Sustainable Investing is gradually gaining popularity with investors from around the world, including in Luxembourg, where the government, in close coordination with the financial sector, is pursuing its vision of becoming the world’s leading sustainable financial center. “This is a big and promising step forward,” says Tonika Hirdman, General Director of the Luxembourg Foundation.
“For foundations that support a broad range of philanthropic goals, it is essential to match their investments with the purpose of the foundation and to ensure consistency between the values of the founders and the investments of the foundation. Although most banks in Luxembourg today offer a wide range of sustainable products and services, unfortunately few of them have integrated environmental, social and governance (ESG) factors into their investment portfolios.” This is the result of a recent survey conducted by the Luxembourg Foundation among the many banks with which it cooperates on behalf of more than 80 foundations managed under its umbrella.
Impact investing seeks financial return while investing in innovative solutions to social and environmental problems. The idea is that doing good is just as important as turning a profit.
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Sustainable investment policy
The Luxembourg Foundation recommends that each new founder pursue a sustainable investment policy that takes into account not only financial aspects but also ESG factors. Their reaction is usually very positive. When deciding on such an ESG approach, it is important that it is comprehensive and easy to apply, with clear criteria and a monitoring approach.
Typically, foundations choose between negative screening, which excludes investments in companies or sectors that conflict with the purpose of the foundation, and a positive approach, which selects companies that actively monitor their ESG risks. A third approach is active engagement, which involves influencing the companies in which the investment is made in such a way that harmful social or environmental practices are tackled by themselves. Many investors choose a combination of these three strategies.
It is true that most foundations invest in funds rather than directly through equity in companies. In this context, the Luxembourg label organization Luxflag offers investors guidelines to ensure that funds really do invest as they claim. Unfortunately, there are currently not enough labelled funds available to achieve a well diversified portfolio.
Hopefully, future EU regulation in this area will lead more funds in this direction. For foundations that want to go one step further, a strategy could be developed to further support this not only through grants, but also through so-called impact investments such as microfinance or social enterprises. In this way, a foundation can achieve a double effect.
Impact Investment aims to solve social and environmental problems such as poverty and climate change, while generating modest financial returns that can be reinvested to ensure continuity and long-term impact. If more financial institutions in Luxembourg became fully involved in this area, for example by applying ESG to their full range of products and services, this would be a real opportunity to change the world.
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