The Channel Islands’ commitment to green and sustainable investing has boosted their relationship with the City of London. Now they are working on verification to counter greenwash and shore up the sector for the long haul
A new focus on green and sustainable finance over the past few years has struck a chord with investors around the world – and has cemented and enhanced the strong relationship between the Channel Islands and the City of London.
In Guernsey, seven green funds have been established, channelling investment into this new sector, since the launch of the world’s first green regulated fund structure.
Jersey has also supported several billion pounds of sustainable finance business, while The International Stock Exchange has established a TISE Green segment.
While there is speculation that London could become a greater competitor for Channel Islands financial services business on the tail of Brexit, there is no doubt that the green and sustainable products being developed on the islands are making a valuable contribution to foreign direct investment into the City.
Jersey puts the total figure at £0.5trn per annum, while the equivalent Guernsey contribution equates to around £400bn.
In fact, the consensus view is that, by working together to face cross-border challenges, the City and the islands could further increase the flow of funds – a hypothesis voiced at the 2019 Guernsey Funds Forum in London by Sir Roger Gifford, Chair of the London Green Finance Initiative.
Mark Oliphant, Head of Communications at TISE, says: “The finance industries of the islands are based on facilitating the flow of capital around the world. There’s this interconnectivity with London that exists anyway and this is just another example.”
London has lost some ground to Luxembourg, particularly in the area of green bonds, and is working with Guernsey on the Chinese Belt and Road initiative – an ambitious programme to connect Asia with Africa and Europe via land and maritime networks – with a view to raising more capital.
Andy Sloan, Deputy Chief Executive, Strategy, at Guernsey Finance, heralds green finance as the keystone to the future development of financial services in Guernsey.
He points out that the sustainable finance agenda stretches back to when the UN was borne out of the Second World War with the objective of creating a better world.
“In 2020, it’s still an initiative, but the global population has woken up and smelt the coffee,” he says. “Guernsey has been in the vanguard of this. We were fortunate that we had the foresight to see which way the wind was blowing.
“It’s been a journey in terms of going out there and banging the drum and, for a lot of people, there’s been a Damascene conversion to it.”
Countering greenwash
As with many emerging sectors, the initial growth of green and sustainable finance has outpaced the development of verification and reporting standards.
However, these are seen as crucial to the maturing of a safe and secure green and environmental, social and governance (ESG) sector – not least if it is to distance itself from those seeking to benefit by associating with it via what is known as greenwashing.
This has not escaped the regulators on both islands. The Guernsey Financial Services Commission, as part of a funds discussion paper, has proposed introducing ‘green verification’, while the Jersey Financial Services Commission has launched a consultation paper around disclosure for sustainable investments.
Karolina Pilcher, Senior Strategic Projects Manager at Jersey Finance, says: “This is an evolving global sector and, as an industry, the key is to be smarter in capturing quality data to support and evidence progress.”
It’s a common challenge when innovating a financial services product, observes Kees Jager, Head of Funds at Intertrust Guernsey. “The problem that’s always been there is how to report on this,” he says. “In the PE world, there’s no real standardised ESG data. Standardised and consistent reporting will come about.”
Is tech the solution?
It’s not only important to enhance existing reporting systems, but also to get new technology in place ahead of the curve, adds Jager.
The creation of the TISE Green market segment goes some way towards substantiating green credentials, complementing the Guernsey Green Fund kitemark designation – a benchmark intended to assure investors and third parties of the genuinely green and sustainable nature of the investments in a fund.
Oliphant says there are currently four green bonds within the TISE segment. There are other investments on the exchange that would qualify for the green label, but some companies are reticent about the added cost and administration involved in achieving verification, he adds.
However, 75% of the AUM in Guernsey is managed or administered by firms conforming to the UN PRI (Principles for Responsible Investment).
A fine balance is needed between badging a product as truly green against a recognised standard and remaining competitive with other jurisdictions that may have a lighter touch. The focus is on arriving at a universally acceptable benchmark that will support the authenticity of the green sector.
Winning more green business
Thoughts are also turning to how to develop the sector further, building on the existing track record and experience, to take it beyond a niche concept.
Jager says: “We need a springboard off the existing green funds in Guernsey. It’s definitely a trend. From the ESG side, the ‘S’ part of that is now massively on people’s agendas.”
Annette Alexander, Partner at Carey Olsen, is confident that the word is getting out. She cites a recent inquiry from the Middle East looking to domicile a green fund in Guernsey.
“It’s the usual story. It’s about gaining recognition for the products we have innovated, gaining track record and being reputable,” she says.
“Like every single sector, it’s a very crowded space and you have to be able to stand out from the crowd and be legitimate – and not involved in greenwash.”
Andy Sloan advocates a review of skills shortages and recognises the need to build capacity by upskilling the workforce.
Meanwhile, Pilcher recognises the potential. “Despite all the good work that’s been done in bringing sustainable finance into the mainstream over the past decade, there is still plenty of scope for further progress.
“For instance, there’s a real opportunity for greater sophistication in terms of weighting and balance across the E, S and G strands – something that will likely become more important in light of Covid.
"And there is also much to be done in terms of benchmarking, data quality, better measurement and evaluation. These are areas where Jersey can play a really positive and progressive role,” she says.
Tim Clipstone, Partner at Ogier, agrees. “Guernsey was one of the first members of the UN’s FC4S (Financial Centres for Sustainability) and hosted a Sustainable Finance Week in June 2020 on the theme ‘Financing sustainability in the post-Covid-19 era and the role of private capital’,” he explains.
“The week was held, appropriately, entirely online – using webinars and live links to speakers around the world looking at the role of private capital in financing sustainability in a post-Covid era.
“The sessions echoed the calls of many that the opportunity to harness the revelation of virtual meetings, reduced business travel and working from home should not be squandered.
“Instead, many saw it as a springboard to reducing fossil fuel emissions and a potential societal shift to a lower carbon lifestyle for the developed world, recognising that such a move requires significant capital investment.”
Walking the green walk
The islands’ own reputation in this space will be underpinned by demonstrating that they can walk the green walk – and there is already strong evidence of this. Sloan believes engagement, advocacy and international collaboration have all enabled Guernsey to make sure it is walking the walk.
Guernsey Electricity has been generating all power from renewable sources, for example, while a commitment to net-zero greenhouse gases means that by 2050, like the UK and EU, it will be carbon neutral. Jersey has committed to carbon neutrality by 2030.
A green and sustainable approach to finance is clearly no fad. As Alexander says: “Green will be with us for a long time. Climate change is self-evident for all of us and we are going to have to get used to doing things differently in the next 20 to 30 years.
“There will also be a need for essential impact investing, because there will be a lot of deprivation. We should funnel as much money as we can into things that will be sustainable for the long term.”
As with most business, the impact of Covid-19 needs to be recognised and, for the green and sustainable sector, it is positive.
“In recent weeks, we’ve heard a lot of talk, too, about how Covid-19 could be an accelerator in driving forward the sustainable finance agenda, and there’s truth in that,” says Pilcher.
“Institutions, investors and governments are all looking at this as an opportunity for positive change, underpinned by greater transparency, an appreciation of what ‘good citizenship’ means and a desire to rebuild economies and communities better.”
Clipstone concurs. “Even before the global lockdowns, we had begun to see evidence that sustainable investments were producing similar returns to more traditional ‘sin stocks’ and evidence was growing that the former were more resilient to environmental and societal shocks.”
As to the future, Sloan is bullish. “The future is now. The only form of finance going forward is the sustainable variety. Post-Covid, the penny has dropped that things have got to change and the finance industry is well aware of it.”