Sustainable investment funds have gained significant traction in recent years, as investors increasingly seek to align financial performance with broader environmental and social objectives. In Europe, this momentum has been further driven by regulatory developments, with sustainable funds accounting for 19% of total fund assets by the end of 2023—up from just 6% in 2019, according to a study by ALFI in collaboration with Tameo and Morningstar.
Luxembourg has maintained its leadership as Europe’s principal hub for sustainable investment funds, hosting over a third (34%) of net assets in this segment. The country saw a 14.1% increase in assets during the year, and remains home to a substantial share of investment managers, accounting for 27% of Europe’s sustainable fund assets.
Across the continent, the top five fund domiciles—including Luxembourg, the United Kingdom and Switzerland—collectively hosted 80% of sustainable fund assets.
Under the Sustainable Finance Disclosure Regulation (SFDR), funds classified as Article 8 and Article 9 made up 58% and 4%, respectively, of the total assets within scope. Meanwhile, impact funds—those with sustainability embedded at the core of their investment strategy and a commitment to generating long-term societal and environmental benefits—represented nearly one-fifth (18%) of sustainable assets, reaching EUR 418 billion.
Luxembourg also continues to strengthen its position as a centre for private markets. From 2019 to 2023, assets under management in ESG-focused private market funds expanded at a compound annual growth rate of 95.2%. Within this space, private equity attracted the largest share of assets, followed by infrastructure, real estate, and private debt. The Luxembourg financial centre is well positioned to capitalise on the new European long-term investment fund (ELTIF 2.0) structure and the burgeoning trends of retaliation in private markets.
Curious to learn more?
If you're looking to deepen your understanding of sustainable finance trends in Luxembourg and across Europe, we highly recommend the following reports:
- The European Sustainable Investment Funds Study 2024, conducted by ALFI, Tameo and Morningstar
- Sustainable Finance in Luxembourg 2024 study, conducted by the LSFI and PwC
- In addition, Luxembourg for Finance publishes an annual report in collaboration with New Financial, alternating each year between a focus on ESG and green finance.
A Flexible Fund Toolbox for Sustainable Investment
Over the years, the Grand Duchy has developed a comprehensive set of investment fund tools. This toolbox is one of the defining strengths of the financial centre, enabling fund promoters to create structures precisely tailored to the nature of the investment and the target investors.
All Luxembourg investment funds can be used for sustainable finance purposes, whether they are regulated retail funds or professional investment vehicles. They may also benefit from EEA marketing passports and can be structured as umbrella funds with multiple compartments, each featuring distinct investment strategies and separate profit-and-loss accounts.
Commonly used structures for funds with an ESG focus include:
- UCITS, primarily aimed at retail investors and subject to high regulatory standards.
- SIFs, which offer operational flexibility and fiscal efficiency, and can be used for all asset classes.
In addition, several pan-European sustainable investment fund structures have been introduced:
- ELTIF (European Long-Term Investment Fund): designed to channel long-term capital into infrastructure projects, unlisted companies (SMEs), real estate, and other long-duration assets that support the real economy in the EU. Any EU Alternative Investment Fund (AIF) can apply for the ELTIF label.
- EuSEF (European Social Entrepreneurship Fund): Designed for European social impact projects.
- EuVECA (European Venture Capital Fund): Intended for European venture capital initiatives.
How do Layered Funds Work?
Among the most successful developments in the Luxembourg sustainable finance sector is the “layered fund” structure, where risks and rewards are differentiated according to the type of shareholder, typically defined as retail, professional and foundation shareholders. This allows for the issuance of shares and notes with different characteristics, according to the needs of each type of investor. By accepting “first loss” liability and granting priority to retail investors on income earned, the foundation shareholders create a low-risk environment that encourages private investment and so assures that the fund is large enough to achieve its mandate.
The Luxembourg-EIB Climate Finance Platform
Layered funds were pioneered by the European Investment Bank (EIB), which has collaborated with the Luxembourg government to create the Luxembourg-EIB Climate Finance Platform.
The EIB’s decision to use Luxembourg structures for some of their most complex and innovative funds has stimulated product development in the Grand Duchy.
CASE STUDY
The Forestry and Climate Change Fund is a compartment of the Luxembourg Microfinance Development Fund (LMDF), an umbrella fund that employs a layered structure to reduce carbon emissions by investing in the sustainable management of secondary and degraded forest.
It is for retail and institutional investors from the private sector.
