Towards responsible investment?

What if your investment strategy, beyond the legitimate pursuit of returns, were also developed according to the environmental or societal impact of the assets under consideration? This is, in any case, what guides responsible investors, who are becoming more and more numerous. Discover with myLIFE the basics of what characterises them.*

What is a responsible investor?

A responsible investor is a person who has consciously decided to integrate sustainability and responsibility criteria into his investment strategy. Certainly, these “responsible” considerations are now systematically integrated into establishing an investor profile, but here we are speaking of an approach that is inherent to the investor himself.

The climate crisis, social upheavals, or even a health phenomenon such as the Covid-19 pandemic have given rise to and expanded the ranks of this generation of investors. Moreover, although it is often embodied by individuals born at the crossroads of the third millennium, responsible investment is not the prerogative of the young. Whatever their age, all these investors share the desire to give meaning and impact to their investment.

Whatever their age, all responsible investors share the desire to give meaning and impact to their investment.

No need to draw you a picture: the oil industry, tobacco, or the manufacture of weapons, for example, are not options chosen by this investor. On the contrary, it is rather investments aiming to promote education in developing countries, companies engaged in the production of non-fossil energy, targeting carbon neutrality, or favouring short supply chains that tend to attract their attention.

Beyond the themes, there are also specific financial vehicles that are more particularly selected in their portfolio.

Risk and profitability

In addition to the profitability of a given investment, the responsible investor therefore also partly concerns themselves with its environmental or societal impact. We say “in addition to” profitability, because a responsible investor remains an investor. He believes that sustainability and environmental and/or social responsibility are not opposed to profitability – quite the contrary.

Besides, while return remains a central criterion, risk is just as important. Responsible or not, all investments carry risks, and it is essential to be well informed before making a decision.

Responsible or not, all investments carry risks, and it is essential to be well informed before making a decision.

Thus, when establishing a responsible investor profile, after detailing their objectives and their “sustainability/risk/return” ratio, our responsible investor will need to choose financial vehicles that best accommodate this threelegged balancing act.

Responsible products

Proof of its democratisation among investors, all the financial assets you already know can now be found in their responsible versions, meaning they integrate environmental, societal or governance considerations: life insurance, bonds, investment funds, savings products, shares, etc.

Whatever the product in question, it then integrates extrafinancial criteria that define it as more or less responsible. However, while it seems feasible to objectively assess financial performance, or at most energy or chemical quotas, certain societal or political criteria seem more difficult to quantify or simply evaluate due to their nonnumerical nature. The implications in terms of transparency are therefore numerous when discussing responsible finance.

50 shades of “green”

Some unscrupulous actors do not hesitate to present themselves, or to present their financial products, in a way that is far more responsible/“green” than they really are. This is known as greenwashing.

Let us not be caricatural: it is sometimes much more difficult than it appears to distinguish truth from falsehood in this area. As always, things are not entirely black or white… there is light green and dark green. But how then to tell illusion from reality? How to ensure that the money invested truly serves the cause it claims to serve? How to trust the financial products in question? Certain policies, criteria and labels help clarify things a little.

What does the law say?

To distinguish truth from falsehood regarding sustainability, the responsible investor can count on the work of the European legislator. Indeed, since 2019 and the adoption of the Green Deal, a set of regulations aims to harmonise good practices in this field and to exclude bad ones. Three of them are key; we present them to you here.

The CSRD, or Corporate Sustainability Reporting Directive, sets standards and obligations for extrafinancial reporting for large companies. In other words, it requires companies to harmonise the presentation of these measures to determine whether they are real and effective. Initially aimed at large listed companies or those with, on average, more than 1,000 employees and net turnover exceeding 450 million euros, this regulation will gradually extend to nonEuropean companies with significant activities in Europe and with subsidiaries or branches in Europe that meet the defined thresholds.

The CSDDD, or CS3D for Corporate Sustainability Due Diligence Directive, requires large companies to monitor their negative impact on societal and environmental themes such as child exploitation or deforestation, to name a few. This also refers to a duty of vigilance. All European companies with more than 5,000 employees and global net turnover above 1.5 billion euros are concerned. Later, companies outside the EU could also be affected by CS3D.

The SFDR or Sustainable Finance Disclosure Regulation requires all investment service providers and EU asset managers to disclose structured information relating to the sustainability of their investment products. Total transparency is required, as negative impacts, obstacles to the sustainability of these financial products, and their remuneration policies including risks, are disclosed in reports published each year.

A particularity of this regulation lies in the distinction made between two types of financial products: Article 8 and Article 9. These correspond to a hierarchy of their contribution to sustainability. In short: all funds are obliged, by Article 6 of SFDR, to take sustainability risks into account. “Article 8” funds go further by highlighting the environmental and/or social characteristics of their investment strategy. They benefit from a little more flexibility regarding the proportion of “ESG” investments they make, while “Article 9” funds have clearly stated sustainability objectives and are more strictly governed by ESG criteria also imposed by the regulator.

Be aware that these classifications are likely to evolve. Make sure to stay informed.

If you wish to explore sustainable finance regulations further, we recommend regularly visiting the Luxembourg Sustainable Finance Initiative page on the subject.

A responsible language

When delving into sustainable finance, a whole range of strange words, expressions and acronyms appear. We will not draw up an exhaustive list here, but we will present four of them that you will frequently encounter.

The CSR policy (Corporate Social Responsibility) refers to the consideration and voluntary integration of sustainable development and societal issues by a company. It defines actions but does not present measurement elements.

The ESG criteria (Environmental, Social and Governance) evaluate the consideration of sustainable development issues in a strategy. It is an external assessment framework including measurement elements.

The ESR label (Socially Responsible Enterprise) makes it possible to concretely and objectively evaluate a company previously certified ESG and that has achieved or implemented means to achieve specific objectives on the subject.

The SRI label (Socially Responsible Investment) qualifies certain financial products that integrate ESG considerations into their management. Although it is of French origin, this label can be found on financial products available in the Grand Duchy.

Very early on, Luxembourg positioned itself as a financial centre committed to sustainable investment and distinguished itself through various important initiatives.

And in Luxembourg?

Very early on, Luxembourg positioned itself as a financial centre committed to sustainable investment and distinguished itself through various important initiatives.

Since 2016, the Luxembourg Stock Exchange has offered green, social or sustainable bonds and is now considered the global leader in this market. Named the Luxembourg Green Exchange, this platform dedicated to sustainable financial assets fits into a governmental strategy. Within this strategy, we also find the Climate Finance Task Force think tank. This grouping of public and private actors was initially created to support the global action plan developed during the Paris Agreement. It was joined in 2017 by the Climate Finance Accelerator, an organisation that supports investment fund managers wishing to engage in the fight against climate change.

LuxFlag, the Luxembourg labelling agency, launched the Climate Finance Label in 2016, as well as the Green Bond Label in 2017. The objective is, of course, to improve transparency in green climate investments and strengthen investor confidence.

Finally, let us mention the collaborative project initiated by the government and the European Investment Bank, whose fundraising made it possible to gather 30 million euros in favour of climate projects.

Since 2016, the Luxembourg Stock Exchange has offered green, social or sustainable bonds and is now considered the global leader in the market.

Green in the short term

When speaking about investments, we generally refer to financial markets and emphasise the importance of taking a longterm approach. But we would like to end this article with responsible investments that can be made daily through the consumption of everyday goods. Indeed, buying a pair of trousers from a particular brand, oranges from a particular origin, or making use of specific services is also a way of investing your money!

Whether or not one adopts responsible investment in view of the issues that gave rise to it, it is important to study this approach seriously, and even consider it as a real investment philosophy that does not contradict the prospect of returns, nor exempt one from vigilance regarding the risk of capital loss.

* Content translated from French by the BIL GPT AI tool