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 channelled 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 affect the internalization of externalities and the ESG risk of firms. Another angle is the question of the social responsibility of firms, namely how divergence in objectives for CEOs alters 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 the 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 data 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.