Green finance gathers momentum

Written by: Gill Wadsworth Posted: 10/07/2019

CITY_ESG illoEthical investing has turned a corner and is now a credible contender for delivering positive returns. Greater cohesion between Guernsey’s and Jersey’s respective sustainable finance initiatives will allow the Channel Islands to build on the momentum they have already achieved in this field

it took just months for the term ‘climate emergency’ to start replacing ‘climate change’ as a description of the world’s environmental status. In May, the UK government was the first to declare a climate emergency, in the wake of key developments earlier in the year.

A campaign by Swedish teenager Greta Thunberg had led to children across the world going on strike from school in a bid to force politicians to pay greater attention to climate change. And there were warnings from the UN that humans were about to wipe out more than a million species from the planet.

It’s not only the rhetoric that’s changing. The way in which people invest, and a recognition that their money has significant power as an environmental force for good, is changing too.

In the financial sector, people have long flexed their green muscles by investing in environmental, social and governance (ESG) strategies to encourage positive environmental behaviours. But until recently, the motivation for this type of investing was driven by principle rather than potential returns and was left on the fringes of the finance world. 

As attitudes to the environment have advanced, so too have opinions around the power of ESG investing. 

Inflows grow

Inflows to the sector have gathered pace significantly. In the first half of 2018, UK retail investors ploughed £600m into ethical funds, according to The Investment Association – a huge increase on the £180m recorded in 2008.

These inflows are unlikely to slow down. The biggest appetite for ESG investing is among millennials, who, according to EY report Sustainable investing: the millennial investor, are nearly twice as likely to invest in companies or funds that target specific social or environmental outcomes.

And because, according to Kings Court Trust, this demographic is set to inherit £115bn from their baby boomer relatives in the UK alone by 2027, their ESG purchasing power is significant.

It makes sense, then, for financial centres to want to get in on the act – although only a few can boast the required financial infrastructure and green credentials to offer a credible ESG investing base. 

Green Guernsey

Guernsey is one of these centres. The bailiwick is listed as one of 22 members of the UN’s Financial Centres for Sustainability (FC4S) network and is blazing a trail for responsible investment.

Andy Sloan, Deputy Chief Executive at Guernsey Finance, says the island made an early strategic decision to be at the forefront of green and sustainable finance. The vision was to become a leading centre for this type of finance and to be accepted as a force for global good.

Sloan is confident that this vision is being played out across Guernsey, incorporating business leaders, financial providers, advisers and The International Stock Exchange (TISE). 

At the Guernsey Funds Forum, held in London in mid-May, sustainable finance was firmly on the agenda. One attendee, James Tracey, Guernsey Managing Director at private wealth manager JTC Group, says: “There has been a lot of focus on the initial philanthropic drivers for green and ESG investment, and that attention has now switched to returns.

“The consensus view now is that sustainable investment is more profitable, or at least the same, as others.”

ESG investments pull ahead

It is true that ESG strategies are holding their own against their mainstream counterparts. Figures from index provider MSCI show that for the five years to 23 May 2019, the European Universal ESG strategy outperformed its traditional competitor by 1.26%. Meanwhile, the All World Universal ESG strategy only marginally lagged the main index by 0.1%.

The figures look similarly compelling when comparing the S&P 500 – which looks at the largest companies listed in the US – with the S&P 500 ESG index. One-year annual returns to 23 May 2019 were 3.25% for the mainstream index and 3.95% for S&P’s sustainable counterpart.

Much of the improvement in returns reflects a growing understanding that ESG factors are a key part of risk management. Investors are vulnerable to ESG risks because company profits take a hit when any poor practice is uncovered. 

Fund managers are now looking beyond financial reports and digging much deeper into company policies to improve the way they research the businesses in which they invest. Demand for shares in companies with robust ESG policies is high.

While the near-term returns look promising, proponents argue that a long-term view is at the heart of ESG investment as the idea is to promote profitable sustainable business practice.

Tim Clipstone, a Partner at law firm Ogier, says that because investors are also consumers, they recognise a growing willingness to pay more for a ‘greener’ product or service as a hedge against environmental and social risk. In the long run, this pays dividends for shareholders.

For the Channel Islands to secure their position as centres for sustainable finance, they need a proven track record in managing money. 

Wayne Atkinson, a Partner at law firm Collas Crill, highlights the infrastructure already in place in the islands, which has made establishing a sustainable investment centre the next logical step. 

“If you put the moral motivation aside and focus on what a financial centre requires, it plays to everything that Guernsey, for example, is good at,” he explains. “It involves reporting to investors, keeping track of asset flows, conducting due diligence. We are also good at facilitating the flow of capital internationally.”

CITY_ESG illo 2The right funds

That said, ethical investors also need to access funds that they are confident meet strict ESG criteria. In response, Guernsey Finance established the Guernsey Green Fund (GGF) – an accreditation for individual funds that have their own performance targets and choose their own benchmark against which their success is measured. 

Launched in 2017, the GGF has a clear set of ESG principles to which funds must adhere. They must also be authorised by a recognised body, for which they receive certification.

The principles include exclusion from investing in fossil fuels and landfill without gas capture. Landfills generate methane, a greenhouse gas that’s 21 times more powerful than carbon dioxide over a 100-year time horizon. Capturing this gas can help to reduce the impact of landfills on climate change.

Clipstone says the GGF provides investors with a framework for investing sustainably, which in turn gives reassurance that their investment is in line with approved ESG standards.

“The Green Fund benchmark or quality assurance is only granted if the fund meets the requisite criteria,” he explains. “This is in response to accusations that some funds may be ‘greenwashing’ to appear more sustainable than they are. The GGF provides certainty for investors about the green credentials.”

Since the GGF was launched, funds representing more than £4bn of assets under management have been awarded the accreditation. 

Guernsey Green Finance, a division of Guernsey Finance and founder of the GGF, has also announced a formal collaboration with UK Green Finance, designed to promote sustainable investment initiatives between the two jurisdictions. 

Examples of their collaboration include working on developing green insurance and ensuring that the regulation and infrastructure between the jurisdictions are as seamless as possible.

Sloan says: “Given Guernsey’s strong and symbiotic connections with the City of London, it makes sense to work together and strengthen ties in our mutual objective – to promote the development of green and sustainable finance.”

TISE focus

Alongside the Guernsey Finance initiatives, TISE has set up a ‘green segment’ to marry those seeking green capital with likeminded investors. As with the GGF, TISE Green demands that issuers receive accreditation, but the exchange does not charge extra fees for a green listing.

TISE Head of Communications Mark Oliphant says: “The green segment is not about profit making. We are raising visibility of sustainable investment by promoting green propositions in which investors can allocate capital.”

Although much of the focus is on Guernsey as the hub of ESG investing, Oliphant notes that Jersey also attracts interest from responsible investors. “Jersey has a strong focus on philanthropy and on family offices investing in impact or socially responsible funds,” he says. 

According to Jersey Finance, the island administers more than 30 socially responsible investment (SRI) funds and has attracted 41 new registered charities since its Charities Law came into force in 2018. 

“More recently,” says Oliphant, “there has been a review of the business environment in Jersey to see what regulators and Jersey Finance can do to harness that.” 

He would like to see a greater cohesion between Guernsey and Jersey – Jersey has been very much focused on socially responsible and impact investing, while Guernsey focuses on green finance. 

He would also like to see more balance between the E and S and G, which would give more momentum to the drive for responsible investment as a whole.

When it comes to meeting the requirements of a growing army of ethical investors, Guernsey and Jersey have placed themselves as firm frontrunners. Sloan says there is talk of developing green insurance in Guernsey, which would add yet another bow to the island’s responsible investment credentials.

The challenge now is to bring the multiple initiatives across the islands together to keep the momentum going. 

JARGON BUSTING

Like all fields of finance, responsible investment is blighted by jargon. One person’s ‘ethical investment’ is another’s ‘impact fund’.
   Rachel Whittaker, Director and Head of Strategy for Sustainable Investment at UBS Wealth Management, says: “For responsible investors, terms have become more complicated as different styles and types of responsible investing have emerged.
   There’s a lot of confusion, so investors may need to do more due diligence than usual, including looking at the impact of any proprietary systems for measuring ESG policies or climate change, to be sure they understand what is involved.”

A brief guide to some of the key responsible investment terms may help:
• Environmental, social and governance (ESG) Investing for the sole purpose of financial gain in the belief that environmental, social and governance issues pose a risk to return and should therefore be managed
• Impact or socially responsible investment (SRI) Investing to have a positive social or environmental outcome – for example, committing capital to a clean water project
• Screening Removing certain ‘sin’ stocks – such as tobacco, armaments, alcohol and gambling – from portfolios that do not align with the investor’s own moral code
• Engagement Trying to promote responsible company behaviour and improve long-term returns through activities such as voting at AGMs and meeting with company boards.

 


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