Luxembourg’s fund industry is ripe for growth

Luxembourg’s financial centre has developed a reputation for being nimble when new opportunities present themselves. In 1988, Luxembourg became the first country to implement the first European directive for funds, which helped attract so-called UCITS, making it the largest fund domicile in Europe and a global leader in cross distribution of funds. This was not something that was built overnight. It required cooperation between public and private players and involved creating the right regulatory environment and generating the necessary expertise.

More than three decades later, Luxembourg has the opportunity to demonstrate its nimbleness once again by becoming a global hub for sustainable finance. The sustainable fund market is growing rapidly, and Luxembourg is well positioned to benefit. According to Morningstar, $1.65 trillion was invested into sustainable funds at the end of 2020, with 77% of these flows coming from Europe¹.

There is no doubt Luxembourg is embracing sustainable investments. We have moved on from convincing ourselves of the need to take sustainable finance seriously. Most people recognize that sustainable finance is the future, but there is still a lot of work to do.

The Sustainable Finance Disclosure Regulation (SFDR), which  came into effect on March 10th 2021 requires to enhance transparency on sustainability at entity and financial product level. Regarding those disclosures, definition for sustainable risk or remuneration policy in order to implement correctly SFDR are still not clear.

However, it is an opportunity for firms to measure their sustainability and ethical impact against their peers. The SFDR only marks the beginning of the sustainable finance journey. Firms must ensure the correct processes and data are in place before the periodic reporting begins in 2022.

Just as in 1988, collaboration between public and private entities will be key to advancing the new agenda. The Luxembourg Sustainable Finance Initiative (LSFI) and its new strategy, which it unveiled in early March, will raise awareness and help Luxembourg develops into a sustainable finance hub.

Investing with meaning

The Luxembourg financial community is also embracing technological innovation. Investing in new technologies will not only help businesses become more efficient, they are necessary to stay competitive.

In the past, most investors were only interested in the expected return on investment. This is changing as firms seek to attract a younger, digital-savvy and more socially-conscious group of investors. The new generation that is emerging also values transparency and want meaning from their investments. Of course, these investors still want to generate a profit. But they also want to know where their money is going and how their data is being used. This requires a fundamental rethink to the way financial service providers make investment decisions. It will also require firms to recalibrate their offering to appeal to a diverse segment of the investor base.

Luxembourg has a big role to play because we have the expertise to identify the right solutions. But it is by no means a quick fix. A growing number of firms recognize this and have started introducing distributed ledger technology and cloud computing to enhance their services. Transfer agency, fund accounting and custodial services will all need to optimize their operating models to remain at the forefront of the industry.

Brexit is not a food fight

Brexit has been known for quite some time and the current perceived wisdom is there will be minimal to no change to the December 2020 agreement. In the media, the debate over Brexit has at times resembled a food fight with competing sides sparring over who will be the winners and losers.

This overly-simplistic view of Brexit fails to consider the expertise needed to develop a financial services ecosystem. For that reason, I do not expect the United Kingdom to compete for Luxembourg’s fund business. Instead, I anticipate British firms will develop closer ties with our country so that they can capitalize on the services we offer here.

However, on the private asset side, offshore centres within the UK will have the opportunity to capitalize on local regimes. That remains to be seen, but there is an argument for more competition between jurisdictions for private assets.

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What opportunities lie ahead for Luxembourg’s financial centre?

Sustainable finance is a tremendous opportunity for Luxembourg. There is no doubt the industry is embracing sustainable investments. But there is still a lot of work to do in terms of adhering to new disclosure regulations, getting processes in place and generating the right data. We need to translate our ambitions into concrete actions.

What role will innovation play in Luxembourg’s financial industry?

Investing in new technologies will not only help businesses become more efficient, they are necessary to stay competitive. More and more firms are introducing distributed ledger technology and cloud computing to optimise their operating models. This will ensure Luxembourg remains at the forefront of the financial industry.

What are the opportunities and risks associated with Brexit?

Firms have been preparing for Brexit for quite some time and many already have a presence in Luxembourg. I am not expecting the UK to try and compete for business with Luxembourg. Rather, I anticipate British firms will develop closer ties with Luxembourg so that they can capitalise on the expertise we have developed here over many years.

Article published on PaperJam

¹ https://www.morningstar.fr/fr/news/209278/investissement-durable--forte-croissance-de-la-collecte.aspx