Luxembourg is by far the leading EU domicile for environmental funds, according to a new report by PwC (see below). Assets under management in green funds in the Grand Duchy are greater than the combined totals of the next three largest domiciles for these products. Why is this?
A total of €1,520bn green investment funds were based in the Grand Duchy in the first half of this year, representing about 45% of the EU total of around €3,350bn, according to the report. This calculation was based on funds classified under the sustainable finance disclosure regulation (SFDR) as either “light green” article 8 products, or article 9 impact funds. Data was provided by Refinitiv Lipper. This proportion is well above Luxembourg’s EU market share for all funds, which is currently just above one-quarter.
Article 8 dominates
Article 8 products (which have relatively modest, often exclusionary, green ambitions) dominate the EU market, accounting for over 90% of all green fund assets in the EU. Article 9 products (which have explicit, active green-investing goals) account for about 8% of the green fund total. Across the EU, green fund assets under management represented about a third of the total for all funds. Luxembourg broadly reflects the EU picture, with article 8 fund assets totalling €1,357bn, and article 9 €163bn.
France is second placed in the EU with total assets of €547bn, a 16% market share, followed by Ireland (€515bn/15%), and Sweden (€300bn/9%). The sixth-placed German funds industry accounted for just 3% of the EU market, with Italy on just 2%.
In terms of the number of funds, Luxembourg had 1,967 classified as article 8, with France on 725 and Ireland 541. As regards article 9, there were 262 in the Grand Duchy, 93 in France and 66 in Ireland.
Passives’ small share
Actively managed funds are to the fore in the ESG space. While green fund assets represent a third of the EU total, they account for about 8% of all EU ETFs (exchange-traded funds). Equity, bond and mixed funds dominate the market, with money-market products making up a lower-than-average share.
Yet, while these figures give an interesting early overview, they must be treated with a degree of caution. SFDR only went live in March, so these figures probably represent an early outline. Moreover, the taxonomy is still relatively new, and green investing data provision is a maturing activity.
There is broad confidence these teething troubles can be worked thorough. Indeed, PwC estimates that the total assets for green funds could double or even triple by 2025. This could come to represent anything from 41% to 57% of all assets under management in the EU, up from a third now.
Why Luxembourg’s lead?
Luxembourg has probably taken this early lead due to its status as a European centre of excellence for managing regulatory challenges. Ireland also has these capabilities, but as a country that focuses on money market funds it is less implicated in the green fund revolution as it is currently playing out.
However, there appears to be little evidence that the subscription-tax breaks available for impact investments in Luxembourg are having a direct effect, even if it is possible this reform (introduced at the end of last year) might have helped set the tone.
At the moment, most funds in Luxembourg pay an annual subscription tax rate of 0.05% of net assets under management. However, when the share of taxonomy-aligned investments increases, this can be reduced: to 0.04% when at least 5% of a fund’s total net assets are sustainable; 0.03% for 20%; 0.02% for 35%; and 0.01% for 50%.
No subscription-tax breaks claimed
“My understanding is that no fund promoter has yet submitted any such requests,” said Sergio Venti, head of client solutions and innovation at Pictet Asset Services, Luxembourg, speaking in a recent webinar run by Responsible Investor. He said this might change at the end of the year “because that’s when we’re going to be obliged to disclose the taxonomy alignment of our financial products.”
Yet even so, he believes asset managers are tending to be relatively cautious. “Collective judgement is still rather oriented towards putting negative disclosures into perspective. This prudent approach means stating that there is, as yet, reluctance to give a rate of alignment.”
Ultimately this comes down to the on-going lack of high confidence in the green investing data. There is nervousness about getting too far out in front of peers, with the attendant risks of accusations of greenwashing.