Economic pressure, stiff competition and insufficient visibility has buffeted Luxflag, the labelling agency that checks financial firms’ responsible investing claims. But, Isabelle Delas, its CEO, said Luxflag was digitalising its processes and diversifying its lineup in a bid to regain momentum.

The number and size of funds categorised as “sustainable” has continued to grow, with the law firm Maples reporting that the European market had risen by a fifth in 2023, hitting more than €5.5trn in total assets.

However, the number of investment and insurance products labelled by Luxflag declined by 24% between the end of 2021 and first quarter of 2024, according to figures released by the agency earlier this year. Total assets under management in labelled products over the same period shrank by 32%.

Challenges facing Luxflag

Delano asked Delas if confusion around the EU’s Sustainable Finance Disclosure Regulation was complicating matters for Luxflag. The future of the regulation is uncertain, with Brussels currently undertaking a review that could potentially shift SFDR from a reporting regime to some sort of labelling scheme.

“I think that’s part of the explanation,” Delas replied during an interview with Delano in May. The results of European elections could “unfortunately” push ESG and sustainability further down the EU agenda, she said, although Delas was confident that it will remain a priority. As for the shape of the revamped SFDR, “I don’t have a crystal ball. Everyone’s trying to understand what exactly will be the future of that regulatory framework.”

Luxflag labels are valid for one year, after which time they need to be reviewed and renewed. Delas conceded that some firms have not reupped because of budget pressure. Applying for labels comes “out of the marketing cost” centre and given the current economic climate, marketing budgets at many financial firms have been cut.

Delas said Luxflag was considering “a longer length of validity” to make the process less resource-intensive for firms, but such a switch would not “decrease the quality or the level of the label, in that we will still review the investment strategy and portfolio.”

There also has been increased competition from rival labelling organisations, particularly those in Belgium and France. Fund managers in those countries have been “incentivised” to go with national labelling schemes, Delas stated. Firms face indirect pressure from regulators. For instance, the French financial regulator AMF has been “highly recommending” that fund firms apply for one of the national sustainability labels. In Belgium, “it’s the industry who has created the label,” so many firms already are involved with the Belgian agency.

Luxflag’s action plan

Delas will host leaders of the Belgian and French labelling outfits this month, to discuss how the rival agencies could potentially cooperate. “We all share common goals... our mandates are to encourage sustainable finance.” Delas hopes to find some “common positions… in our advocacy roles.”

The organisation is currently working to automate the application process to make it easier and faster. That would both make the label more attractive and free up internal resources that could be put to developing new products and services. Eventually the entire workflow could be digitalised.

In parallel, the agency is developing diversification plans. It is considering the creation of new labels, such as a social impact label or a blue label for sustainable maritime investments, as well as new training, knowledge sharing and capacity-building services.

Delas said Luxflag would likewise step up its communications efforts, which “was a bit lacking probably.” The outfit has not been visible enough and needs to communicate a bit more regularly about its activities, she stated. “That’s probably where we need to invest a bit more and we have planned to do it, for this year, especially.”

This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.