In IFC Review's Summer/Autumn Economic Report, Guernsey Finance Chief Executive Dominic Wheatley discusses green finance, why it is a priority for Guernsey and why the island can be a leader in the green space.
Guernsey has identified the development of green investment products as a priority as part of the development of its financial services strategy unveiled earlier this year.
Our ambition is to be the 'go-to' international finance centre for green finance, through the development of the broadest and best range of products.
Guernsey is building on work already carried out in regulatory product development by the island's regulator, the Guernsey Financial Services Commission (GFSC), and the island is also looking to further develop and grow its relationship with the UK's green finance sector.
The potential for green and sustainable finance is enormous and streams into major global initiatives. There has been significant international activity in the green space, with impact investments made into commercial agriculture, healthcare, social housing and sustainable technologies, with the intention to generate social and environmental impact alongside financial return.
Action in this area builds on Guernsey's strengths and expertise in private equity and infrastructure, supports other initiatives in areas such as impact investing, and supports a general repositioning of the island's financial services offer towards a greater focus on more ethical, and altruistically motivated investing for private clients and institutional investors.
The island wants to live up to its reputation as a responsible global citizen, and its commitment to the Kyoto Protocol, to contribute our expertise and experience as an international finance centre to the fulfilment of these goals.
Guernsey already has considerable expertise in alternative risk management in insurance, asset servicing with investment funds, asset stewardship in the fiduciary sector and stock exchange listings.
A paper from PwC and the City of London Corporation highlighted six fundamentals needed for a jurisdiction to become an impact investing hub. These are: knowledge and expertise; innovation in products; mature and attractive financial markets; a favourable legal and regulatory environment; social impact standards; and reporting and international connections. Guernsey meets these requirements.
The transition to a greener future is reported to need at least $1 trillion in investment each year. The motivation is not just to avoid the costs of dealing with global climate change, but increasingly to capture a share of the transition's economic opportunity for domestic voters and taxpayers.
It is important for financial centres such as Guernsey to adapt to the increasing demand for green investments. We are able to take advantage of what this movement has to offer, and in the creation of a world first with the Guernsey Green Fund Rules, proposals for which were published in the spring, we can assure investors that their investments are being used for environmental purposes that are established and monitored against a reliable set of standards.
The product will place Guernsey at the forefront of the initiative to mitigate the risks associated with climate change and promote engagement in climate change issues.
Guernsey has the benefit of already being a secure and experienced jurisdiction in which to hold investments and has the wealth of knowledge and expertise necessary to build on a green fund platform on top of existing versatile structures. Securing capital for environmental purposes is a strong indication that Guernsey is an innovative and forward-thinking place in which to do business, and demonstrates that we are mindful of international climate obligations.
We note that European officials are now describing sustainable finance as mainstream, with the rise of the socially-conscious investor, but definition is seen as the problem. Retail investors are said to need the comfort of labels and standards.
The objectives of the Guernsey Green Fund (GGF) is to provide a platform upon which investments into various green initiatives can be made. The GGF will enhance investor access to the green investment space by providing a trusted and transparent product that contributes to the internationally-agreed objectives of COP21, the 2015 United Nationals Climate Change Conference, and provides certainty, consistency and simplicity for investors.
Investors in a GGF will be able to rely on the GGF designation, provided through compliance with GGF rules, to represent a scheme that meets strict eligibility criteria of green investing and will have the objective of a net positive outcome on the planet.
Our development has been welcomed by Michael Mainelli, Chairman and Co-Founder of the think tank Z/Yen, which has listed Guernsey as an 'emerging global contender' in its inaugural Green Global Finance Centres Index.
"I am extremely encouraged to hear about Guernsey bringing out green fund regulation," he said on the pro-sustainability podcast Planet Pod. "We are seeing regulators begin to pay attention and I hope that's picked up."
Recent figures show that the impact investment sector has more than $114 billion in assets undermanagement, and this is expected to grow to $2 trillion, equating to 1% of global invested assets by 2025.
The green bond market has picked up pace over the past few years, exemplified in the growing number of global stock exchanges which have specific segments dedicated to listing bonds which finance environmental projects. At the end of 2017, the London Stock Exchange reported a 57% growth of its listed green bonds in one year, with more than $20 billion raised. International standards from the green bond market are being established.
But green funds are still at an embryonic stage. Investors remain hesitant to invest in funds which may not ring true to their green label, or do not want to sacrifice a good return for the sake of the environment. The GGF rules use standards developed by international financial institutions with the appropriate scientific background to ensure that the various assets held in a GGF are green within the true meaning of the word.
Any type of fund can apply to be a green fund in Guernsey and, under the guiding rules and principles, will have to invest in areas such as renewable energy, lower carbon and efficient energy generation, energy efficiency, agriculture and forestry, waste and waste water and transport. The island already has a number of cleantech funds established.
The development of the green rules was facilitated through Guernsey industry and government strategy groups. The consultation closed at the beginning of June and the next phase of development is likely to be an exciting prospect.
The GFSC has also announced plans to work with the global insurance industry to enable long-term green investments to be taken on as assets to meet long-term life insurance liabilities.
The initiative seeks to make it easier to insurance companies to access long-term investments that in turn will make it easier for insurance companies to offer sustainable long-term returns to policyholders, and to widen the pool of purchasers for green investments.
New proposals on sustainable finance and the Capital Markets Union were published in May by the European Commission, furthering Guernsey's prospects in presenting opportunities for investment through the Channel Islands. Europe has been talking about, among other issues in the green sector, carbon stress tests, integration of sustainable criteria and the development of a green finance mark and a green bonds standard.
In the past few weeks, Dr Andy Sloan, Deputy Chief Executive, Strategy, at Guernsey Finance, presented the Guernsey Green Fund to the OECD's Centre of Green Finance and Investment in Paris.
We are excited about these prospects.
As a jurisdiction seeking to become an impact investment hub, we appreciate that Guernsey needs to demonstrate an internationalist, outward-looking world view. Guernsey may be small, but its horizons are large.
What is green finance?
The Green Finance Study Group, established at the G20 summit in 2016, defined green finance as 'the financing of investments that provide environmental benefits in the broader context of environmentally sustainable development'.
Green Finance includes traditional investment vehicles such as equities, investment funds and bonds, in which the underlying businesses are involved in operations aimed at improving or maintaining the natural environment.
Why green finance? Why now?
In September 2015, the United Nations published the Sustainable Development Goals – a collection of 17 global goals covering a broad range of economic development issues, including climate change.
What is Guernsey's current position?
Guernsey was named within Z/Yen's inaugural Green Global Finance Centre as an 'emerging global contender'.
Guernsey is home to a full-service financial services industry offering both capital and insurance market products and services, including investment and insurance management and capital market listing, much of which can legitimately claim to have green credentials.
What is Guernsey's ambition in green finance?
Guernsey mission statement is 'to become the leading small international finance centre for green finance'.
What is Guernsey's approach?
Guernsey will seek to contribute positively to the green taxonomy in partnership with supranational organisations such as the UN and the G20.
Guernsey will focus on its key strengths as an international finance centre to enable international capital flows via green capital and insurance market products, including the world's first green investment fund rules.
An original version of this article first appeared in the IFC Review Economic Report, Summer/Autumn 2018.
For more information about Guernsey's finance industry please visit www.weareguernsey.com.
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