Luxembourg-domiciled ESG Funds
PricewaterhouseCoopers (PwC) released a report on Luxembourg-domiciled ESG funds, aiming to analyze the characteristics of ESG funds in Europe and the relationship between these funds and the Sustainable Finance Disclosure Regulation (SFDR). Luxembourg is an important offshore fund registration location in Europe and is also the key to studying European ESG funds.
This report is supported by the Luxembourg Sustainable Finance Initiative (LSFI). LSFI regularly measures and tracks the development of ESG funds and helps stakeholders complete sustainable transition. The global ESG asset management scale is US$18 trillion in 2021, and this number will reach US$33.9 trillion in 2026. As a financial center in Europe, LSFI will help Luxembourg play an essential role in attracting sustainable capitals.
Related Post: PwC Releases European ESG Fund Report
Overview of Luxembourg-domiciled ESG Funds
As of the second quarter of 2023, the total scale of ESG funds in Europe is 4.8 trillion euros, of which the total scale of Luxembourg-domiciled ESG funds is 2.76 trillion euros, accounting for 58%. The total size of Luxembourg funds is 4.1 trillion euros, of which ESG funds account for 67%. The current asset management scale in Luxembourg in 2023 is still lower than in 2021. This is due to the continued impact of macroeconomic factors on the financial market.
Luxembourg-domiciled ESG funds mainly adopt ESG Exclusionary and ESG Involvement, accounting for 59.1% and 23.4% respectively. ESG Screening funds accounted for 17.5%, ranking third. Among all ESG fund categories, equity funds account for the highest proportion, reaching more than 50%. The proportions of bond funds and mixed funds are 26% and 15% respectively. Money market funds account for the lowest proportion, about 9%.
Capital Flows of Luxembourg-domiciled ESG Funds
Although the size of ESG funds accounts for 67% of all funds in Luxembourg, in terms of number of funds, there are 4,814 ESG funds, accounting for 49% of the 9,761 funds, which shows that the average size of ESG funds is larger. As financial market volatility caused investors to choose safe assets, ESG funds experienced a total outflow of 21.3 billion euros in 2023, while bond funds and money market funds were the only asset classes to see net inflows, with 3.3 billion euros and 7.1 billion euros respectively.
The resilience of ESG funds is still higher than average. Since the historical high in 2021, the AUM of ESG funds has dropped by 12.3%, which is lower than the 14.7% of non-ESG funds. Individual investors increased their ESG asset allocation by 4.1 billion euros in the first half of 2023, while institutional investors decreased by 25.5 billion euros.
Among the 4,814 funds, US asset management companies have the largest management scale, reaching 756 billion euros, followed by France, the United Kingdom and Switzerland, with management scales of 414.6 billion euros, 358.7 billion euros and 349.6 billion euros respectively.
ESG Funds and Sustainable Finance Disclosure Regulation
Most Luxembourg funds under the Sustainable Finance Disclosure Regulation (SFDR) are Article 8 funds, accounting for 62%, followed by Article 6 funds (33%) and Article 9 funds (5%). Among Luxembourg-domiciled ESG funds, Article 8 funds, Article 6 funds and Article 9 funds accounts for 92%, 1% and 7% respectively.
SFDR requires Financial Market Participants (FMP) to disclose the principal adverse impacts (PAI) that affect decisions. The current PAI list includes 18 mandatory disclosure indicators and 46 environmental and social indicators.
Among the 485 asset management companies involved in Luxembourg-domiciled ESG funds, 57% complied with SFDR regulations, but only 22% disclosed PAI information, and the other 35% issued statements that they were not prepared to disclose PAI involved in investment decisions.
Although the mandatory disclosure of PAI has taken effect, there are still 180 asset management companies (37%) disclosing information that does not meet the reporting requirements. Among non-compliances, some companies disclosed vague information, some companies did not issue PAI reports, and other companies did not explain why they did not disclose PAI reports. This shows that ESG funds are still insufficiently prepared for SFDR requirements.
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