Fund managers across Europe can opt for a label to certify their investment product does what it says it does. The Luxembourg Finance Labelling Agency, also known as Luxflag, has certified some 365 funds, mostly with an ESG label. Luxflag chair Denise Voss spoke to InvestmentOfficer.lu for a podcast.
“A label is about certifying or giving clarity to investors, that what they invest in, is what it says on the tin. We’re actually not saying you must invest in this or that,” said Voss.
And referring to the popularity of the Luxflag ESG label, she said: “At the end of the day, the asset management industry, the financial industry has an opportunity here to be part of the solution.”
Luxflag was established as an international non-profit association in 2006 by seven private and public founding partners to support sustainable finance: the Luxembourg government, Alfi, ABBL, ADA, the European Investment Bank, Luxembourg for Finance and the Luxembourg Stock Exchange.
Voss is chair of the Luxflag board at a time that the agency is searching for a new managing director. Its previous director, Sachin Vankalas, unexpectedly passed away last year due to Covid-19. A successor is expected to be appointed in the near future.
ESG label most popular
Luxflag now has six labels, all aligned with the EU’s sustainable finance disclosure regulation, the SFDR. Four are considered impact labels as per article 9 of the SFDR, which is about sustainable investments and impact: labels for climate finance label, environment, microfinance and green bonds.
Two labels show a product aligns with article 8 of SFDR. These are the ESG label, “by far and away our most popular label,” said Voss, and the recently introduced LuxFlag sustainable insurance product label, or LSIP. This is a label for insurance products, whereas the ESG label is really a label for investment funds.
“The ESG label is about integrating environmental, social, and governance factors into the investment analysis and decision making process. It is really about the process,” said Voss.
Exclusion list
What’s new, in place since March 2021, is an exclusion list added to the Luxflag ESG label criteria. “We felt we needed to introduce an exclusion list to continue to be credible vis-a-vis the investors who look at the Luxflag label and expect certain things from the Luxflag label. It wasn’t an easy journey to get there to get to this exclusion list because exclusions are often quite personal.”
Exclusions can be difficult to define, also considering different cultures in different countries. Voss likes to use alcohol as an example. “For some countries, alcohol should be excluded from an investment portfolio. But if you’re in France, then from a cultural perspective, that’s not the case. But on the other hand, from an ESG perspective French asset managers that would invest in companies that produce alcohol, would actually expect those companies to have a responsible drinking policy.”
The exclusion list at Luxflag includes the UN Security Council sanctions list, as well as the Financial Action Task Force blacklist, which lists North Korea and Iran, and expects applicants to consider the principles of the UN Global Compact.
Financial products, not companies
“Just to be clear, what we’re labelling at LuxFlag is financial products. We’re not labelling individual companies. We’re not labelling the asset managers or the insurance companies. We are labelling the funds or the insurance products as well the unit linked products or the like,” said Voss.
Luxflag so far has labelled 365 financial products, about 60 percent of which are products with a home in Luxembourg. Luxembourg, with nearly 5900 billion in assets under management, is home to some 3500 investment funds. “So we’ve got a way to go,” said Voss.
Luxflag often is asked how many applications it refuses, she said. But that is not the point. It’s the engagement that matters. When an asset manager approaches Luxflag about a label, “they engage with us, they ask us questions, we tell them what they need to have from an application point of view, but also what we expect from an ESG process perspective. This engagement can take a while, in fact, in the past, it took perhaps a couple of years.”
Need for education
It still takes a while because asset managers are all on different parts of the journey, she said. “Obviously, there are some asset managers who’ve been basically incorporating ESG into the investment process for years. So it’s much faster for them. But there are still asset managers that are relatively new to this.”
Voss sees a clear need for more education in the industry. “There’s obviously a lot at stake. I hope that we don’t have to convince many people anymore that this is a climate crisis. The extreme weather events, I guess you could say they have helped, unfortunately, but there’s still just a lot of education required.”
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- Luxflag launches sustainable insurance product certificate
- Additional SFDR requirements to prevent greenwashing
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