Responsible Investing

What is the main objective of ALFI´s Responsible Investing technical committee?

The Luxembourg fund industry has a key role to play - and is extremely well positioned to play that role - when it comes to mainstreaming responsible investing. The main objective of ALFI’s RI committee is two-fold:

  • Confirm Luxembourg as the European center of choice and expertise for impact funds (i.e. funds which pursue a social or environmental objective as primary objective, e.g. microfinance funds, social entrepreneurship funds, climate finance funds).
  • Accompany and promote the implementation of ESG (environmental, social and governance) criteria across all asset classes and all investment strategies. For a number of reasons (including investors demand, risk management, regulatory transparency rules, tax incentives, corporate values, etc.) applying ESG criteria has become the rule for most managers globally. Having an ESG mindset is relevant for both retail and institutional funds. There is a diversity of ESG strategies, which the RI committee is continuously screening and adapting, in coordination with the other relevant players in and outside ALFI.  

ALFI’s RI committee is composed of seasoned experts in both impact and ESG strategies. It is organized in 4 work streams:

  • The market intelligence and outreach working group promotes best practices and innovations, supports academic research and provides market data to participants.
  • The legal and policy working group interacts with Luxembourg and EU legislators and regulators to build the most favorable regulatory environment.
  • The labels working group assists LUXFLAG with the design, implementation and promotion of new labels.
  • The conference and promotion working group organizes our well-established annual “Impact Investing Conference” and coordinates communication generally. 

International commitments to fight climate change are increasingly important to asset managers: why?

The agreement reached at the COP21 conference in Paris to undertake ambitious efforts to combat climate change and to keep the global temperature rise well below 2°C, ratified since by 148 countries (out of the 197 signatories) and entering into force on 4 November 2016, has resulted in a binding international framework of actions to fight climate change. These public commitments will translate into very concrete recommendations regarding financing of sectors, technologies and solutions allowing to reach the Paris targets, such as:

  • Which climate change related sectors will receive increased financing;
  • What amounts of capital will be invested and
  • In which geographical regions will this capital be deployed.

Public commitments related to the fight against climate change will thus determine eligibility criteria for public and semi-public money, increasing investor demand for “green” products and investment arbitrage between polluting and non- (less) polluting companies and sectors.

It has become evident over the last 10 years that public money alone is not sufficient to tackle these types of issues and private money is needed to scale up public investments. At the same time, innovative ventures are mostly privately driven at the beginning and require public capital to start up.

Over the next years, these combined factors will create a conducive environment for climate finance related sectors, such as renewable energies, energy efficiency, sustainable agriculture and forestry, waste management, low carbon technologies etc.

Scientific and economic studies have evidenced that climate risks, which have over the past rather been considered as non-financial risks, will increasingly have financial consequences. For example, fossil reserves will at some point no longer be exploitable due to CO² reduction commitments and become “stranded” assets, losing economic value; companies which are heavy polluters and CO² emitters will be abandoned by some investors and face a shrinking market cap; companies adopting new business models based on energy efficiency and renewable energy will gain market share and competitive advantages, and thus investors’ interest.

For all these reasons, climate change and the risks and opportunities arising out of it will affect asset owners and managers, request shifts in asset allocation, and require the due consideration of non-financial risks which will inevitably result in financial risks.

The additional regulatory push for more transparency and disclosure on environmental and social investment criteria is likely to drive investor demand, enhancing the abovementioned implications on asset allocation for the benefit of greener and more sustainable investments.

          

Corinne Molitor (Innpact S.à r.l.) and Christian Hertz (Luxembourg Investment Solutions S.A.)

Co-chairpersons of the ALFI Responsible Investing Technical Committee