ESG funds in Luxembourg: what they are and how they are regulated. Learn all about them by reading this article.
ESG funds: what are they?
In recent times, Luxembourg has become the state with the highest level of "sustainable investment," thanks to the spread of ESG (Environmental, Social, Governance) funds.
But what are ESG funds in Luxembourg.
ESG funds, like any other fund under Luxembourg law, are investments integrating environmental (E), social (S) and governance (G) criteria into their strategy. The goal of these funds, through a sustainable investment approach, is to create value not only economically, but also socially and environmentally. ESG funds, in essence, are distinguished, by the need to balance opposing interests: on one hand, the need to generate profit (this unites them with all other funds), on the other hand, the need to meet sustainable and responsible standards, aiming for a positive impact on the environment and society.
ESG funds in Luxembourg: criteria for establishment
The criteria for establishing an ESG fund are:
- Environmental criteria: looking at the environmental impact of the activities in which the fund invests (e.g., reduction of carbon emissions, use of renewable energy).
- Social criteria: looking at respect for human values and rights, appropriate working conditions and safety standards at work, even the promotion of gender equality.
- Governance criteria: the management of ESG funds is set on the quality of corporate management, as well as on the observance of fair business practices and transparency in the management of the fund itself (ensured by appropriate communications with investors). Transparency to investors is ensured by obligations for the ESG fund to provide so-called ESG reports, which detail how sustainability criteria are integrated into investment decisions and what results have been achieved.
ESG funds in Luxembourg: establishment procedure
The establishment of an ESG fund in Luxembourg first requires the need to define an investment strategy that takes into account environmental, social and governance criteria of incorporation. Hence, the need to invest in environmentally sustainable sectors such as renewable energy, reduction of CO2 emissions, or promotion of biodiversity.
The investment strategy is complemented by the fund's ESG classification under the SFDR Regulation.
The European **Sustainable Finance Disclosure Regulation (SFDR)**, effective from 2021, requires fund managers to classify their financial products according to their sustainability. Hence the distinction into three main categories:
- Funds that do not have ESG characteristics, but comply with its basic regulatory framework.
- Funds that have environmental or social characteristics, but do not pursue an explicit sustainability objective.
- Funds that have a specific sustainability objective and therefore pure ESG.
In order to establish an ESG fund in Luxembourg, it is essential to establish its category and ensure compliance with the disclosure provisions of the SFDR.
ESG funds in Luxembourg: regulation
ESG funds are regulated by the Commission de Surveillance du Secteur Financier (CSSF), Luxembourg's financial supervisory body. The CSSF ensures that funds comply with the regulatory requirements imposed by Luxembourg law.
As such, the CSSF will ensure that funds:
- comply with European rules on sustainability disclosure;
- have an appropriate code of conduct to ensure transparency, integrity and accountability in the management of sustainable investments;
- conduct detailed due diligence on planned investments.
ESG funds in Luxembourg: what can we do for you?
Luxembourg is recognized as one of the best countries in the world to set up investment funds, and ESG funds are no exception.
Establishing an ESG fund in Luxembourg offers investors a whole range of guarantees and high standards of security compared to other financial vehicles. This is because with its complex and innovative regulations, Luxembourg provides detailed guidance for the creation and management of ESG funds. This ensures that funds meet the highest standards of transparency and accountability.
All this is accompanied by a competitive tax regime for investment funds, including the possibility of tax exemptions on dividends and capital gains, thanks to favorable tax treaties with many countries.
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.
