ESG (environmental, social, and governance factors ) funds are slowly emerging as an integral and innovative tool in Luxembourg’s sustainable financing market. International private investors and corporate entities flock to Luxembourg to raise funds for their respective ESG investments. EU and non-EU asset managers are also creating investment funds that integrate ESG factors and risks, with the added measure of evaluating their environmental impact to meet investors increasing demand for sustainable and resilient investments. 

Important Facts About the Luxembourg Green Exchange Market

• The Luxembourg Green Exchange was established in 2016. It is the world’s first platform that is specifically designed for green bonds. Since its inception, the Luxembourg Green Exchange has expanded to include sustainability, social bonds, and SRI (socially responsible investing) investment vehicles. 
• As the world’s first and premier platform for sustainable securities, the Luxembourg Green Exchange has succeeded in creating an international footprint with up to 222 issuers from 47 countries, issuing securities in a total of 47 currencies. 
• As of 1 February 2022, there are a total of 1,234 green, social, sustainable, and sustainability-linked bonds with an estimated value of EUR 640 billion. 

The Future of Socially Responsible Investing

Increasing investor demand is boosting the growth in sustainable debt issuances on a global scale. This is evidenced by the increasing popularity of the Luxembourg Green Exchange in 2021. It was reported that a total of 560 new Green, Social, and Sustainability (GSS) Bonds were added to the Luxembourg Green Exchange platform in 2021 alone, a 47% increase compared to Green, Social, and Sustainability (GSS) Bonds reported in 2020.  

The all-new Green, Social, and Sustainability (GSS) Bonds succeeded in raising a total of EUR 246 billion for specific green and social projects and sustainable initiatives across the globe. This reveals a 31% increase in terms of amount raised compared to 2020. 

Green bonds saw a remarkable growth, given it is considered as the most common category of sustainable debt instrument on the Luxembourg Green Exchange. The growth also reveals a whopping 55% increase in terms of total number of bonds and up to 84% growth in terms of amount raised compared to 2020. 

Solving the Need for Sustainable Investments

The main aim of the Luxembourg Green Exchange is to pursue a sustainable finance agenda. It addresses the concerns of a growing number of investors by offering visibility to issuers who raise funding for green and sustainable developments. Achieving a complete green transition is what the Luxembourg strives to deliver over time. 

International issuers who are looking to showcase their financial security on the Luxembourg Green Exchange are required to adhere to the platform’s strict eligibility criteria and provisions before committing to ongoing reporting on their respective investment vehicles. All required documents and paperwork are available n the Luxembourg Green Exchange online platform, thus making it easy for potential investors to confirm whether their issuers can make do with their promise of sustainable investing. 

Bonds Listed on the Luxembourg Green Exchange

Green Bonds

By definition, green bonds refer to financial instruments that finance green initiatives while providing investors ongoing, fixed income payments. As climate change threatens all nations and their economies, it poses a risk for sources of our daily needs, including agriculture, food, and water supplies. Substantial financing is required to address the challenges of climate change and its effects, including potential food and water shortages. It is therefore critical for investors to create connections with projects that are geared towards saving the environment and promoting projects that promote sustainability. 

The categories for green bonds that satisfy the criteria set by the Luxembourg Green Exchange are as follows:

• Energy efficiency
• Clean transportation
• Renewable energy 
• Eco-friendly management of living natural resources and land use
• Sustainable water and wastewater management
• Climate change adaptations
• Pollution prevention and control
• Green infrastructure

Social Bonds

More conscious investors are raising funds for projects that deliver positive social outcomes while providing investment returns. Social bonds include projects that improve the condition of food security, access to quality education, affordable housing, as well as healthcare financing. 

Sustainability Bonds

Sustainability bonds refer to unsecured bond transactions that offer the same financial and contractual terms as any other unsecured transactions on the market. Issuers are committed to allocate bonds proceeds to green and social developments. Issuers are also deemed to provide investors a detailed reporting on projects financed by using sustainability bonds proceeds. 

ESG Funds

An ESG fund on the Luxembourg Green Exchange integrates environmental, social, and governance factors into various decisions and processes. ESG investing follows specific selection strategies to gain recognition as a responsible investment fund by the Luxembourg Green Exchange. Asset managers that launch ESG funds adapt certain strategies, including impact investing, ESG integration, engagement and voting, norms-based screening, ESG ethical screening, best-in-class, and many more. 

To date, the Luxembourg Green Exchange has created strong partnership agreements with important institutions in Asia, Africa, and South America to further grow the sustainable finance agenda and further strengthen cross-border collaboration and cooperation in support of sustainable development. 

Some of the most important agreements include the MoUs with the Nigerian Stock Exchange and the Santiago Exchange. The Luxembourg Green Exchange also gained active support from the Inter-American Development Bank’s Green Bond Transparency Platform. More recently, the Luxembourg Green Exchange has extended access to information to critical capital markets, including the Green Bond Channel for Chinese domestic bonds included on the Shenzhen Stock Exchange. 

As experts in the Luxembourg capital markets, Damalion offer issuers and investors with advanced sustainable finance knowledge to boost more responsibilities moving forward. Our global service network assists private and corporate investors in sustainable investment vehicle formation and other fund initiatives that promise excellent returns in the future. If you are looking to invest in green and socially responsible initiatives through fund formation in Luxembourg, our seasoned can assist you in every turn. To learn more, reach out to a Damalion expert today. 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.