1 Legal and enforcement framework
1.1 What regulatory regimes and codes of practice primarily govern environmental, social and governance (ESG) regulation and implementation in your jurisdiction?
The ESG regime in Luxembourg is governed by:
- EU regulations and legislation;
- national legislation; and
- regulatory guidance.
The primary regulatory regimes are as follows:
- EU regulations include (and not limited to):
- Luxembourg laws and recommendations include:
- the Law of 23 July 2016 on the publications of non-financial information, which transposed the EU Non-financial Reporting Directive (2014/95);
- the Grand-Ducal Regulation of 27 July 2022 amending Grand Ducal Regulation 30 May 2018 in order to transpose Delegated Directive 2021/1269 amending Delegated Directive 2017/593 regarding the integration of sustainability factors into the product governance obligations of the Second Markets in Financial Instruments Directive; and
- all press releases, circulars and other recommendations on sustainable finance issued by the Commission de Surveillance du Secteur Financier (CSSF), including CSSF Circular 21/773 on the management of climate-related and environmental risks for all credit institutions designated as less significant institutions under the Single Supervisory Mechanism and all branches of non-EU credit institutions.
- Codes of conduct include:
- Principle XI of the Revised Association of the Luxembourg Fund Industry (ALFI) Code of Conduct 2022; and
- the X Principles of Corporate Governance of the Luxembourg Stock Exchange.
1.2 Is the ESG framework in your jurisdiction primarily based on hard (mandatory) law and regulation or soft (eg, 'comply or explain') codes of governance?
While the ESG framework in Luxembourg is made up of both hard and soft law, it is primarily based on mandatory EU regulations and directives, in addition to Luxembourg laws that implement these directives.
1.3 Which bodies are responsible for implementing and enforcing the rules and codes that make up the ESG framework? What powers do they have?
In relation to national law, the Law of 25 February 2022 appoints the CSSF and the Office of the Insurance Commissioner (CAA) as the national authorities responsible for ensuring the application of the SFDR and the Taxonomy Regulation. This law grants the CSSF and the CAA supervisory and investigative powers over financial market participants and financial advisers that are subject to their supervision, in order to ensure that they are applying the law correctly.
These supervisory and investigative powers include:
- the right to access, receive or take a copy of documents or other data, whatever form it may take; and
- the right to carry out on-site inspections of the people or entities under their supervision.
These bodies also have administrative sanctioning powers, which may be exercised upon discovering an act of non-compliance by entities within their scope. Examples of these powers include:
- the right to publish a public statement disclosing the identity of those responsible for the violation along with the nature of that violation;
- the ability to issue an administrative fine of between €250 and €250,000; and
- the power to temporarily prohibit a person from exercising his or her managerial functions.
1.4 What is the regulators' general approach to ESG and the enforcement of the ESG framework in your jurisdiction?
As one of Europe's leading financial centres, Luxembourg already plays an important role in mobilising private and public capital in order to help governments and investors around the world to mitigate climate change. The CSSF's interest in sustainable finance has increased significantly in recent years as a result of the adoption of:
- the UN Agenda (2030) for Sustainable Development;
- the Paris Agreement on Climate Change; and
- the European Commission Action Plan: Financing Sustainable Growth in 2018.
In October 2018 Luxembourg also published the Sustainable Finance Roadmap, which aims to promote a more sustainable financial sector. The roadmap lays the foundations on which a comprehensive sustainable finance strategy will be based, in order to support the objectives of the UN Agenda (2030) and the Paris Agreement.
1.5 What private sector initiatives have been launched in your jurisdiction to complement the ESG framework?
The three main private sector initiatives which exist in Luxembourg to complement the ESG framework are:
- the Luxembourg Sustainable Finance Initiative (LSFI);
- the Luxembourg Finance Labelling Agency (LuxFLAG); and
- the ALFI framework – in particular, its Code of Conduct.
The LSFI is a not-for-profit association that designs and implements the Sustainable Finance Strategy for the Luxembourg financial centre. The LSFI was founded in 2020 with the objective of raising awareness and promoting and helping to develop sustainable finance initiatives in Luxembourg. The organisation works around three pillars:
- raising awareness and promoting sustainable finance;
- unlocking potential; and
- measuring progress.
LuxFLAG is an independent non-profit association that was founded in Luxembourg in 2006. The organisation has launched a variety of labels which allow investors to identify sustainable investment products. These include the Environment Label, which reassures investors that the relevant investment product invests the majority of its assets in environmental-related sectors, in a responsible manner. The association also awards labels for other sustainability matters, such as the Climate Finance and Green Bond Labels.
The ALFI Code of Conduct was originally published in September 2009 and was updated in 2013 and again in 2022. The code establishes good governance practices for funds and management companies and has proved successful over the last decade. In order to remain relevant and adapt to the current environment of fund regulation and governance, the code was updated in 2022 to incorporate ESG matters.
2 Scope of application
2.1 Which entities are captured by the rules and codes that make up the principal elements of the ESG framework in your jurisdiction?
By way of direct application of the EU regulations affecting ESG – including, for instance, the EU Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation – the ESG framework in Luxembourg applies to:
- financial market participants, including:
- investment firms which provide portfolio management;
- alternative investment fund managers (AIFMs);
- managers of qualifying venture capital funds;
- managers of qualifying social entrepreneurship funds;
- management companies of undertakings for collective investment in transferable securities (UCITS); and
- credit institutions which provide portfolio management; and
- financial advisers including credit institutions, investment firms, AIFMs and UCITS management companies which provide investment advice.
In relation to national law, the Law of 23 July 2016 on the publication of non-financial information, which sets out the principal elements of the ESG framework in Luxembourg, applies only to large public interest entities – notably those which:
- are organised as:
- a limited company;
- a European company;
- a limited partnership with shares; or
- a limited liability company; and
- 500 employees;
- total assets of €20 million; and/or
- a net turnover of €40 million.
In addition, soft national law in the form of Commission de Surveillance du Secteur Financier Circular 21/773 on the Management of Climate-Related and Environmental Risks sets out recommendations for:
- all credit institutions designated as 'less significant institutions' under the Single Supervisory Mechanism; and
- all branches of non-EU credit institutions.
2.2 How are entities in your jurisdiction that are not subject to specific rules or codes implementing ESG?
Entities that are not subject to specific rules or codes implementing ESG may refer to soft Luxembourg 'law' to implement ESG. Examples include the following:
- The Association of the Luxembourg Fund Industry Code of Conduct covers:
- all funds, meaning all types of Luxembourg undertakings for collective investment, whether UCITS or alternative investment funds; and
- investment fund managers.
- The Code of Conduct is principles based rather than rules based; and foresees, in its Principle XI, recommendations to integrate, as appropriate, sustainability standards and objectives including ESG criteria in a fund's business model and operations generally. Entities that do not fall within the scope of the code may decide to abide by these principles on a voluntary basis.
- The Luxembourg Stock Exchange has also published the X Principles of Corporate Governance of the Luxembourg Stock Exchange as a complement to the domestic legislation. The X Principles have been drawn up for limited companies with a single-tier governance structure (ie, a board of directors), which is the form most commonly adopted by companies in Luxembourg. However, they are also intended to apply to other forms of companies. The X Principles have been amended to integrate a new principle relating to corporate social responsibility.
2.3 What are the principal ESG issues in your jurisdiction that are either part of the ESG framework or part of the implementation of ESG?
Implementing the SFDR and the Taxonomy Regulation in practice (eg, as regards the pre-contractual disclosure obligation) has been quite challenging for many financial market participants.
Successful implementation involves:
- understanding the regulatory requirements from a compliance perspective;
- having ESG vision and ambition, robust processes and operational controls in place (eg, a dedicated ESG team; training for relationship managers; integration and evaluation of ESG risks); and
- identifying measurable ESG targets on whose progress the company will report annually.
Finding comparable and reliable data has also proved difficult. As periodic reporting on ESG has just begun, it appears that it may be challenging to determine exactly what should be described in such reports and how this should be reported (eg, in relation to the extent to which environmental or social characteristics have been met).
The regulatory framework is also evolving (eg, new SFDR templates as of October 2022; local regulator clarifications on European Securities and Markets Authority Q&As), making it difficult to adapt and implement all requisite changes in time. The market practice for Level 2 SFDR disclosures was still being developed in early 2023, leaving room for various interpretations and further guidance at both the EU and national levels.
3 Disclosure and transparency
3.1 What primary disclosure obligations relating to ESG apply in your jurisdiction?
The primary disclosure obligations relating to ESG derive from EU legislation – notably, the Sustainability Finance Disclosure Regulation (SFDR) and Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing the SFDR ('SFDR RTS'). Financial market participants such as alternative investment fund managers and undertakings for collective investment in transferable securities management companies must provide information on:
- the integration of sustainability risks into investment decisions;
- how the integration of sustainability risks is reflected in the remuneration policy; and
- the consideration of the principal adverse impacts of investments on sustainability factors.
In addition, financial market participants should categorise the financial products they manage as Article 6, 8 or 9 under the SFDR. For Article 8 or 9 funds, the proportion of investments in the portfolio aligned with the Taxonomy Regulation must also be disclosed.
The abovementioned information must be disclosed on the website of the financial market participant, and in its pre-contractual documents and periodic reports. The applicability of each rule differs depending on whether the disclosure is made at the level of the financial market participant or the fund. Further details on disclosure are outlined in the appendix to the SFDR RTS, which became applicable on 1 January 2023.
In relation to national law, disclosure obligations relating to ESG are set by the Law of 23 July 2016 and concern the obligation to publish a non-financial statement or a consolidated non-financial statement.
3.2 What voluntary ESG disclosures are also commonly made in your jurisdiction?
Several interest groups are active in the area of disclosures relating to environmental, carbon emissions, climate, social and governance matters. They have developed various disclosure frameworks that asset managers may consider on a voluntary basis when disclosing ESG information. The different frameworks available to issuers include:
- the disclosure recommendations and methodology developed by the industry-led Financial Stability Board's Task Force on Climate-Related Financial Disclosures;
- other reporting frameworks developed to include ESG matters, such as:
- guidelines and recommendations issued by authorities such as the European Banking Authority, the European Securities and Markets Authority and the International Organization of Securities Commissions.
3.3 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?
There is no specific hard law on the role of the board or other corporate bodies and/or officers with regard to ESG voluntary disclosure.
According to the Law of 10 August 1915 on commercial companies, with the exception of the powers that are reserved to the general meeting of shareholders, the board of directors is vested with the widest management powers to take any action that is necessary or useful to realise the corporate object of the company.
In addition, according to soft Luxembourg law such as the Revised Association of the Luxembourg Fund Industry Code of Conduct and the X Principles of Corporate Governance of the Luxembourg Stock Exchange, the board should integrate as appropriate sustainability standards and objectives including ESG criteria in the company's business model and operations. Hence, the board of directors should:
- ensure that processes are in place that are designed to protect human and social rights;
- ensure that the choice of service providers takes into consideration the integration of ESG criteria;
- encourage the integration of sustainability-related aspects into remuneration policies or principles, as applicable;
- regularly – and at least annually – obtain a dedicated report on the fund's sustainability strategy; and
- monitor adherence to applicable sustainability-related laws and regulations relevant to the design, implementation, management and distribution of the fund.
3.4 What best practices should be considered in relation to ESG reporting and disclosure?
In recent years, the ESG regulations have become more extensive in volume and stricter in their requirements. The EU ESG legislative framework is now more stringent and has been expanded to encompass an increasing number of industries and entities. The Corporate Sustainability Reporting Directive (CSRD) not only has introduced new reporting requirements on environmental, social and governance topics, but also requires the provision of external limited assurance over the information disclosed, aligning the requirements of non-financial reporting with those of financial reporting. Companies in scope will need to have appropriate processes in place to ensure that the information disclosed is high quality and reliable. Hence, the European Union has introduced for the first time a third-party assurance requirement in relation to ESG disclosures.
Timely reporting and keeping up to date with regulatory developments are crucial to ensure ongoing compliance with the disclosure requirements. International standards such as the CSRD can help companies to ensure the consistency of the information disclosed when reporting – which in certain cases can be a challenge for entities that are new to the publication of ESG information. These standards highlight the importance of conducting a double materiality assessment to determine which topics are of greatest interest for the company. Players should share with stakeholders information that is relevant to their business and operations, encompassing related challenges, risks and opportunities. To ensure that this assessment is objective, entities should involve internal and external stakeholders in this exercise, to collect different views on what is relevant to their business and evaluate internally risks and opportunities for their business model linked to ESG integration.
4 Strategy and governance
4.1 How is ESG strategy typically designed and implemented in companies in your jurisdiction?
There is growing recognition of the importance of ESG factors in the investment decision-making process. As a result, investors are increasingly favouring fund and asset management companies that can demonstrate a commitment to sustainability and responsible business practices.
The design, implementation and communication of a sound and transparent ESG strategy are now crucial in order for a fund to attract and retain clients. Currently we see a different level of ESG integration in the investment process, starting from negative screening (light ones) following the alignment with well-known frameworks such as UN PRI and SDGs, to more "mature" ones that target impact investing and commitments to sustainable investments.
More advanced players are embedding ESG inclusion principles in their processes and focusing on thematic and impact investing.
4.2 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?
The board of directors plays a crucial role and is responsible for:
- setting the company's strategic direction; and
- ensuring that ESG is integrated into its business practices.
The board's role involves:
- setting ESG policies;
- identifying risks and opportunities; and
- overseeing the implementation of ESG strategies.
To effectively execute an ESG strategy, boards should focus on four key pillars:
- Identify the key internal departments – it is the board's responsibility to ensure that:
- each department understands its role and responsibilities in implementing the ESG strategy; and
- the various departments have the necessary resources to execute the tasks effectively.
- Establish an internal ESG team – the board should create or assign an internal ESG team to develop and implement the company's ESG strategy. This team should consist of individuals at manager level from various departments including finance, HR, operations and legal. They should be responsible for setting ESG goals that are aligned with the company's overall strategy.
- Designate key personnel to upgrade non-financial information.
- Ensure that the company's sustainability reporting meets the standards set by external organisations such as the Global Reporting Initiative.
4.3 What mechanisms are typically utilised to monitor the implementation of ESG strategy in your jurisdiction?
As in relation to the monitoring of ESG strategies, stakeholders increasingly expect companies to demonstrate their commitment to sustainable practices. International sustainability standards:
- provide a framework for companies to manage and report on their ESG performance; and
- help to ensure consistency and comparability across different companies and sectors.
These standards cover a range of topics, including:
- environmental impact;
- labour practices;
- human rights;
- governance structure; and
- supply chain management.
They provide a common language for sustainability reporting, allowing companies to report on their ESG performance in a consistent and comparable manner. This helps investors and stakeholders to evaluate a company's sustainability performance and compare it with that of other companies. Standards also improve the quality of ESG reporting by providing clear guidance on how to measure, manage and report on ESG issues; this helps to ensure that sustainability reports are accurate, comprehensive and transparent, while in turn building trust and enhancing the reputation of the reporting company.
The ultimate aim of the Corporate Sustainability Reporting Directive is to standardise and simplify sustainability reporting for companies. It seeks to consolidate, within one disclosure, all the needs of EU regulators, investors and other stakeholders. However, fulfilling the requirements of this regulation may prove challenging for enterprises that are not accustomed to the disclosure and monitoring of sustainability requirements.
4.4 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?
With the application of the CSRD, the board of directors and its committees will ultimately be responsible for approving the non-financial information under European Sustainability Reporting Standards to be published as part of the company's management report. This obligation will increase the board's involvement in the ESG agenda, requiring it to establish a robust ESG strategy and monitor its implementation.
4.5 How is executive compensation typically aligned with ESG strategy in your jurisdiction?
The monitoring of ESG information is the responsibility of the ESG teams.
However, the board of directors must be involved in ensuring the transparency and veracity of the information shared, as this could affect the image of the company. One tool that should facilitate the transition to a successful ESG strategy is the alignment of executive compensation with the ESG strategy; through this, the board can hold management accountable for progress against the strategy.
In addition, ESG criteria should be integrated into remuneration policies. This can be done by:
- identifying the company's ESG targets and ambitions;
- defining concrete objectives and metrics that are appropriate for inclusion in pay practices (eg, occupational health and safety measures); and
- providing bonuses or equity rewards.
4.6 What best practices should be considered in relation to the design and implementation of ESG strategy?
The integration of ESG strategies into business practices is increasingly crucial in meeting the demands of consumers, investors and regulators for greater transparency and responsibility. To this end, companies should adopt certain best practices.
In view of upcoming regulations, best practices include the incorporation of ESG factors into the company's core business strategy. Moreover, companies should engage with stakeholders such as investors, employees, customers and communities to understand their ESG concerns and priorities. Regular communication, collaboration and feedback mechanisms should be employed to ensure that ESG strategies align with stakeholder expectations. Companies should also prioritise transparency and disclosure in ESG reporting, providing clear and consistent information about their ESG performance and impacts. This can involve using internationally recognised standards and frameworks – such as the Global Reporting Initiative or the Task Force on Climate-related Financial Disclosures – to ensure credibility and comparability.
By applying best practices, companies can:
- manage ESG risks and opportunities effectively;
- enhance their reputation;
- attract and retain talent; and
- create long-term value for stakeholders.
As the world continues to face complex ESG challenges, companies that adopt a proactive and strategic approach will be better positioned to succeed in the future.
5.1 What is the general approach of lenders towards ESG in your jurisdiction? What internal and external information regarding a prospective borrower will they typically consider in this regard?
ESG lending activity driven by EU and national legislation and incentives has increased significantly in recent years. Luxembourg lenders are in particular influenced by the following:
- Authorities such as the European Central Bank, the European Banking Authority and the Commission de Surveillance du Secteur Financier have tightened up their supervision of ESG matters. Lenders are expected to integrate ESG risks into their business strategies, governance and risk management frameworks.
- With sustainable finance a strategic goal set for the finance industry, lenders are taking a proactive approach to incorporating ESG considerations into their lending policies.
- Due to the evolution of the regulatory landscape, credit institutions must now integrate ESG factors into product governance requirements when designing and distributing financial instruments.
A prospective borrower is expected to provide the lender with information evidencing the 'sustainable' purpose of a project – for example, it should be able to demonstrate specific energy efficiency performance. ESG ratings and labels (eg, by the Luxembourg Finance Labelling Agency) are also of significance.
5.2 Are bonds/loans that are marketed as green bonds/loans, social bonds/loans, sustainability bonds/loans or similar a feature of the markets in your jurisdiction?
The green, social, sustainability and sustainability-linked bond market has grown significantly in Luxembourg in recent years. The COVID-19 pandemic particularly accelerated the focus on social elements of ESG. The Luxembourg Stock Exchange saw a significant increase in new sustainable bonds in terms of value.
In 2016, the Luxembourg Stock Exchange launched the world's first and now leading platform dedicated exclusively to green bonds: the Luxembourg Green Exchange (LGX). Since then, the LGX has expanded to include social, sustainable and sustainability-linked bonds. The main objective of the LGX is to reorient capital flows towards sustainable projects.
In 2020, Luxembourg became the first European country to launch a sustainability bond framework, which should help to boost financing for sustainable projects – for example, those relating to:
- the construction of green buildings;
- the energy transition;
- access to essential services; and
- job creation.
As a consequence of this framework, Luxembourg issued the first European sovereign sustainability bond.
5.3 What key developments have taken place in the structuring of these instruments in your jurisdiction?
The key principles in relation to the structuring of instruments have been developed by international market associations:
- To support the capital markets, the International Capital Market Association has published:
- Green Bond Principles;
- Social Bond Principles;
- Sustainability Bond Guidelines; and
Sustainability-Linked Bond Principles.
- To support the loan market, the Loan Market Association has published:
- Green Loan Principles;
- Social Loan Principles; and
- Sustainability-Linked Loan Principles.
It is expected that the EU Green Bond Standard will further develop the bond industry.
5.4 What best practices should be considered in relation to ESG in the financing context?
ESG-related challenges have made it easier to engage in 'greenwashing' – that is, providing false or misleading ESG-related information on a company or financial instruments. Therefore, the establishment of measures such as ESG ratings and the structuring of key performance indicators to prevent greenwashing are of critical importance. It is expected that the EU Sustainable Finance Disclosure Regulation and the Taxonomy Regulation should help to mitigate the risk of greenwashing.
6 ESG activism
6.1 What role do institutional investors and other activist shareholders play in shaping ESG in your jurisdiction?
Shareholder activism is not yet a widespread practice in Luxembourg. There is a structural explanation for this, as many global groups use Luxembourg as a hub for the establishment of companies and investment vehicles. Thus, listed and unlisted companies, as well as investment funds and other vehicles, generally have a limited number of shareholders (sometimes just one), which often directly or indirectly hold investments and participations mainly in non-Luxembourg – or even non-EU – companies. As such, through their Luxembourg vehicles, activist shareholders hold and may affect the decision making of companies established worldwide, rather than just Luxembourg-established companies. Consequently, by using the legal instruments available under Luxembourg law, shareholders can potentially influence the functioning of both Luxembourg-based companies and direct and indirect subsidiaries and affiliates globally.
At present, it seems that institutional investors are not keen to participate in voting on ESG-related matters. However, certain institutional investors – such as pension schemes – will still exercise their voting rights, primarily due to regulatory constraints.
6.2 How do activist shareholders typically seek to exert influence on corporations in your jurisdiction in relation to ESG?
Activist shareholders can seek to influence boards in several different ways, which primarily aim to encourage dialogue with management to advocate for ESG matters rather than to promote campaigns. They include:
- keeping themselves informed on the company's enactment and implementation of ESG regulation and policies – in particular, ahead of the annual general meeting (the management report should include information on the enactment of the ESG policy);
- requesting the inclusion of ESG-related items on the agenda for general meetings and proposing the wording of related resolutions as well as the postponement of a general meeting for up to four weeks (reserved to shareholders representing at least 5% and 10% of the share capital respectively);
- participating in and voting at general meetings and particularly annual general meetings, where they have the right to decide on whether to discharge the management;
- posing questions to managers both at general meetings (within the limits of the agenda) and outside them – if there is no response, shareholders can request the judiciary to appoint an expert accordingly (reserved to shareholders representing at least 10% of the share capital); and
- enacting and updating management remuneration policies (however, the shareholders' vote is advisory only, unless the articles of association provide otherwise).
Shareholders that are extremely displeased with the management's decision making on ESG issues can resort to suing board members for violation of the law or of their fiduciary duties with respect to compliance with ESG regulations and the implementation of internal policies.
6.3 Which areas of ESG are shareholders currently focused on?
Given the limited instances of shareholder activism in Luxembourg, it is not easy to identify the areas of ESG on which shareholders are currently focused. The fact that several of the major global investment managers – including some based in Luxembourg – participate actively in initiatives such as Climate Action 100+ suggest that climate change and the environment are a primary concern in this regard. Other Luxembourg fund market players recently indicated that they may introduce new voting practices at general meetings aimed at obliging companies to promote more proactive policies to protect gender diversity, among other things.
Aside from individual initiatives, the Luxembourg regulatory environment continues to evolve rapidly, driven by the spurs of the EU legislature. It is thus possible that other issues, such as global human rights and employment conditions, may soon gain ground in Luxembourg. Companies may also find synergies in these areas with non-governmental organisations, which – especially in the case of global organisations – may have a better chance of championing ESG causes directly before shareholders and institutional investors.
6.4 Have there been any high-profile instances of ESG activism in recent years?
The main instances of shareholder activism in Luxembourg have taken place during hostile takeovers. Shareholders took the side of both the target and the would-be acquirer, ultimately helping the latter to prevail. Chief among these are the hostile takeovers of:
- Arcelor by Mittal in 2006, resulting in the creation of global steel production behemoth ArcelorMittal; and
- Braas Monier Building by Standard Industries Inc in 2016, resulting in the creation of leading roofing and waterproof solutions provider BMI.
However, in these cases the shareholder activism primarily had financial and corporate motivations. As a result, unlike in other EU and global jurisdictions, there is little to no indication of campaigns promoted by shareholders to promote ESG in Luxembourg.
6.5 Is ESG activism increasing or decreasing in your jurisdiction? How and why?
As shareholder activism is not generally prevalent in Luxembourg, it is not easy to predict whether it might increase in future. Based on precedent, the progressive enactment of EU-driven ESG regulations, coupled with the recent reforms to shareholders' rights, may prompt shareholders to further their influence on boards of directors. Where investors organised in investment funds (or other investment vehicles) sign up for global ESG initiatives (eg, Climate Action 100+), they may use all available instruments to ensure that the management of the companies they invest in commit to the relevant ESG targets and the regulations applicable thereto. Such activism would aim to engage board members in a dialogue to advance the ESG agenda, and could entail the adoption of specific measures such as the establishment of ESG and remuneration committees with advisory and supervisory functions. This, in turn, would result in an important ESG-specific influence in board decision making. Given the structure of the Luxembourg market, the use of such instruments will likely affect subsidiaries and affiliates globally, rather than Luxembourg-based entities.
7 Other stakeholders and rights holders
7.1 What role do stakeholders or rights holders (eg, employees, pensioners, creditors, customers, suppliers, and Indigenous communities) play in shaping ESG in your jurisdiction? What influence can they exert on a company?
There is no particular law that empowers stakeholders or rights holders to shape or influence a company.
Nevertheless, customers rather than regulators are in reality the most important ESG stakeholders; and asset managers exert significant influence on the ESG efforts of companies, as equity is the most important asset class, accounting for 64% of sustainable fund assets as compared to 48% in conventional funds (according to the European Sustainable Investment Funds Study 2022 by Morningstar and zeb, powered by the Association of the Luxembourg Fund Industry).
Many investors now look at ESG performance as closely as financial returns when considering where to invest their funds. As a consequence, the interest that stakeholders and rights holders have in ESG issues may encourage companies to adopt and implement a clear ESG strategy in a bid to attract stakeholders to invest in them.
8 Trends and predictions
8.1 How would you describe the current ESG landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
In recent years, Luxembourg has followed an active ESG and sustainability policy both at governmental level and in terms of its fiscal policy.
As such, Luxembourg aims to implement, in due course, all ongoing EU rules relating to ESG, including:
- the Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937;
- the Proposal for a Regulation of the European Parliament and of the Council on European green bonds;
- the Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks, and amending Directive 2014/59/EU; and
- the Proposal for a Regulation of the European Parliament and of the Council amending EU Regulation (575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor.
In addition, at the national level, Luxembourg has tabled Draft Law 7433 on sustainable finance, which would amend the Law of 17 December 2010 on undertakings for collective investment ('UCI Law') adopted by the Luxembourg government on 25 April 2019. The draft law would introduce a more favourable tax regime for sustainable finance. Thus, while under Article 172 of the UCI Law, the annual subscription tax rate payable by UCIs is 0.05%, a reduced rate of 0.01% would apply to UCIs oriented towards sustainable finance.
9 Tips and traps
9.1 What are your top tips for effective ESG implementation in your jurisdiction and what potential sticking points would you highlight?
The EU regulations – in particular, the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation (including the Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing the SFDR) – are major steps towards the introduction of mandatory disclosure obligations for financial market participants.
It is expected that 2023 will mark an important milestone in terms of the transparency of the ESG information disclosures of financial market participants. The applicable regulations may be subject to amendment in the coming years in order to provide greater clarity at both the EU and national levels. While best practice will be built on, improved access to reliable ESG data will also increasingly be expected. The regulatory risk linked to the implementation of the ESG regulations should be appropriately mitigated by financial market participants – not least by seeking legal advice from a law firm with advanced expertise in ESG and sustainable finance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.