As one of Europe’s leading financial centers, Luxembourg already committed to mobilizing private and public capital, in order to assist governments and investors around the world to mitigate climate change and move towards sustainability. But what are the conditions under which financial system can serve the world in tackling the challenges it currently faces? How is Luxembourg addressing those issues through sustainable finance? Is sustainable finance enough to “shift the millions” and solve the climate crisis?
The whole topic of sustainable finance has gained huge momentum. There are a lot of efforts made on all levels: public and private. Over the last few years there has been a number of major initiatives that promote and support sustainability, including The United Nations Sustainable Development Agenda for 2030, Paris Agreement on Climate Change, EU Action Plan for sustainable finance, EU Taxonomy and most recent and most ambitious EU Green Deal. Nevertheless, on a global scale so far only a tiny fraction of investments has already been committed.
In our project we studied how finance could help tackle sustainability issues ranging from environmental such as climate change to social problems such as inequality and inclusiveness.
Our research was also focused on Luxembourg in an effort to understand the sustainable finance market in the country, what does it offer, what are its main strengths and limitations and what are the outcomes from the institutions and players involved.
Throughout the research process we understood that the key factors that would lead to a paradigm shift to the stakeholder capitalism are the power of finance in today’s socioeconomic reality, the pricing of externalities that are starting to make way into the financial system but are yet to be quantified, and a drive for a change, whether it comes from private or public, by means of laws, or incentives, or simple activism.
Thus, sustainable finance is another tool and force at humanity’s disposal that can be used to reshuffle capital flows towards sustainability goals.
Being one of the world’s well-recognized financial centers, Luxembourg hosts a large array of international financial institutions, infrastructures such as stock exchanges and clearing houses. One of the attractive features of Luxembourg is easy access to and quick decision-making process by the authorities allowing to incorporate new initiatives very quickly. Luxembourg claims its full commitment to the goal of transition to a sustainable economy and is constantly expanding its assortment of products and services to promote investments in sustainable projects.
Furthermore, Luxembourg has the potential to forcefully drive the agenda for sustainable development through its involvement in key initiatives at an international and the European Union levels.
But there are limitations as well. The sustainable finance segment in general and in Luxembourg alike faces the following obstacles:
A major part of international financial institutions has their decision-making process determined by the headquarters, and thus their policies might deviate from agendas and priorities in other areas of presence. Which in case of Luxembourg, can be at least partly mitigated by local legislation. There is still lack of liquidity and volumes for big and well recognized funds. More incentives would be needed for them to increase share of sustainable investments in their portfolios. Alternative financing institutions remain few with marginal (investment-wise) initiatives and are heavily dependent on public support and subsidies.
Despite the current barriers we believe that refocusing of financial markets on taking into consideration sustainability will help to successfully address the challenges we all face.
Jean Sébastien ZIPPERT
– Coordinator at Etika