Asset Managers Struggle With Luxembourg Tax Perk: ESG Regulation

(Bloomberg) -- A tax break intended to lure ESG investors to Luxembourg is proving elusive, with little sign asset managers have been able to take advantage of the perk in the almost four years since it was introduced.

Luxembourg, already the world’s biggest hub for sustainable investment managers, intended to cement that position by reducing the annual subscription tax for environmental, social and governance funds to as little as 0.01% from 0.05% of the share of net assets invested in sustainable economic activities, as defined by Europe’s green taxonomy. 

But the most recent update from Luxembourg Finance Minister Gilles Roth, which dates back to April, shows that not a single investment firm has sought that tax benefit. 

Roth said the lack of interest in the tax benefit reflects the state of EU sustainable finance regulations. Advisers had previously warned that a lack of data combined with confusion around how to interpret ESG rules made it difficult for funds to prove their sustainability credentials. The upshot is that the cost of documenting ESG claims may outweigh the benefit of the tax break.

The EU is currently in the process of overhauling its ESG investing rulebook — the Sustainable Finance Disclosure Regulation. It’s also worth noting that Luxembourg won’t allow funds to call their nuclear or gas holdings sustainable, a decision that goes against the EU’s green taxonomy.

The apparent failure of Luxembourg’s ESG tax perk to draw interest coincides with a wider retreat from the investing strategy. Against a backdrop of higher interest rates, political backlash and the risk of greenwashing allegations, this year has seen evidence of a global cooling to ESG.

In the US, ESG funds saw a second quarter of withdrawals in the three months through June. In Europe, however, ESG funds continued to attract new money, according to data compiled by Morningstar Inc. 

NEWS ROUNDUP

Offsets | German authorities are rejecting 215,000 carbon credits worth approximately €18 million ($20 million) on the basis of “irregularities” found following an investigation launched earlier this year.

Big Tech | Alphabet Inc.’s Google is abusing its dominant position in advertising technology, the UK’s antitrust agency warned in a move that could pave the way for hefty fines and an order to change one of the tech giant’s most lucrative businesses.

Insurance | As the market for in-house insurance surpasses a record $200 billion, the underlying reasons for that boom show how a hotter, less stable planet is redrawing the risk map for corporations.

Deforestation | A group of more than 30 investment managers has teamed up to put pressure on the banks they hold, in an effort to get them to purge their books of deforestation risk.

Commodities | The days of equating ESG with the blacklisting of commodities are over, it seems. In a fresh study, analysts at Goldman Sachs Group Inc. have found that fund managers are increasingly including oil, gas and mining stocks in portfolios that are registered as ESG. 

Real Estate | Joseph Sumberg, a former managing director at Goldman Sachs Group Inc., is betting his career on the idea that climate change is about to turn the real estate market on its head.

Cars | Volkswagen AG is considering factory closures in Germany for the first time in its 87-year history, parting with tradition and risking a feud with unions in a step that reflects the deep woes roiling Europe’s auto industry.

China | President Xi Jinping unveiled a raft of economic sweeteners for Africa, showcasing China’s commitment to strengthening its sway over a continent seen as key to his geopolitical ambitions.

Rapeseed |  Rapeseed extended declines in North America and Europe on concerns that China’s anti-dumping probe will curb its imports.

Dairy | China’s anti-subsidy probe of dairy imports from the European Union comes at a time when the local industry is on its knees. 

Chips | China has threatened severe economic retaliation against Japan if Tokyo further restricts the sales and servicing of chipmaking equipment to Chinese firms, complicating US-led efforts to cut the world’s second-largest economy off from advanced technology.

BLOOMBERG RESEARCH

Zero Waste | As waste management and reduction garners greater attention, more companies probably will set zero-waste strategies and targets. An increase in thematic ETFs and green bonds that focus on the topic will likely follow. (Bloomberg Intelligence)

Tesla’s Battery Recycling and Material Recovery

Nvidia | Reports that Nvidia and third parties received subpoenas from the Justice Department are unsurprising, following earlier news that the DOJ is reportedly looking into possible antitrust issues related to Nvidia’s acquisition of Run:ai, as well as whether the company imposes anticompetitive restrictions or requirements on its chip customers. Potential outcomes are uncertain. (Bloomberg Intelligence)

Automakers | For automakers, steel and aluminum play a vital role in their Scope 3 emissions. Decarbonizing these materials may in some cases already make economic sense for automakers. Automakers that adopt low-carbon steel and aluminum would need to raise a car’s price by only 0.8-2.2% to keep the same operating profit margin. (BloombergNEF)

Nuclear | The nuclear fusion industry is likely to see billions of dollars flowing in once the next critical milestone is passed. (BloombergNEF)

Solar | Chinese solar module maker JinkoSolar Holding Co. told investors that it received tax credits under the US Inflation Reduction Act for its factory in Florida. (BloombergNEF)

OFF THE SHELF

Corrections | Over the past decade, ESG investment funds have become a wildly popular corner of finance. Money poured in even though there was little oversight to determine which funds could fairly claim that they focused on environmental factors, social issues or questions of corporate governance. Now there’s a vigorous shakeout.

Central Banks | Some of the world’s largest central banks are joining the fight against climate change. Though melting glaciers may be a huge leap from monetary policy, policymakers say they must respond to threats that have the potential to disrupt the global economy. Some critics say climate policy is better left to politicians, particularly in countries where central banks are hemmed in by explicit government mandates.

Taxonomies | Floods, droughts and food shortages are just some of the effects of climate change, as exploitation and corruption drive social injustice around the world. Governments tackling these issues are realizing that to solve them, they need to first define and measure them. Some are turning to so-called taxonomies that establish which economic practices and products are harmful to the planet and which aren’t. The idea is the price of goods and services must reflect the human and environmental cost of both production and disposal, which in turn would spur much-needed change. But designing a code is fiendishly difficult. 

Double Materiality | Should a business or an investment fund care only about making money, or should it also worry about the environment, social justice and good governance? Can the two goals overlap? Do they already? These questions get to the heart of something called “double materiality.” While the concept has been built into new European regulations, it has yet to make significant inroads in the US — even as Wall Street behemoths like JPMorgan Chase & Co. embrace the idea. At issue is what information should be mandatory to report, and who decides? 

Circular Economy | Take, make, use, dispose. For decades, this has been the standard approach to production and consumption. Companies take raw materials and transform them into products, which are purchased by consumers, who ultimately toss them out, creating waste that ends up in landfills and oceans. Worried about climate change and environmental degradation, people are challenging the sustainability of this linear model and urging a so-called circular economy of take, make, use, reuse and reuse again and again.

ABC | The strategy known as ESG investing has grown by leaps and bounds – and landed in hot water. Its focus on environmental factors, social issues and questions of corporate governance had always attracted people drawn to progressive causes. But in the US, that association with liberalism has triggered a backlash from Republican Party politicians.

OTHER ESG-FOCUSED FIXTURES

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