December-January 2017

ASSOCIATION COLUMN: Funds have a key role in climate finance

The fight against climate change requires funding running into hundreds of billions. Investment funds are an essential tool to catalyse these resources. Leveraging on experience gained in the responsible investment fund sector, where Luxembourg is a European champion, Alfi is actively promoting the crucial role the investment fund community can play in climate finance.

The agreement reached at the Paris Climate Conference (COP21) in December 2015 recognised the need to mobilise $100 billion (€94 billion) annually by 2020 to finance both climate change mitigation projects (to help countries most affected) and projects to reduce greenhouse gas emissions. This amount may even be insufficient.

Funding is needed from a variety of sources, and the financing tools to access that funding will reach across the board from donations to investments and even loans.

In its communication on the Capital Markets Union, ‘Accelerating Reform’, the European Commission underlines the need for reforms for sustainable finance “to support investment in clean technologies and their deployment, ensure the financial system can finance growth in a sustainable manner over the long term, and contribute to the creation of a low-carbon, climate resilient economy”. Investment funds constitute an essential tool in this context.

The Luxembourg investment fund industry is well placed to play a key role. Luxembourg is already the leading European domicile for ‘responsible investment funds’ – both ‘impact funds’ with a targeted environmental or social impact, and more broadly invested traditional funds applying environmental, social and governance (ESG) screening techniques.

A large number of investment funds in the environmental sector, with investment strategies ranging from energy efficiency and renewable energy to sustainable forestry and agriculture, have already been set up in Luxembourg. They take advantage of the opportunity to design a Luxembourg investment fund in such a way its capital structure and income distribution accommodate requests by public, private and institutional investors alike, which assists with combining public and private resources to achieve financial leverage.

Alfi’s European Responsible Investing survey showed the responsible investing market is still mainly driven by institutional investors. However, following COP21, an increasing number of investors – both institutional and retail – appear to express interest in funds with a direct impact on the environment. There is also an increasing pressure on the investment fund community to apply environmental criteria in their other, more mainstream, strategies.   

In order to develop the responsible investing sector, the focus has to be put on simplicity, transparency and integrity. This is true for climate change funds as well as for other ‘impact funds’ and for ESG funds as a whole. Labelling initiatives such as LuxFLAG aim to reassure investors about the purpose of their investments. At the same time, investment funds are putting more emphasis on extra-financial reporting and in communicating to investors what impact the projects in their portfolio have achieved.

Governments have a role to play in helping smaller and innovative climate-related investment managers to achieve scale. They can do it by encouraging the participation of private sector actors in innovative ventures, for example providing guarantees, absorbing first losses or designing ‘incubator’ services, or by granting specific tax advantages.

Alfi is proactively encouraging the investment fund industry’s contribution to much-needed common efforts.

Anouk Agnes is deputy director general, Alfi – the Luxembourg funds industry association

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