For many people, Luxembourg is synonymous with finance, a reputation that is well deserved. The country's highly developed banking sector, stable economy, excellent regulatory environment, and status as the number one fund centre in Europe all contribute to the robust financial sector.
The thriving financial sector in Luxembourg can be traced back to the 1960s and 70s when American and German banks established syndicated loans and Eurobond market activities in the country. In the 1980s, Luxembourg banks started offering cash flow and wealth management services. What really sparked a burst of growth was the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, which created a regulatory framework for the sale of cross-Europe mutual funds. The year 1988 proved to be pivotal as Luxembourg became the first country in the EU to adopt the directive into national law. Another momentous change took place in the 1990s, when the Second EU Banking Directive allowed for a single banking licence to be valid throughout the EU, leading numerous non-EU banks to set up branches in Luxembourg. By 2012, Luxembourg had become the largest fund centre in Europe, second in the world only to the United States. Far from being a fiscal paradise, the country closely follows regulations and espouses transparency, both of which add to Luxembourg’s triple-A rating by all three major credit ratings agencies. The finance sector is continuously expanding in many directions. Today it’s a leader in green finance and Islamic funds, and it’s a hub for investment between China and Europe.
It’s no wonder that Luxembourg’s unrivaled expertise in cross-border funds draws financial service companies from around the world, the result of which is that more than 60 percent of all cross-border funds in the world are based in the Grand Duchy. Luxembourg truly is an international hub for fund distribution, making it number one in Europe and second only to the United States. Luxembourg funds are distributed in 70 countries, most of them concerned with Europe, Asia, Latin America, and the Middle East. What explains this success? In addition to its expertise, the Grand Duchy offers a wide-ranging toolbox of investment vehicles. These include the Specialised Investment Fund (SIF), Investment Company in Risk Capital (SICAR), Undertaking for Collective Investment in Transferable Securities (UCITS), and the Reserved Alternative Investment Fund (RAIF). It’s not just these investment vehicles that draw asset managers to Luxembourg. The country possesses a multilingual, highly international workforce that also happens to be the highest educated in the world. On top of that, the highly developed regulatory environment ensures fairness but also exhibits sensitivity to the financial sector, offering reliable investor protection and working tirelessly to prevent money laundering.
Luxembourg has long sought to use its financial might to promote environmental and social causes. Since the 1990s, it’s been very active in microfinance, which focuses on small business owners, many of them from developing countries where access to conventional banking is limited. Luxembourg enjoys a 61 percent market share of global assets in Microfinance Investment Vehicles (MIVs). As for the environment, leaders have established a climate finance strategy that aims to both fight against climate change while positioning the Grand Duchy as a hub for green finance. Some key initiatives are a sustainable finance roadmap, the European Investment Bank (EIB) Climate Finance Platform, and the International Climate Finance Accelerator that offers financial and operational support to fund managers launching climate action funds. The culmination of Luxembourg’s promotion of green finance came in 2016 when the Luxembourg Stock Exchange launched the Luxembourg Green Exchange, the world’s first platform for green, socially responsible, and sustainable securities. The exchange now lists more than half of all green bonds worldwide. One of Luxembourg’s biggest partners in this field is China, the second-largest market for green bonds. The Grand Duchy has signed a series of agreements with stock exchanges and financial institutions in China, securing Luxembourg’s place as the world’s top spot for green bond trading.