The coronavirus pandemic has sharpened the focus on green, ESG and impact funds, and industry experts believe demand will continue to grow as governments respond to the climate change crisis
A compelling development in the investment fund space is gaining significant traction for the Channel Islands – green, environment, social and governance (ESG) and impact investing.
Practitioners involved in this enlightened approach, which focuses on purpose as well as profit, have rapidly gained expertise and, given the contemporary global and societal issues around climate change and the environment, they say it’s here to stay.
But, as with any new wave of financial services business, there are challenges to be addressed and infrastructure to put in place so that Jersey and Guernsey can continue to reap the rewards of their innovation.
Although ESG has been more of a focus for Jersey, Guernsey has led the way with green finance.
The two issues are not the same thing, but there is considerable overlap around their overall objectives – to do good as well as generate a return for investors.
Origins of the concern
High-profile campaigners have put the spotlight firmly on the impact on the planet of unchecked climate change.
Their actions have captured the attention of the population, particularly young people, and governments are beginning to sit up and take notice.
Mourant LP Partner Felicia de Laat says: “It began with climate change, the general environmental crisis, and particularly the impact of plastic on oceans and our wildlife. Sir David Attenborough has really brought this issue to the fore.
“This has escalated to climate change now being recognised by business and regulators as requiring change to the way in which business is conducted. It’s no longer niche.”
Mark Cleary, a Director at Zedra, adds: “The impetus for the industry was a speech by Mark Carney at Lloyd’s of London just before the Conference of the Parties (COP 21) in Paris in 2015, entitled Breaking the tragedy of the horizon – climate change and financial stability. Then the momentum simply grew from COP 21.”
Carney’s speech highlighted one of the three main risks to planet – progress towards a calamitous temperature increase.
“That was the start of more widespread recognition that, as finance providers in society, we need to do more to finance the transition towards a 2ºC increase in global temperatures,” says Cleary.
“That’s from a perspective that not long ago we were predicted to be on target for a 3.5ºC to 4ºC increase in temperature, which would create insurmountable societal and environmental damage. This transition to 2ºC or less cannot be tackled through the public purse alone.
“There’s a massive need for private capital investment through pension funds, private equity funds and a whole variety of organisations to channel funds towards this problem for good financial returns but with the wider objective of doing good for the planet and society in general.”
Alongside the green and environmental investment focus, there has been a rise in the number of funds with an asset class associated with social impact as well as financial return, in areas such as social housing and mental health.
ESG investing
Jennifer Strachan, Sustainability and Business Development Manager at IAM Advisory, says: “Fund managers are just starting to get their head around ESG investing. Some are piling their expertise into one fund, so that if people are interested in ESG they will invest in that portfolio.
“A lot of them are very new without a strong track record; others are embedding ESG principles into their investment process around their entire fund suite.”
Another complementary approach is ‘patient capital’, where a fund’s or portfolio’s performance objectives take longer to achieve, so investors need to be patient about reaping returns.
Taxonomy on track
Fundamental to the maturing of green, ESG and impact funds will be developing a taxonomy and a standardised form of measurement and reporting.
Strachan says there is no agreed set of metrics to report against and it is difficult to obtain data when there are inconsistencies in approach.
“The more data we get, the more understanding we have, not only of risks, but impact. Data agencies are a little bit purist. What is interesting is that the data does not reward impact in the way that I would argue it should,” she says.
De Laat agrees: “It is important that these investments can be benchmarked against credible standards. The need to avoid greenwashing is key.
“The islands are well regulated with high standards and have a lot of expertise in administering and operating funds generally. Rather than develop our own benchmarks, however, it is important that we follow and converge with the regulations and standards being developed globally, particularly by the EU.”
Cleary concurs that a standardised taxonomy will boost the credibility of managers who take heed of market trends in this space.
“Over time, companies that don’t move towards a 2ºC rise at best are not going to have capital allocated to them and their shares may be repriced very quickly – a Minsky moment [where investors suddenly lose all faith in them].”
Kevin Smith, Director at Ocorian, says traditional private equity funds will have to concentrate more on their green credentials and be transparent in what they are investing in if carbon-neutral targets are to be achieved.
“Most of the managers we see are scaling up on that side and having to employ ESG specialists or outsource to a growing number of specialist ESG advisory services,” he says.
Cleary adds: “You do see some of the managers degree-rating their portfolio – a portfolio of assets producing 4ºC of climate change moving down to 2ºC from where they are now by 2030.”
Talking the talk
The Jersey Financial Services Commission has launched a consultation on sustainable investments, and its proposals include disclosure and monitoring requirements specifically to counter the risk of greenwashing.
Another focus will be the upskilling of the workforce to deal with this emerging sector. Professional organisations are already launching specialist training to equip practitioners.
“We need a pool of very well educated people who are knowledgeable about ESG, green and impact. You cannot expect everybody to be climate experts but they need to be aware of the issues,” Cleary says.
“Some professional bodies have begun to launch specialist qualifications, and we need to up our game so that when presented with clients who want ESG or green, we have the vocabulary to converse with them. That will reassure them that we do know what we’re talking about.”
De Laat predicts a strong future for sustainable investment in the islands. “This is something that is regulator-led, not just something investors are asking about. Coming from the Bank of England, it will become part of the new normal,” she says.
Smith agrees. “Green and ESG funds will increase. Pure green funds as an asset class will increase because of the need for governments to have private funding to do it. Funds invested into no-no asset classes – fossil fuels and the like – will peter out. Some big investment managers are moving out of these areas.”
“What Guernsey has done is fantastic,” enthuses Cleary. “The launch of the Guernsey Green Fund was on point. Since then, green private equity principles have been published and they are on point too.”
Strachan is equally optimistic about the future. “The Channel Islands could be for ESG what Luxembourg is for microfinance,” she concludes. “I would love the islands to be the go-to for ESG.”