Luxembourg’s nurturing ecosystem for ethical and responsible investment funds

The recent decision of the US to leave the Paris Climate Agreement and its increasing reluctance to support the
unanimously approved UN Sustainable Development Goals (SDGs) might have been expected to impact ethical
and environmental projects. Quite the contrary, funds with a focus on socially responsible investment (SRI) and
environmental, social and governance (ESG) issues have seen an upsurge in the last 10 years, in particular since
the signing of the SDGs in 2015 and the Paris Climate Agreement in 2016. FLORENCE STAINIER and BISHR
SHIBLAQ explore.

According to the Association of
the Luxembourg Fund Industry,
sustainable and responsible investing
will lead the agenda for asset
management fi rms in 2018 as one of
the key pillars for the industry in
the year ahead along with UCITS
(Undertakings for the Collective
Investment of Transferable Securities)
and alternative investment funds.

That Luxembourg is well established for
fund structuring is probably common
knowledge in the fi nancial industry, but
that it has a long established track record
as a domicile of choice for sustainable
impact as well as Shariah compliant
funds might be a surprise to many.
According to Luxembourg for Finance
(LFF), the country has a total market
share of 39% of responsible investment
funds in Europe, over 60% of European
impact funds, as well as over 60% of
global microfi nance assets, as well as
being among the three leading domiciles
for Islamic funds with 189 Islamic
funds, aft er Malaysia and Saudi Arabia,
according to the Malaysia International
Islamic Finance Centre.

Luxembourg has been successful in
creating a nurturing ecosystem for
all kinds of SRI and ESG funds. The
country’s strategy for growing this sector
is built on fi ve main pillars:

1. The use and leverage of
Luxembourg’s expertise in asset
management and sustainable fi nance

to further grow the SRI and ESG
sector

2. Entering into strategic partnerships
with leading institutional investors
active in the fi eld of SRI and ESG,
such as the European Investment
Bank (EIB) and the International
Finance Cooperation

3. Off ering quality control by
introducing various labels, for
example for ESG funds, green funds
or microfi nance funds through
LuxFlag, an independent association
whose founding partners are, inter
alia, the Luxembourg government,
the Luxembourg Stock Exchange and EIB

4. Supporting innovation by off ering
accelerators to promote fundraising
or launching innovative initiatives,
such as the Luxembourg Green
Exchange, the world’s fi rst platform
for green securities, which now lists
50% of the world’s green bonds,
according to LFF, and

5. Off ering a recognized legal
framework that is regularly updated
to global standards and off ers asset
managers pioneering structuring
solutions.

As with all investment funds, SRI
funds require a solid, yet fl exible,
legal, regulatory and fi scal framework

which allows them to make long-
term projections. In the last few years,

Luxembourg has carefully updated its
legislation, modernized existing vehicles
and introduced new vehicles into its
toolbox. This has also been a determining
factor in why Luxembourg has been able
to keep such a strong position for SRI
and Islamic funds.

UCITS certainly remain the gold
standard for investment funds, but in
recent years, alternative investment

funds of various types have also acquired
an excellent reputation. In this context,
the Luxembourg common limited
partnership, societe en commandite
simple, was modernized and a quantum
leap was taken with the introduction
of the special limited partnership –
societe en commandite speciale in July
2013. A few years and around 1,500
new limited partnership launches later,
the Luxembourg unregulated limited
partnership (whether common or special)
has become a new norm for the launch of
alternative investment funds.

In 2016, a new vehicle was introduced,
the reserved alternative investment fund
(RAIF). The combination of a high degree
of fl exibility and structuring possibilities,
combined with compatibility with EU
regulations and passporting options,
was another quantum leap for the
Luxembourg fund industry. As of
February 2018, around 300 RAIFs have
been established.

As SRI funds increase in popularity,
demands have been made to align the
strategies of Islamic funds with SRI and
ESG funds. By way of example, recent
events have shown that some SRI funds
that screen multinationals’ social and
environmental behaviors excluded
companies that were involved in the
Rohingya crisis, while prominent Islamic
indices did not screen companies for
unethical behavior, although they were
visibly violating standards of Islamic
ethics. Hence, the alignment of these
investment approaches that share
obvious similarities in their objectives
and claims would be benefi cial for
Islamic funds, adding credibility to their
screening process and giving Islamic
funds the possibility to grow together
with the SRI sector. Luxembourg might
be the ideal laboratory as a leading
domicile for the convergence of SRI and
Islamic funds to bring together both
investment approaches and assist in their
growth over the next years.