According to the Association of the Luxembourg Fund Industry, sustainable and responsible investing will lead the agenda for asset management firms 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 financial 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 microfinance assets, as well as being among the three leading domiciles for Islamic funds with 189 Islamic funds, after 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 five main pillars:
- The use and leverage of Luxembourg's expertise in asset management and sustainable finance to further grow the SRI and ESG sector
- Entering into strategic partnerships with leading institutional investors active in the field of SRI and ESG, such as the European Investment Bank (EIB) and the International Finance Cooperation
- Offering quality control by introducing various labels, for example for ESG funds, green funds or microfinance funds through LuxFlag, an independent association whose founding partners are, inter alia, the Luxembourg government, the Luxembourg Stock Exchange and EIB
- Supporting innovation by offering accelerators to promote fundraising or launching 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, according to LFF, and
- Offering a recognized legal framework that is regularly updated to global standards and offers asset managers pioneering structuring solutions.
As with all investment funds, SRI funds require a solid, yet flexible, legal, regulatory and fiscal 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 flexibility 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 beneficial 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.
Previously published in Islamic Finance news Volume 15 Issue 31 dated the 1st August 2018.
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