Luc Courtois, Partner, Head of Investment Funds and Yoanna Stefanova, Partner, Investment Funds at  NautaDutilh Avocats Luxembourg (Crédit: Maison Moderne)

Luc Courtois, Partner, Head of Investment Funds and Yoanna Stefanova, Partner, Investment Funds at  NautaDutilh Avocats Luxembourg (Crédit: Maison Moderne)

A disruptive cultural shift is driving change in the financial industry. Investors and new sources of deals are redesigning the fundamentals of the asset management business.

Demand for sustainable investment

In the asset management industry, trends have generally evolved to keep pace with the need to identify new ways of delivering value. Today, however, investors are also concerned with the social impact of their investments.

The communication on the European Green Deal recently issued by the European Commission is representative of this changing environment. Indeed the EU aims to become climate neutral by 2050. On a more global scale, similar sentiments were voiced at the last UN Climate Change Conference (COP25) in Madrid. Initiatives at the European and national levels focusing specifically on the financial industry are also being taken, such as Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector.

In the Grand Duchy of Luxembourg, there is already a legal framework for green covered bonds linked to renewable energy projects.
Yoanna Stefanova

partner

In the Grand Duchy of Luxembourg, there is already a legal framework for green covered bonds linked to renewable energy projects; in addition, a new bill (no. 7433) on sustainable finance aims to introduce more favourable rules for inter alia funds with environmental, social and governance (“ESG”), green or similar investment strategies. Finally, the Luxembourg Stock Exchange has issued guidelines for reporting on ESG aspects that address “the specific scope and needs of its three main stakeholders: companies, issuers of sustainable debt instruments, and asset managers active in sustainable & responsible investment funds”.

Some key words associated with the trend towards sustainable investing are “ESG”, “responsible”, “green” and “innovation”. There is indeed growing demand for the industry to participate in resolving questions and respond to real-life needs.

ESG investing takes into account both ethical factors and financial elements in the decision-making process and has become increasingly common worldwide in recent years. According to Morningstar, ESG investing attracted more than USD20 billion worldwide in 2019. This figure is expected to continue to rise as consumer tastes shift and investors demand more transparency. ESG strategies, including impact investing, while certainly not new, are gaining momentum as shareholders request action and the consequences grow for companies that fail to adapt.

Performance measurement is coming under increasing scrutiny by investors, and asset management firms need to be able to report on financial and social results in a transparent manner.
Yoanna Stefanova

Yoanna StefanovapartnerNautaDutilh Avocats Luxembourg

Performance measurement is coming under increasing scrutiny by investors, and asset management firms need to be able to report on financial and social results in a transparent manner. This is an area in which an in-depth review of internal processes and investment in relevant expertise can be beneficial.

Digital transformation

In the financial sector, digital transformation tops the list of priorities of most financial institutions and actors.

We may expect increasing adoption of digital operating models, including integrated cross-functional teams, better use of artificial intelligence and machine-learning processes, greater reliance on the public cloud, with a more detailed legal and regulatory framework, and finally continuous investment in data storage in order to synthesise data and facilitate their use.

Luxembourg, the frontrunner in anticipating and driving change

The Luxembourg financial sector is already investing in new standards and processes and revamping its service offering in order to adapt to the rapidly changing landscape.

One of the keys to the success of the Luxembourg financial sector is the speed at which participants (i.e., service providers, credit institutions, auditors, lawyers and authorities) invest in and purchase new skills and technologies to ensure they are seen as modern, mature and competent business partners by the international markets.

As has been the case in the past for other strategies, knowledge and expertise in new areas of investment and services, to anticipate and drive change, will enable the Grand Duchy to remain a location of choice for investors and asset managers.

As global front-runners, Luxembourg financial sector players have not only an opportunity but also a duty to stay on top of these trends.
Luc Courtois

Luc CourtoisPartner, Head of Investment FundsNautaDutilh Avocats Luxembourg

Law firms need to consider all aspects of digital transformation, ESG and impact-investing asset classes and understand the various components and models in order to be able to assess them adequately in the due diligence process and ensure that they are reflected in contractual and legal documentation.

The relevance of ESG criteria and digital transformation is already apparent. As global front-runners, Luxembourg financial sector players have not only an opportunity but also a duty to stay on top of these trends. Understanding ESG issues and digital transformation entails implementing processes within each organisation and constantly innovating by adopting an open-minded, ESG-oriented approach in all areas of business.