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Supplements » Luxembourg 2011

INSIDE VIEW: Taking root

seedling_in_hands_410Luxembourg's fund labelling agency, Luxflag, is expanding on its microfinance focus and has international ambitions. Laëtitia Hamon talks about the agency's beginnings and its plans for the future.

When Luxflag was created back in July 2006, its main objective was to provide a concrete tool to reassure investors that microfinance investment vehicles (Mivs) were actually investing, directly or indirectly, in the microfinance sector. By awarding a distinctive label to eligible Mivs, Luxflag would represent another step towards transparency and would contribute to the visibility of the relatively young Miv sector – two prerequisites of a sustained and healthy growth of the microfinance sector.  

More than four years down the line, Luxflag remains committed to that goal and has decided to extend itself i) vertically, by integrating a social dimension into its microfinance label, and ii) horizontally, by setting-up a new “environment” label for funds investing in sectors related to the environment.

These new developments are in line with the willingness of the agency to promote responsible investments worldwide and to support values such as the reduction of poverty, the protection of the environment, integrity and ethics in business, and transparency in reporting to stakeholders. 

They also mark the beginning of a new phase of development for Luxflag, in which it aims to become an international and independent, not-for-profit sustainable investment funds labelling agency.

Of course, this ambitious expansion plan has to be carefully managed and will require considerable communication and marketing efforts over the next three years in order to spread the word to investors. To reach this goal, the agency has set itself four main objectives. These are:

• Strengthen interest in the microfinance label by adding a social component to it;• Increase international presence and visibility;
• Intensify partnerships with key actors of the industry; and
• Develop horizontally by implementing a new environment label.

Social component At inception, in July 2006, Luxflag was a tiny agency dedicated to a very specific niche market – microfinance investment vehicles. At the time it was created, there were around 80 such vehicles worldwide. 

However, over the past five years, the industry has grown at a fast pace, and so did Luxflag. After having started with a moderate although continuous success, the number of Mivs labelled by Luxflag almost doubled in 2010 from eight to 14. They now represent around US$2.5bn (€1.8bn) in assets under management (AuM). This is an important step for Luxflag as it confirms the growing interest in the microfinance label and reinforces its importance in terms of providing greater transparency to investors.

Another crucial step in the development of the Luxflag microfinance label was the addition of a social dimension. Luxflag started thinking about how to integrate a social dimension into its microfinance label back in October 2008. To put this into context, the idea arose in the aftermath of the financial crisis.

On one hand, financial scandals made environment, social and governance (ESG) considerations resonate with greater importance, and investors started to include these considerations in traditional financial services in a more systematic way.On the other hand, the microfinance industry had to face increased scepticism from the media and journalists pointed out a possible mission drift within the micro-finance sector. Observing these two developments, Luxflag felt it was the right time to move forward. As a result, in 2011, any fund applying for the micro-finance label will have to demonstrate that 1) it includes social performance objectives in its investment objectives; 2) uses generally accepted social performance indicators; 3) regularly monitors the social performance of its portfolio; 4) reports at least on an annual basis to its investors; and 5) indicates for given microfinance institutions (MFIs) whether they have been subject to a social rating or audit.

International presence and visibility
The second objective of Luxflag is to increase its international presence and visibility. After five years in existence, it is fair to say that Luxflag’s name is well established in Luxembourg and the surrounding countries, and that the agency benefits from strong recognition from its peers. 

It is also true that further effort is needed in order to increase Luxflag’s visibility overseas. To that end, the agency participates in microfinance conferences abroad, including one held in Washington DC. As many Mivs are domiciled in the US, this presented a good opportunity for Luxflag to explain its initiative and attract foreign-domiciled funds. 

In 2011, Luxflag’s participation in similar events will be intensified starting with a microfinance conference held in New York. While participating in events and conferences abroad is one way of achieving this goal, intensifying key partnerships may certainly also be instrumental.

Intensified partnerships Keeping in mind the idea of giving an international dimension to the label, Luxflag was associated with various events involving key partners of the industry. Indeed, Luxflag was a member of the jury, along with the United Nations’ Principles for Responsible Investments, and the European Sustainable Investment Forum, to designate the winners of the CGAP ESG Awards. Similarly, Luxflag was a member of the jury for the European Microfinance Awards and also of the Recognition Awards in Washington. 

The agency also actively participated in the European Microfinance Platform (E-mfp) Working Group “Making Microfinance Investment Responsible”, the results of which were then summarised in the 2010 edition of the European Dialogue. 

Last but certainly not least, Luxflag, together with the Luxembourg government and MicroRate, the US-based rating agency specialising in micro-finance, launched a joint initiative called Luminis. This information platform will provide critical information on Mivs in order to facilitate investments in microfinance and growth of the sector as a whole. This new project represents a clear step forward for the micro-finance industry, whose stakeholders have long been demanding clearer and more reliable industry information. 

The efforts and initiatives described above to increase visibility and strengthen partnerships mainly concern Luxflag’s microfinance arm.  As the agency nourishes the ambition to go a step further and add a new label to its product range, one should remember that specific and well-defined action must be taken if the socially responsible investment industry is to be targeted.

New environment label Along with the three objectives listed above, Luxflag took the decision to develop horizontally by implementing a new environment label. This ambitious idea mainly came from the observation that similarly to what can be observed in the microfinance area, investors may be misled by funds claiming to invest in so-called green sectors where they are only using green-washing techniques. 

Therefore, after a two-year project undertaken by a dedicated team, it was agreed that funds eligible for the  environment label will be those that mainly invest in environment-related sectors and also screen their investments based on ESG criteria. A detailed questionnaire will have to be filled in by applicants, the answers to which will be reviewed by an external auditor. Subsequently, the Eligibility Committee of Luxflag, comprised of experts in both the financial and environmental arena, will analyse each fund’s application and will give recommendations to Luxflag’s board, who will take the final decision. 

The environment label is almost finalised and should be officially announced during the first half of 2011 with the first labels expecting to be granted before the year end. 

Future plans
Luxflag plans to extend beyond micro-finance to become an international sustainable investment funds labelling agency. With the development of a new label and the international positioning that Luxflag wants to achieve, communication will be instrumental. 

Despite the many challenges that Luxflag will certainly have to face in the upcoming years, we are confident that it is well-placed to lead in its chosen role. 

To that end, the agency will continue to review its strategy and adapt accordingly in order to maintain a leadership position and continue to serve this growing sector of the investment community.

• Laëtitia Hamon is business development officer at Luxflag

©2011 funds europe