Nicolas Mackel on the existential nature of sustainable finance

From law to education to international affairs, there are few professional fields that Nicolas Mackel hasn’t touched during his career as a politician and diplomat. Now, as CEO of Luxembourg for Finance, he is one of the key pacemakers – and a fast one, at that – for Luxembourg’s growth as a European financial center, and particularly when it comes to sustainable finance.

But economic growth in and of itself is not what drives his ambitious work in this field. Rather, the expansion of sustainable finance and all of the instruments therein is a means to a more transcendental end of solving humanity’s most pressing challenge – climate change – as he explains here.

Over the course of the past decade, government bodies and financial institutions in Luxembourg have launched many initiatives propelling the country’s sustainable finance sector forward. How has the country been able to move so quickly in this field?

There are two reasons for this. First, Luxembourg always prides itself on moving fast once it recognizes that something is important. In this particular case, and that’s the second reason, it was the importance of helping to realize the objectives of the Paris Agreement – limiting warming to no more than two degrees Celsius – and the way we could contribute as a financial center. The Luxembourg Stock Exchange listed the world’s first green bonds in 2007, and at the time of the Paris Agreement in 2015, already had quite a significant market share of investment in, for instance, renewable energy.

Now having said all this, I think what is also very important to realize is that we don’t look at this as being only about additional market share for the Luxembourg industry. For us, this is an existential topic, and we should make sure that everybody does their part. We do not stand to gain if we are the only ones active in this field. This is not about market share. This is about helping to create a sustainable future.

You spent time working in Shanghai. What did you learn from China’s approach to financial systems during that time, and how have you sought to apply what you learned there to Luxembourg?

China has always been and is a fascinating country. What I learned generally is that you always need to be open to new ideas, but even if you can learn from new ideas in and of themselves, they may not necessarily be transposable as such to your environment. And that is very much the case in financial services between China and Europe. I think in many regards, we live in a different framework than they do in China. China is one big unitary market with the power of 1.4 billion people behind it, where the role of the state is completely different from the one that drives the markets here in Europe.

I think more interesting question is: how can Europe and China make our systems compatible? How can we work together in order to create win-win situations?

Do you have any ideas of how that relationship could be built and what forms it could take?

Yes. Luxembourg has managed over the last couple of years to become one of the bridge heads for China in Europe, but that plays both ways. For instance, in today’s asset management industry, Luxembourg has the leading market share in the world for investment funds that go into Chinese equities or bonds. How did that come about? Well, when the Chinese opened up their capital markets, the Luxembourg regulator was the first Western regulator to go and talk to them, establishing a dialogue to find out how we can make the European UCITS framework compatible with the Chinese framework, all while taking into account the requirements of both frameworks. That allowed for investment flows from Europe to China in very high amounts. That is a win-win situation.

Others are how, for instance, Chinese payment firms can operate in Europe. And now what we see in the area of green finance and sustainable finance is that quite a lot of work is being done by the European Investment Bank (EIB) and Luxembourg Stock Exchange on the definitions – the taxonomy of what is green and so on – and then connecting the Chinese market to European investors.

For instance, the Luxembourg Stock Exchange has created a green bond exchange, or green bond channel, between Shanghai and Luxembourg that displays information on Chinese green products to its European and global investor community.

Part of your career was spent working at different embassies. How do diplomatic efforts play into your work in finance?

First of all, as a diplomat, you are a generalist, which is a trade in and of itself. To be a generalist is really something you learn and acquire. Sometimes that can be very useful because you can take a step back and look at the picture holistically rather than in a segmented or a specialized view that might come if you are an expert.

The second aspect is, having lived in all sorts of different continents and worked with people from all sorts of different cultures, you learn to listen. You learn to understand others. You learn to see how they view the world, how that impacts their decisions and thus how you have to factor that in.

So these are, if I have to sum it up, the valuable lessons I learned in my 20-plus years as a diplomat. Ultimately, what I did as a diplomat and what I do today are similar to the extent that it’s all about economic diplomacy. Representing your country and representing your country’s main economy are ultimately the same. I have never in my career pursued a commercial objective anywhere. I have always worked, promoted, developed and defended the country of Luxembourg. So, that hasn’t changed.

How do you think Luxembourg’s small size works to its advantage in maintaining its status as one of the EU’s financial centers?

Being part of the European Union (E.U.) allows Luxembourg to be part of a single market, which thus is our domestic market – it’s our backyard, a 520-million-consumer market, though soon, unfortunately, only 450 million [due to Brexit].

I think a large degree of our success has also always been the efficiency of our bureaucracy. When you are small, it’s easier to make decisions and implement them quickly. You don’t have a bureaucracy like a supertanker that takes eternities to turn around. We leverage our smallness in order to be nimble, and that serves us very well.

What areas of sustainable finance do you think are growing most rapidly, and in which areas do you personally place the most hope?

I think everything around capital markets and investments is growing very rapidly because it has started to be seen not as a burden but as an opportunity for growth and an opportunity to invest money, not only to get a return – because returns are not on the same level as other investments – but also to do something good.

That includes investment funds; it includes green and blue bonds. While everything is still relatively small – ‘green’ maybe a little bit less than ‘blue’ – the objective is to grow the part that is indeed sustainable within the overall capital market’s activities.

Personally, why do you think sustainable finance is important?

As I mentioned before, we look at this whole issue as something existential. If you talk about Brexit, that is a major disruption to the industry, but it is organizational, structural. If you look at digitalization, that is transformational, but you can adapt to it.

But if you look at global warming, it’s purely existential, and thus we all have a vested interest in finding solutions and doing something about the situation. If we as a financial industry – if we all as individuals – can do something about it, we should. I think it would be a dereliction of duty on behalf of all of us, whether in our professional or private capacity, not to be doing something, and we all can certainly get better at it.