What are green and social impact funds?
Green and social impact funds are investment fund vehicles that have integrated environmental, social and governance factors (ESG) into their investment process. These ESG funds are considered to invest into businesses or activities which are deemed to be environmentally friendly and/or have a positive impact for society.
The term is broad, but this asset class has emerged in the last ten years as a new and growing asset class. Investments in these sectors can take different forms and can be an active investment in a sector which is deemed environmentally friendly, such as solar or wind energy, an investment into a start-up with an ESG agenda or the investment in a blue-chip company fulfilling ESG criteria.
This sector has seen a considerable growth, as institutional investors and sovereign wealth funds, have been under increasing pressure by governments around the world to integrate ESG criteria into their investment allocations.
Why set up an ESG fund in Luxembourg?
Due to its market leadership and its flexibility in adopting new ideas, Luxembourg has been at the forefront of the ESG development and has a long-established track record as a domicile of choice for ESG funds. Luxembourg is also ideally positioned to use the EU passporting rights to distribute the fund across the EU and to global markets. Furthermore, all relevant service providers in the asset management industry have a presence and offer services in Luxembourg. Luxembourg funds are distributed in more than 70 countries and are known around the world.
Luxembourg has a strategy for growing the ESG sector, which is focusing on these main areas:
1. Leveraging on Luxembourg’s expertise in asset management, alternative funds and sustainable finance:
Luxembourg is a globally leading domicile for investment funds, the second largest investment fund centre in the world after the United States and the largest fund domicile in Europe with currently more than EUR 4,7 trillion of assets under management. The country has a total market share of 31% of responsible investment funds in Europe, over 60% of European impact funds, over 61% of global microfinance assets, as well as being amongst the top 4 domiciles for Islamic funds.
2. Introduction of labels for ESG funds, green funds or microfinance funds:
The Luxembourg Government, the Luxembourg Stock Exchange and the European Investment Bank have established LuxFlag, an independent association for the labeling of ESG funds. The aim of LuxFlag is to promote the raising of capital and to reassure investors that the applicant invests in the ESG sector.
3. Supporting innovation:
Luxembourg has established accelerators to promote fundraising and the launch of innovative initiatives, such as the Luxembourg Green Exchange, the world’s first platform for green securities, which now lists 50% of the world’s green bonds.
4. ESG legal framework:
Luxembourg is offering a legal framework that is regularly updated to global ESG standards and provides the ESG sector with flexible investment structuring solutions.
What ecosystem does Luxembourg offer to ESG funds?
Luxembourg offers a toolbox of solutions to establish green funds and ESG vehicles, offering promoters a high degree of flexibility for their investments.
As an EU domicile, ESG funds established in Luxembourg can be more easily distributed within the EU on the basis of existing passporting rights for EU funds.
The key advantages of Luxembourg as a domicile for ESG funds are:
1. One Stop Solution
Setting up an ESG fund with an EU passport, using leading service providers, listing it on a recognized stock exchange, setting up SPVs to benefit from double tax treaties and outsourcing certain functions back to other countries. Luxembourg has the flexibility to offer a one stop solution for operating and distributing investment funds, as well as deploying the funds in an efficient and structured manner.
2. Choice of vehicles
Fund promoters have the choice between unregulated or regulated funds and vehicles: Depending on investor demands, they can either opt for:
(i.)an unregulated fund or vehicle that is quickly set up and needs no approval by the Luxembourg Financial Supervisory Authority (Commission de Surveillance du Secteur Financier or CSSF),
(ii.)a fund that is supervised by the CSSF, or
(iii.)a fund that is not supervised but has appointed a supervised Alternative Investment Fund Manager (AIFM).
3. Global brand
Investors are comfortable with Luxembourg, as it has the following advantages for investors:
(i.)professional and globally recognized fund service providers are established in Luxembourg,
(ii.)depository/custodian is in Luxembourg, if within the scope of the AIFMD,
(iii.)Luxembourg is a reputable fund jurisdiction with established legal frameworks for funds.
4. EU passport
The ESG fund or vehicle could be distributed on the basis of an EU passport. There are different possible options for EU passport, including funds established as a European Social Entrepreneurship Funds (EuSEF). The EuSEF is an EU-wide label of funds that have a specific investment policy and that benefit from the EuSEF label and the EuSEF passport.
Which investment funds and vehicles could be suitable for a green fund or ESG fund?
Luxembourg offers a range of solutions for the ESG sector, ranging from supervised to non-supervised.
1. UCITS (Undertaking for Collective Investment in Transferable Securities) is the leading globally distributed investment fund product. Features of UCITS are the following:
(i.)highly regulated retail product supervised by the CSSF;
(ii.)invest in listed securities, bonds, index components and assimilated assets;
(iii.)strict rules on investment and diversification;
(iv.)access to UCITS passport, meaning that once authorised by the CSSF in Luxembourg, they can be distributed to the public in all other EU Member States, on the basis of a formalized procedure; and
(v.)many countries around the world recognize the UCITS standard, making this the globally leading fund type distributed around the world.
2. SIF (Specialised Investment Fund) is a flexible commonly used fund type. The SIF is:
(i.)supervised by the CSSF;
(ii.)reserved for well-informed and professional investors;
(iii.)requires a low level of diversification;
(iv.)can be set up as an umbrella fund; and
(v.)may also qualify for the AIFMD passport, provided the conditions are met.
3. SICAR (Investment Company in Risk Capital) is also a supervised fund that must invest in risk-bearing assets. The SICAR is:
(i.)not subject to any diversification rules;
(ii.)restricted to well-informed and professional investors;
(iii.)may also qualify for the AIFMD passport, provided the conditions are met; and
(iv.)interesting fiscal regime and double tax treaty access.
4. RAIF (Reserved Alternative Investment Fund) has been a highly successful fund vehicle, since its introduction in 2016. The RAIF allows for a significantly reduced time-to-market, with the option to transform later to a supervised SIF or SICAR, if required. The RAIF is:
(i.)structurally similar to the SIF or SICAR regime but is not subject to a direct supervision by the CSSF;
(ii.)can also be set up as an umbrella structure; NS
(iii.)the RAIF has to appoint an AIFM (Alternative Investment Manager) in Luxembourg, which itself is regulated by the CSSF, but can therefore benefit from the AIFMD passport.
5. Limited Partnership (CLP/SLP) is a highly flexible fund vehicle that has been very successful in the last years. The limited partnerships (CLP/SLP) are:
(i.)not directly supervised and similar to the partnership structures in Common Law jurisdictions;
(ii.)contractual flexibility: The limited partnership agreement (LPA) is the main document organizing the functioning of the partnership, which gives the fund the flexibility to organize the structure of the fund; and
(iii.)this fund type is not restricted to any asset type and not subject to any risk diversification rules.
6. Securitisation Vehicles (SV) are investment vehicles, that can be set up as an alternative investment vehicle to the fund vehicles mentioned above. The SV is:
(i.)flexible in nature and can either be set up as a corporate entity or a securitisation fund;
(ii.)can be set up as an umbrella structure with multiple compartments and is required to issue securities (bonds, notes, etc.) in relation to an underlying risk (receivables, credit risk or any other form of risk); and
(iii.)in principle not supervised, provided that the SV does not issue on a continuous basis to the public.
How long does it take to set up a vehicle in Luxembourg?
The time to set-up depends on whether the vehicle is a supervised or non-supervised fund vehicle. Whilst a non-supervised investment vehicle can be set up within 2 weeks, a supervised vehicle can be established with 2-3 months, depending on the complexity of the fund structure and its investment policy.
How much does it cost to establish a private equity vehicle?
As Luxembourg offers a toolbox of different solutions, the establishment cost greatly varies between the solution chosen and the service providers used to service the fund. Setting up a fund which is not supervised, is less costly than a supervised fund targeted for retail clients.
Apart from setting up your own fund, you can also rent a sub-fund of an existing umbrella structure.
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