An exclusive interview of Nicolas Mackel, CEO of the Luxembourg for finance
WHY DO WE SEE FINANCE FISRT AND FOREMOST AS A PROBLEM?
The fundamental role the financial sector plays in any economy has been overshadowed by the stories about the excesses of risks taken with « other people’s money » that have too often led to bank collapses, culminating in the Global Financial Crisis of 2008, as well as by examples of lapses in regulatory or tax compliance. Moreover, media reports on certain excessive pay levels in the financial services industry also contributed to convey an image of greed. Finally, the complexity of certain operations has reached levels that can be scarily beyond the comprehension not only of the layman but sometimes even of experts.
While these cases have rightly been shocking to a public opinion on the receiving end of the negative consequences of the crisis, it is important to underline that governments but also the financial sector itself have drawn the lessons from the recent past, with regulatory frameworks and practices having been thoroughly enhanced to avoid repeating the same mistakes.
The financial system and thus banks, asset managers and insurance companies are vital to the real economy by providing companies and entrepreneurs with the capital they need to finance their activities, whether by raising debt in the capital markets, receiving loans from banks, investments from major asset managers who invest in their equity or coverage for their property and commercial risk. No firm, large or small can operate without the economic life blood that is finance.
How can finance create a better society ?
Finance is a means to an end. The days where the business of business was business and the only responsibility of business was to increase profit are long gone.
Financial innovation can help society in multiple ways by putting finances at the fingertips of whole segments of the global population thus far excluded from the banking system, connecting them with the economic system and sustaining their livelihood. The benefits of digitalisation allow not only the wealthy but anybody with a mobile phone to invest, even very small amounts, and thus reap the benefits of economic activity.
By connecting the world, finance helps infrastructure investments flow to projects such as roads, schools and hospitals.
With the world coming together in the fight to combat climate change, finance will be playing an existential role. The investments needed for projects to reduce global warming and mitigate the catastrophic effects of the rise in global temperatures are way beyond the means of governments alone and require the global investor community to step up, even more so if we are serious about the UN Sustainable Development Goals. The financing needs are enormous but so can be the opportunities this will bring. Many investors have understood that it is not only their responsibility but also that sustainable finance IS the future of finance. The sustainable debt market saw another record year in 2018, with issuance surging 26% to reach close to USD 250 bn. Moreover, already 25% of global assets under management are governed by an ESG mandate. Given current growth rates, Deutsche Bank estimates that this percentage will rise to 50% by 2020 and already by 2030 95% of assets under management would be ESG compliant.
What is the role of Luxembourg? And how can Luxembourg become the first platform for sustainability?
Luxembourg is already a leading sustainable finance centre.
The facts speak for themselves: it has the largest market share in Europe as regards responsible investment funds and a market share of 45% in ESG environment funds. Luxembourg layered funds have proven particularly effective in projects that require blended financing in order to accommodate both public and private investors.
The world’s first green bond was listed at the Luxembourg Stock Exchange in 2007 by the European Investment Bank. This pioneering role has led to the creation in 2016 of a separate platform, the Luxembourg Green Exchange (LGX), entirely dedicated to green, social and sustainable securities. LGX today lists more than 50% of the volumes of world issuance in green bonds. This was a game-changer as it enhanced transparency and reporting standards, increasing trust in this new market segment. Since then, the expertise accumulated by the team of the Luxembourg Green Exchange has also been tapped by the European Commission for its laudable efforts to develop a framework at EU level.
Luxembourg furthermore has a long-standing expertise in fund labelling thanks to LuxFLAG, an agency created more than a decade ago to issue labels first to microfinance, ESG and environmental funds and today also to climate funds as well as green bonds. These labels help reassure investors that their target fund invests in the given sector in a truly sustainable and transparent manner.
The International Climate Finance Accelerator (ICFA) is the latest addition to Luxembourg’s sustainable finance eco-system. It supports innovation and high impact investment strategies to grow tomorrow’s climate finance leaders.
Moreover, the Luxembourg government is working with multiple international partners, such as the EIB and the IFC, to push the sustainable finance agenda.
The new government that took office after the October 2018 elections has identified sustainable finance as one of its priority areas of development for the financial industry in Luxembourg. The government will build its work on the Sustainable Finance Roadmap, it developed in partnership with the United Nations Environment Programme.
The public-private partnership that prevails in this area between the government, the financial industry associations (ALFI, ABBL and ACA) as well as with the financial sector itself is fully committed to make rapid progress in the greening of the financial industry overall.