Sustainable Finance

Sustainable Finance can be broadly defined as the financing of investments to transition the  economy towards a more sustainable future. As the next decade will be key in winning the fight  against climate change, successful actions to win this fight require massive investments. It is  therefore of great importance that the required capital is channeled into the right investments.  Financial markets play an important role in ensuring that sustainability criteria are taken into  account in business and investment decisions. In short, these criteria are often classified into  Environmental, Social and Governance (“ESG”) criteria.

To fight climate change and to put economies on a path towards a more sustainable future is a  global and international goal. Luxemburg as a country is uniquely positioned to play a key role and  has started to use its strength as a financial hub to support these global goals.

The University of Luxembourg established in 2019 a Sustainable Finance Project (SFP) in  cooperation with the Ministry of Finance and the Ministry of Environment, Climate and Sustainable  Development. The University of Luxembourg (UL), the country's main research institution, is  committed via its Department of Finance of the Faculty of Law, Economics and Finance (FDEF) to  support, foster and accelerate this societal transformation by entering the SFP.
In particular, the development of top-notch research in sustainable and green finance within the  Department of Finance is a priority and directly linked to its research strategy. The EU-topics as  well as the global agenda on sustainability are and will be targeted in fundamental as well as  industry-oriented research.

We address research questions on a microeconomic as well as on a macroeconomic level.

On a microeconomic level we are interested in how the financing of investments by different securities and their design effect the internalization of externalities and the ESG risk of firms. Another angle is the question of social responsibility of firms, namely how a divergence in objectives for CEOs alter the level and the risk profile of investments as well as the financing of firms. We also research the pricing of securities and ESG activities of firms as well as risk and return properties of ESG in different asset classes. Among the projects we study are topics such as the impact of ESG investor activism, the pricing of Green Bonds as well as the challenges posed by climate risk and ESG for mutual funds.

After the call by the EU commission, it is important to find out whether and how capital market participants react to climate-related information by firms: Does the reporting of climate-related risks reduce stock price risk ?

 On a macroeconomic level we focus on the question of Sustainable Finance versus Carbon Tax : Why and when are sustainable finance initiatives preferable to carbon taxes? Another area is the estimation of the demand for financial securities to quantify the preference of investors for low-emission issuers. We are working on estimating the carbon footprint of investor portfolios by combining greenhouse gas emissions date by firms with investor portfolio holdings.

Research on Sustainability indices for countries and companies to guide investors by making information accessible through the use of indices will help to support Luxembourg as a sustainable finance hub.