Sustainable finance and local businesses post Covid
As sustainable finance is being driven by increasing market and regulatory pressure, the Luxembourg financial sector is rushing to keep pace. As for the local economy, the effects of the Covid lockdown are about to be felt as state support is withdrawn. Maren Stadler-Tjan, Partner Investment Funds and Stefanie Ferring, Partner Banking, Finance and Capital Markets of the law firm Clifford Chance, highlight the challenges.
Q: How well is the Luxembourg market adapting to sustainability rules?
Maren Stadler-Tjan: Luxembourg players were well prepared because investors put ESG at the top of their agendas several years ago, and the industry followed this trend and became comfortable with the related concepts. However, specifically with SFDR [sustainable finance disclosure regulation], many hoped the March 2021 deadline would be delayed, as clear guidance on the interpretation of several aspects of the regulation were outstanding when it became applicable earlier this year. So there was a lot of work to be completed in January and February when it became clear the deadline was not going to shift.
Q: How has the industry reacted to the requirement to categorise funds as article 6, 8 or 9 [respectively: "from light green to dark green"]?
Maren Stadler-Tjan: Some fund managers appear to be using the article 6, 8 and 9 categorisations as labelling, which we understand was not the European Commission’s intention. Also, we hear that certain investors are now saying they can or want to invest in a specific category of fund only, be it an article eight or nine product. Nevertheless, this seems to be helping the EU meet its goal of driving sustainable investing, but it is coming more quickly than most fund managers were expecting. They’ve had to study closely the draft regulatory technical standards, the draft taxonomy regulation and the Paris agreement, and work with clients to achieve an acceptable balance.
Q: What has been the specific impact for Luxembourg players?
Maren Stadler-Tjan: Well of course this is happening everywhere in the European Union, and clients have viewed SFDR quite positively. ManCos and AIFMs have to ensure a high level of risk management, in particular related to the risk of perceptions of greenwashing. Disclosure documents have to take this into account, with procedures reformed to ensure compliance. In particular third party ManCos and AIFMs are required to have an even deeper level of understanding of their clients’ investment strategies. The relationship between fund initiators and third party ManCos and AIFMs is becoming closer and stronger as a result.
Q: More generally, how is Luxembourg building its reputation as a global sustainable finance hub?
Stefanie Ferring: Of course Luxembourg’s status as a European and global financial and fund centre means it was required to act early and quickly with the move to sustainable investing over recent years. All stakeholders – banks, insurance companies, regulators, private equity houses, assets managers and more – are impacted by sustainable finance and have reacted. Also moves such as the establishment in 2016 of the Luxembourg Green Exchange as the first global platform for green, socially responsible and sustainable securities was a landmark private initiative. There are also several public-private partnerships, with the Luxembourg state and private players working together, such as through the Luxembourg –EIB Climate finance platform. Industry associations have also raised awareness amongst their members.
Q: Is this message getting through to global players?
Stefanie Ferring: Increasingly, yes it is. I have heard from international clients and partners how they see what is happening in Luxembourg, how the building of expertise has been happening early, and has reached an advanced state. But really, the ability to deploy sustainability strategies is no longer a nice-to-have for financial sector players. These skills and capabilities in sustainable finance are now a must-have. The next challenge will be social finance and Luxembourg needs to be ahead of the curve for this next wave too.
Q: How are Luxembourg businesses looking to restructure post-Covid?
Stefanie Ferring: The first thing to note is that official figures – which suggest minimal impact from confinement restrictions so far– reflect the fact that the government lifted the requirement to file for bankruptcy during the pandemic. So as we emerge from this regime with state support being removed, companies that were already struggling before the pandemic will be vulnerable, particularly in areas like hospitality.
Q: Is reform of insolvency law required ?
Stefanie Ferring: We need adequate procedures to allow fundamentally healthy businesses to restructure to help them avoid bankruptcy. At the moment, the prevailing procedure is the bankruptcy procedure which is aimed at liquidating the assets of a company, but it does not seek to help the rescue of businesses. Current insolvency law does have rescue procedures in place, such as controlled management, suspension of payments and composition with creditors, but those procedures are rarely used in practice because the process is generally too cumbersome. A bill of law on business preservation and modernisation of insolvency laws was introduced in 2013, but has not yet been adopted. The bill of law aims at preventing bankruptcies through various reorganisation measures for businesses in difficulty. The European restructuring directive will also have to be implemented in Luxembourg, which is due for next year now.