Climate change: the day-to-day challenges of sustainable finance

Individuals can and should contribute to combating climate change through sustainable finance, as public investments alone cannot achieve the goals set by the Paris Agreement. For example, one way individuals can contribute is by choosing a bank that priorities sustainability and offers investment products that align with environmental and social goals.

Investing in sustainable financial products such as shares, bonds, funds or pension products supporting the transition to a low-carbon economy is another option, as increased transparency around environment, social and governance (ESG) considerations in recent years has allowed investors to make more informed decisions. For instance, a sustainable bond issued by the government of Luxembourg in 2020 is said to have financed 74 sustainable projects related to low-carbon transport, education, and healthcare. By investing in such projects, individuals can positively contribute to the climate transition.

Education is also vital in advancing the low-carbon economy. Calculating the carbon footprint of investments or pursuing careers in sustainable finance can guide more responsible choices. Moreover, engaging in conversations with peers about sustainable finance can help spread awareness and inspire others to invest in sustainable products. By making informed choices and fostering discussions, individuals can amplify the positive impact of sustainable finance and drive meaningful change.

Luxembourg is home to numerous initiatives aimed at raising awareness around sustainable finance, and we are proud to be involved in many of them. The government of Luxembourg also laid out a 10-point Action Plan on Sustainable Finance, which prominently features educational programmes.

These initiatives are crucial in educating the general public about sustainable finance. In 2022, the CSSF, the ABBL Foundation for Financial Education and LSFI launched a survey to assess the general public’s level of knowledge and understanding of sustainable finance. Of the 1,011 Luxembourgish residents surveyed, 47% admitted that they had limited knowledge around sustainable finance.

Personally, I have witnessed a significant demand for increased education on sustainable finance, from individuals but also from institutional investors, issuers, advisors and asset managers. In 2020, we established the LGX Academy to fill the gap in sustainable finance education and increase the knowledge and understanding around sustainable finance principles, standards, labels and regulations. Within the LGX Academy, we cover highly relevant topics including greenwashing and gender finance. Additionally, we regularly feature case studies and market research on specific subjects within the realm of sustainable finance on our website and dedicated blog, further supporting this important initiative.

Transparency is essential in sustainable finance as it helps build trust and confidence among investors. Unlike traditional finance, which primarily relies on straightforward financial metrics, sustainable finance involves complex environmental, social, and governance factors that require detailed and accurate information. Individual investors need to understand where their money is going to and the outcomes achieved, which makes transparency a critical element.

For transparency to be effective, financial instruments and issuers must align with recognised international standards, frameworks, and labels, like the LuxFLAG label for instance. This alignment not only facilitates informed decision-making but also enables investors to manage risks associated with potential reputational harm or operational disruptions, which could impact the return on their investments.

Transparent communication enables investors to assess the positive social and environmental impacts of their investments, ensuring alignment with their personal values. Ultimately, transparency empowers retail investors to navigate the evolving standards of sustainable finance, allowing them to make choices that not only deliver financial returns but also promote societal benefits.

The most significant challenges for individuals looking to take part in sustainable investment activities include the lack of financial literacy, the lack of promotion of sustainable finance products to retail investors, the lack of information publicly available, the complexity of sustainable finance terminologies, and greenwashing practices.

Despite the rapidly evolving regulatory environment around the disclosure of sustainable finance practices, there is still a significant lack of information on companies’ ESG practices, making it difficult for investors to make informed choices. What's more, despite the growing number of stringent regulations that are being implemented, greenwashing practices do still exist, although they are gradually decreasing. Additionally, the perception that sustainable investments will underperform compared to traditional investments remains prevalent. These challenges, combined with the complex terminologies around sustainable finance introduced by the new European regulatory framework can sometimes leave investors feeling overwhelmed.

Nevertheless, there are several encouraging developments aimed at facilitating sustainable choices for retail investors. The European regulatory package is making significant progress by enhancing suitability disclosures through various regulations and directives such as the SFDR, CSRD or CSDDD. 

The retail investors must now also be asked about their Sustainability preferences alongside their risk profile, when investing. This starts conversations and enables investors to actively select more sustainable products.

These measures aim to combat greenwashing practices and improve the education of financial professionals. The more knowledgeable these financial practitioners become, the better prepared they will be to guide their retail clients.

Here are my five key recommendations for individuals looking to engage in sustainable finance: