Agefi Luxembourg - octobre 2025

AGEFI Luxembourg 28 Octobre 2025 Fonds d’investissement C arbon credits are rapidly gaining recognition as a compelling new asset class for fund investors, driven by growing global commit- ments to combat climate change and re- duce greenhouse gas (GHG) emissions. As governments and corpora- tions intensify their decarboni- zation strategies, carbon markets have become essen- tial financial mechanisms. Thesemarkets enable the tra- ding of emissionpermits, of- fering investors bothpositive environmental impact and potential financial returns. For fund managers, especially in Luxembourg’s vi- brantinvestmentlandscape,carboncreditsrepresent auniqueopportunitytoalignportfolioswithsustain- ability goals while tapping into a rapidly expanding market. Why carbon credits gain traction A dual market structure: The carbon credit market facilitatesthebuyingandsellingofpermitsthatallow holders to emit a specific amount of carbon dioxide or equivalent GHGs. These markets are broadly di- videdintotwocategories:complianceandvoluntary. Compliance markets, such as the European Union Emissions Trading System (EU ETS), are govern- ment-regulatedframeworkswherecompaniesmust adhere to legally binding emission caps. In contrast, voluntary carbon markets (VCMs) operate without regulatoryobligation, allowing companies and indi- vidualstopurchasecarboncreditstooffsettheiremis- sions voluntarily. Flexibility and innovation : While compliance mar- ketsdominateinsizeandregulatoryrigor,voluntary markets are evolving rapidly, driven by increasing corporatedemandforflexible,innovativeapproaches to sustainability. The VCM’s adaptability enables a diverse range of projects – from nature-based solu- tions like reforestation to advanced carbon removal technologies – togenerate credits. Thisflexibility fos- ters innovation but also requires careful scrutiny to ensure credibility and impact. Growing investor interest: Carbon funds focusing on the voluntarymarket are gaining traction as they offer opportunities to support emerging climate so- lutions and engage with a broader set of stakehold- ers. Increasingly, these strategies are seenas comple- mentary to natural capital and forestry funds, given their shared focusonclimate changemitigation, bio- diversitypreservation, and long-termsustainability. Blending carbon credits with natural capital expo- suresenablesinvestorstobuilddiversifiedportfolios that capturebothfinancial returns andenvironmen- tal co-benefits. This trend is reinforced by the recent rise of new natural capital funds in the US and Eu- rope, underscoring the growing institutional ap- petite for investments that deliver measurable impact alongside returns. Navigating the complexities of carbon funds in Luxembourg Despite the attractive opportunities, launchinga car- bonfundinLuxembourgpresentsuniquechallenges due to the specificities of this emerging asset class combinedwiththebroadspectrumofLuxembourg’s investment fund toolbox and the variety of account- ing frameworks available. Choosing the right fund regime and structure Luxembourg offers a variety of fund structures, in- cluding the Reserved Alternative Investment Fund (RAIF), Specialized Investment Fund (SIF), and the other lightly regulated Limited Partnership (SCSp). While the RAIF is popular due to its flexibility and relatively streamlined authorization process, it may notalwaysbethebestfitdependingontheinvestors’ profile, marketing strategy, or specific objectives of thecarbonfund.Insomecases,amoretraditionalSIF or even a non-fundvehiclemight bemore appropri- ate.Thegeographiclocationoftheunderlyingcarbon projects can also influence the fund structur- ing decision, as different jurisdictions may present specific regulatory, legal, or tax con- siderations that impact investor protection and operational efficiency. Managers must evaluate these options early in the design phase to avoid regulatory or operational mismatches later. Taking the ex- ample of setting up the carbon credit fund as a RAIF, the pro- moter of the fund has the option to determine the accounting principles within the prospec- tus. Whereas most RAIFs pres- ent their investments at fair value, it is also possible to apply a cost model, realizing gains only upon realization. Valuation hurdles Under theAIFMLaw, if thevaluation function is not outsourced to an independent external valuer, the Commission de Surveillance duSecteur Financier (CSSF) must closely examine the procedures implemented at theAIFM level. Given the complexity and illiquid nature of carbon credit, most fund managers cur- rentlyprefertokeepthisfunctionin-house.However, because valuation methodologies for this asset class are still evolving and vary significantly across man- agers, it is not uncommon for the CSSF to request a reportfromthe réviseurd’entreprisesagréé beforegrant- ing authorization for the fund. This process can add time and cost to fund launches, requiring managers topreparearobustpolicyandsupportingdocumen- tation to justify their approach. Accounting frameworks and operational considerations Luxembourg’s investment vehicles benefit from a broad rangeof accounting frameworks.Aregulated fund (RAIF or SIF) would allow IFRS or Luxem- bourg GAAP, whereas an SCSp under the AIFM Law allows for additional reporting frameworks. The novelty of carbon credits means that not all ac- counting standards are ideally suited to their unique characteristics. Their illiquidity and bespoke nature canmake fair valuemeasurement challenging, and inconsistent accounting treatments across funds can complicate investor reporting. Selecting the right framework: fundmanagersmust carefully select an accounting framework that bal- ances compliance, transparency, and operational efficiency. Engaging with carbon market experts is essential to developsoundpoliciesandensurethatfinancialstate- mentsaccuratelycapturethefund’sexposuresandas- sociated risks. Finding the right partners Findingfiduciariesanddepositariesfamiliarwiththe regulatorynuancesof carboncredits canbe challeng- ing. These service providers play a vital role in safe- guardingassetsandensuringregulatorycompliance, so their expertise in this emergingasset class is essen- tial. A lack of understanding can lead to delays, in- creased costs, or operational risks, underscoring the importance of early engagement and educationwith key service providers. 2025:What’s next for carbon funds inLuxembourg? Ascarboncreditsgaintractionandhavethepotential to transition from niche instruments to mainstream investmentassets,Luxembourgfundmanagershave a timely opportunity to lead in this evolving space. The growing demand for sustainable investment so- lutions and the increasing sophistication of carbon marketsmakecarbonfundsanattractiveproposition for investors seeking both impact and returns. How- ever,thepathtosuccessfullylaunchingandmanaging acarbonfundisnotwithoutchallenges.Thecomplex- ity of valuation, the need to choose the right fund structure, the careful selection of accounting frame- works, and the importanceof knowledgeable service providersallrequirethoroughplanningandexpertise. Byaddressingthesefactorsproactively,Luxembourg fundmanagerscandesigninnovative,compliant,and efficientcarbonfundsthatmeetinvestorexpectations and regulatory standards. In doing so, they will not only contribute to global climate goals but also position themselves at the forefront of a transformative asset classwith signifi- cant growth potential. For thosewilling to navigate the complexities, carbon credits offer a compelling new frontier in sustainable finance, one that com- binesfinancial innovationwithmeaningful environ- mental impact. EYwillhostanin-personCarbonCredits&NaturalCapital event on 6November. Clément JULIEN, EY Luxembourg Partner, Assurance, Private Equity Andrei SENCHUK, EY Luxembourg Senior Manager, Assurance Carbon Credits: ANew Frontier for Luxembourg Fund Managers ByMichel VERLAINE, ICNBusiness School I remember, long time ago, I read an article onhumanbehaviour andbecame interes- ted inbehavioural economics. The article consisted in an experiment implemented with chicks in a cage. Crusts of breadwere sent randomly to the chicks and after some time, by sheer luck, some chicks received more crusts of bread thanothers. Interestin- gly, those chicks that had receivedmore food started towaggle andmove around as if they had receivedmore crusts because of their be- haviour or because of being special in some way. Even though sheer luckwas involved, those chicks believed that theywere better than the others. Itmight be funny, but this describes at least partlyhowhumans are. Their paths are partly influencedby shocks and their career paths that aremuchmore randomthan they thinkor acknowledge. This leads towell-knownphenomena of overconfidence andhubris documented in Behavioural Economics. Unfortunately, the current crisis of representative democracy,which is visible at nakedeye, canbe seen as the result of some kind of overconfidence and hubris bydecision-makers that seemmore interested incareerconcernsratherthansolvingtheirelectorates’ problems. Recent research on belief and preference formation (Giuliano, P. and Spilimbergo, A. (2025)) providesapotentialanswertothenurturingofagen- erationofdecision-makersfocussedonself-promotion and expressive individualism , a term coined in Collier and Kay (2021). For some of them, with the support of their lobbies, the need for self-expression has be- come so overwhelming, that they have forgotten for whom they are supposed towork andwhat the task at hand is. They spendmore time discussing who is getting the next well-paid job, of coursewith the tax- payersmoney, rather thansolve theEuropeanpopu- lations’ problems. Theselectionofthebestdecision-makersisachalleng- ing task. Incidentally, as highlighted inPopper (1962) the limit of the power and the control of political de- cision-makersismoreimportantfordemocraciesthan whogetsthejob.Therecentemergenceofgeopolitical uncertaintyalso increases the importanceof selecting the best decisionmakers. Radical uncertainty and in- commensurabilityofpreferencestypicallyleadtodif- ficulties in decision-making. It is difficult to rank options, and all kinds of biases might creep into the decision-making process. To address this type of un- certainty,Freyetal.(2022)suggestusingqualifiedlot- teries. Qualified lotteries involve two steps. First, to preselect, either individuals or committees that are qualifiedor experienced for the taskat hand. Second, theselectedindividualsthenchoosethewinnerofthe competitive election (Suchman (1995)). Buchstein (2020) highlights thatAristotle exclusively saw a random system as associated with rationality and political virtues. Duxbury (2002) highlights that random choices also limit the influence of families andpowerful clans. Even though, historically, quali- fied lotteries have been used in political decision- making, the Enlightenment with its emphasis on rationality concomitant with the French Revolution led to a relegation of such procedures (Buchstein (2009)).Anintellectualelitewassupposedtomanage the welfare of the community (Frey and Zimmer (2023)).Thebeliefinconstructivistformsofrationality and the fear by clans to lose power, potentially ex- plainswhysuchaprocedurewouldberejected.Ran- domness in the political process can, however, provide an answer to the crisis of representative democracy (Manin (1997)). Meritocracy has led to the belief that individuals are successful on their own. In a systemwith excessive meritocracy,hardwork,intelligence,andtalentaswell asrisk-takingmatter.Ihighlightrisktakingasinmany cases, especiallysomeof today’spolitical andadmin- istrative decision-makers have no skin in the game (Taleb(2018)) and never went through a severe selec- tion process that would have selected wise and adapteddecision-makers. The excessive belief inmeritocracy together with the concentrationofpowerandlobbyingbyclanshasled to decision-makers focussed on themselves. They sometimes confusebeing richand famouswith intel- ligent and the inflation of youtube experts with a con- centration of power in the knowledge production is worrisomeandseemssubjecttowinner-take-allmar- kets and the power law. Even though, cognitive abil- ities are assumed to follow a normal distribution the disparities in terms ofwage, visibilityandwealthdif- ferentials bear no linkwith any type of talent but are often the result of sheer luck (Pluchino et al. (2018)). The counterreaction to self-serving policies leads to a rise of so-called populism and “a meritocracy trap” (Sandel (2020)). The strategic management literature also docu- ments that theprofitabilityof companies, for a large part, is not explainedby factors emphasized in text- books (Liu, C. & De Rond, M. (2016)). Liu (2021) highlights that a top manager’s assessment often comes close toanunintended lottery. Thismight ex- plain thepolitizationof jobs,where the taskdoes not matter as such, but rather the identity of the person that gets the job. The Matthew effect implying that the rich get richer also widens the gap between lucky and less lucky ones. Fake socialist policies under the branding of progressist policies have not changed anything so far. In such a political environment in which, we are far fromthePhilosopher-kingsthatshouldruleinthein- terests of the whole society, as advocated by the Greeks,qualifiedlotteriesmightbeaninterestingtool to select disinterested but qualified high-level deci- sion-makers. It reduces the self-attribution bias, namely of people attributing their success to them- selves rather than acknowledging the community’s role in their success. Unfortunately, media attention and journalists also tend to foster “great man theo- ries”. Even though the effect of luck on career paths cannot be eliminated, it canbe contained.At least, the selection through qualified lotteries might decrease the expressive individualism (Collier andKay (2020)). The randomization of potentially qualified decision- makers might lead to authentic diversity and even closethegendergapwhilebreakingthelinkwithpo- tentialfamilybackgrounds.Sometimes,familytiesare overlyapparentandunderminegenuinedemocracy. Qualified lotteries also potentially reduce hubris, de- finedastheabuseofpowerbyoverconfidentindivid- uals (Berger et al. (2020)). In some EU countries, growing tensions mean that eventuallybetterwaystochoosedecision-makerswill beneeded, andqualified lotteries couldbeonepossi- ble solution. However, some decision-makers may dislike these procedures, which could indicate that theyprioritisetheirownpositionsoverthewell-being ofthepopulation.Ineconomictheorysuchpreference revealing menu choices are called elicitation mecha- nismsandrevealtherealpreferencesofdecision-mak- ers rather thanwhat economists call cheap talk. On qualified lotteries and the crisis of representative democracy References Berger,J.,Osterloh,M.&Rost,K.(2020)Focalrandomselection closes the gender gap in competitiveness. Science Advances, 6(47) Buchstein, H. (2009) Demokratie und lotterie. Campus Verlag. Buchstein, H. (2020) Randomdecisions viewed historically. A short history of the use of lottery in governments. In: Osterloh, M. & Rost, K. (Eds.) Leadership by lot. Special issue of ZFO Zeitschrift führung &Organisation, pp. 9–13. Duxbury, N. (2002) Random justice: on lotteries and legal de- cision making. Oxford: Oxford University Press on Demand. Elster, J. (1989). Solomonic Judgements: Studies in the Limita- tion of Rationality. Cambridge: Cambridge University Press. Frey, B., Osterloh, M. and Rost K. (2023) “The rationality of qualified lotteries”, European Management Review . Vol. 20, Issue4 :698–710. Frey, B.S. & Zimmer, O. (2023) Mehr demokratie wagen? Volksherrschaft im 21. Jahrhundert: Aufbau Verlag Giuliano,P.andSpilimbergo,A.(2025)“AggregateShocksand theFormationofPreferencesandBeliefs” , JournalofEconomic Literature 63(2), 542-597. Liu, C. (2021) Recruiting? Random selection can help you tap into diversity dividend. Liu, C. &De Rond, M. (2016) Good night, and good luck: per- spectives on luck in management scholarship. Academy of Management Annals, 10(1), 409–451. Manin, B. (1997) The principles of representative government. Cambridge: Cambridge University Press. Pluchino,A., Biondo,A.E. &Rapisarda,A. (2018) Talent versus luck: the role of randomness in success and failure. Advances in Complex Systems, 21(03n04), 1850014. Popper, K. (1962) The Open Society and Its Enemies, Rout- ledge & Kegan Paul Sandel, M.J. (2020) The tyranny of merit: what’s become of the common good? London: Allen Lane. Stone,P.(2009).Thelogicofrandomselection.PoliticalTheory, 37(3), 375–397. DOI: 0090591709332329. Stone, P. (2010) Three arguments for lotteries. 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