luxembourg and continue to grow, although no specific framework regulates impact investing.
Impact investment mechanisms and strategies are inspired by the traditional investment techniques. For instance, carried interest is also commonly used as a remuneration mechanism in social impact investing, but in addition to linking a portion of the remuneration of the managers to specific financials, it also tends to include the social performance metrics of investments.
In addition, the impact fund industry partially relies on blended finance models in which public investors usually take on a greater risk to attract private investors to the structure.
Finally, impact investment mechanisms also include responsible exit. Unlike a traditional exit strategy, which solely considers financial return to determine the right exit timing and counterparty, a responsible exit refers to the best time for a fund to exit a given investment to allow the investee to continue having access to the right resources and also considers the appropriate counterparty to ensure its sustainability.
To design their strategy, impact funds often refer to the impact investment norms of the Impact Management Project, which provide a framework to assess and measure the outcome of the investments underlying the impact funds (eg, using a classification of impact).
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