1 Legal and enforcement framework
1.1 What regulatory regimes and codes of practice primarily govern environmental, social and governance (ESG) regulation and implementation in your jurisdiction?
The approach to ESG in international finance centres such as Jersey seeks to deal with two main categories of business and understanding the difference is crucial in understanding the current approach to regulation:
- companies or entities established for international finance transactions including special purpose vehicles and investment funds (‘international entities'); and
- locally based trading companies or entities that are not established to carry out international finance transactions (but including services providers to international entities such as administrators and law firms).
As such, the approach to ESG in a jurisdiction such as Jersey must be viewed through these two different lenses: a local lens and an international lens. Although the focus of this Q&A is primarily on international entities, some of the considerations will apply equally to local trading companies.
* * * * * *
Financial services are the cornerstone of Jersey's services-based economy. The government of Jersey has committed to developing a framework for sustainable finance as part of the broader review of Jersey's domestic policies and laws to ensure that they comply with international sustainable development targets and objectives. As an important early step in developing an ESG regulatory regime in Jersey, in 2021, following a period of consultation with the financial services industry, a targeted disclosure-based regime was introduced by the Jersey Financial Services Commission (JFSC), the island's financial services regulator. The aim was to mitigate the risk of greenwashing as well as protect investors and the integrity of Jersey's finance sector. This regime was implemented through changes to the following guides and codes of practice:
- the Code of Practice for Certified Funds (regulated funds);
- the Code of Practice for Fund Services Business (regulated service providers to funds);
- the Code of Practice for Investment Business (investment businesses that provide investment advice); and
- the Jersey Private Fund (JPF) Guide (Jersey private funds and their service providers).
This regime applies where a fund, JPF or relevant regulated person is marketed (or involved with marketing) on the basis of investing in a ‘sustainable investment' as part of its investment objective. For these purposes, a ‘sustainable investment' is a broad concept that captures any investment or investments which contribute to either an environmental or social objective.
Where the regime applies, the relevant person (which could be a fund or registered person under the relevant regime) must disclose all material information in relation to the sustainable investment strategy and objectives. Disclosure can be made via website, pre-contractual document, private placement memorandum, offer document or documents in which the terms of investing are contained.
The information to be disclosed includes:
- alignment with any specific taxonomy or, where there is no alignment with a specific taxonomy, a statement to that effect (‘comply or explain');
- the proportion of investments that are sustainable;
- the basis on which due diligence, benchmarking, and performance measurement and reporting are likely to be conducted; and
- any limitations to methodologies and data.
In respect of investment businesses providing investment advice to a client in relation to a fund that is marketed on the basis of investing in a sustainable investment as part of its investment objective, the investment business must inform, and make available to the client, the appropriate disclosure information in relation to the sustainable investment strategy and objectives of the fund. If no such information is available, the client must be informed of that fact.
1.2 Is the ESG framework in your jurisdiction primarily based on hard (mandatory) law and regulation or soft (eg, ‘comply or explain') codes of governance?
Although the requirements applicable to financial services (as set out above) are contained in a guide and codes of practice, the authority to issue those is based in Jersey statutes. Accordingly, the requirements are essentially mandatory – albeit that certain aspects of the regime (eg, alignment with a particular taxonomy) operate on a ‘comply or explain' basis.
The JPF guide is issued by the JFSC pursuant to its powers under the Control of Borrowing (Jersey) Law 1947 and the Control of Borrowing (Jersey) Order 1958 (COBO). The purpose of the JPF guide is to set out the eligibility criteria for a JPF which requires consent to be issued pursuant to COBO; and a JPF which satisfies the eligibility criteria may be established and issued with a relevant consent pursuant to COBO.
In relation to the codes of practice, these have been issued by the JFSC under powers granted to it by:
- Article 19 of the Financial Services (Jersey) Law 1998, as amended (FSJL), in respect of the Code of Practice for Fund Services Business and the Code of Practice for Investment Business; and
- Article 15 of the Collective Investment Funds (Jersey) Law 1988, as amended in respect of the Code of Practice for Certified Funds.
The JFSC also has general discretionary powers to refuse the issue of regulatory consents under COBO (eg, for the issue of shares), where the proposed activities of a Jersey entity raise issues for the reputation or integrity of Jersey's financial sector. The Sound Business Practice Policy sets out principles and guidance around these powers, including an evolving list of activities that may be considered sensitive for these purposes. These include certain activities which could also be said to raise ESG-related considerations – for instance:
- the purchase of debt in circumstances that undermine international debt relief efforts;
- involvement (directly or indirectly) in the extraction of natural resources; and
- involvement in the manufacture or trade of weapons.
Certain non-Jersey requirements can also apply, essentially where Jersey entities are required to comply with those external standards in order to ensure commercial or market access such as under the EU Regulation on Sustainability‐Related Disclosures in the Financial Services Sector (2019/2088).
1.3 Which bodies are responsible for implementing and enforcing the rules and codes that make up the ESG framework? What powers do they have?
The JFSC is responsible for implementing and enforcing the ESG standards under the JPF guide and codes of practice noted in question 1.1. This falls within the JFSC's wider statutory objectives, such as:
- the reduction of risk to investors due to dishonesty, incompetence or malpractice; and
- the protection of Jersey's reputation and integrity in financial matters.
This is a set of objectives that tracks into wider regulatory expectations placed on all regulated financial services providers in Jersey, regardless of any specific focus on ESG in their activities.
Under the JPF Guide, the JFSC has appropriate authorisation, supervision, enforcement and cooperation powers in relation to JPFs, subject to COBO. Possible sanctions may also include revocation of regulatory approvals.
Each ‘designated service provider' (as defined in the JPF Guide) will also be regulated by the JFSC for one or more types of financial service business (within the meaning of the FSJL) and will be subject to the JFSC's standard supervision process.
In each case, a breach of a code of practice can result in a variety of possible actions by the JFSC, including:
- revocation of regulatory approvals;
- written directions (including removal of particular persons involved or cessation of business);
- public statements; and
- financial penalties.
1.4 What is the regulators' general approach to ESG and the enforcement of the ESG framework in your jurisdiction?
The JFSC is supportive of ESG and aims to align its approach in a way that is commercially viable and proportionate, and that meets international standards. It is implementing a progressive strategy based on:
- early changes to the codes of practice and guide (outlined in question 1.1) to mitigate the risk of greenwashing and build trust in Jersey's ESG credentials;
- collaboration with industry bodies, both locally and internationally, to build capacity and share best practice on sustainable finance; and
- the exploration of opportunities for further jurisdiction-appropriate regulatory and policy development.
The approach to regulation set out above reflects the fact that where Jersey businesses operate on an international basis, there can often be multiple different standards available (or required) to be complied with.
This approach also recognises that international ESG standards are evolving rapidly and that such standards are often driven by multinational non-Jersey bodies (eg, accountancy regulators or the European Union). The Jersey regime thus aims to be flexible enough to facilitate the adoption of those standards by Jersey entities and businesses, while also requiring that adopters be consistent and transparent.
In terms of international collaboration, in 2021 at COP26 in Glasgow, the JFSC announced that it had been accepted as a member of the Network for Greening the Financial System (NGFS). The NGFS is a network of central banks and supervisors which, on a voluntary basis, exchange experiences, share best practices and contribute to the development of environment and climate risk management in the financial sector. On a wider basis, the Jersey government has a target to be carbon neutral by 2050 and has adopted a Carbon Neutral Roadmap in 2022 to support that aim.
At a local level, the JFSC participates in governance of Jersey for Good, the island's sustainable finance strategy, which is discussed in more detail in question 1.5.
Due to the recent introduction of ESG regulation in Jersey, there is no current data in relation to the JFSC's approach to enforcement in this area.
1.5 What private sector initiatives have been launched in your jurisdiction to complement the ESG framework?
Jersey has a strong culture of corporate governance and responsible business practices. This has led to private sector support for a range of initiatives aligned to the transition to a sustainable economic model. Locally developed corporate ESG initiatives include:
- the Jersey Good Business Charter; and
- the Diversity Network Jersey.
The Eco-Active Business Network, created by the government of Jersey, also provides opportunities for the private sector to share best practice in ESG matters.
Often the international activities of Jersey funds and other entities means that they will be adhering to the standards of the jurisdictions or industries in which they operate or that are required by their investors or supply chains. These include voluntary ESG standards and frameworks, covered in more detail in question 2.2.
In relation to the finance sector specifically (which accounts for around 40% of Jersey's gross value added), industry representative body Jersey Finance launched a sustainable finance strategy (Jersey for Good) in 2021 to build up Jersey's capacity and credentials as a sustainable finance centre of choice. Alongside the JFSC, the government of Jersey and Jersey Finance, this initiative brings together key stakeholders including representatives from the major financial sector trade bodies.
As an early deliverable under Jersey for Good, in 2021 Jersey Finance worked with its public and private stakeholders to complete the first stock-take of sustainable finance in Jersey, using the UN Financial Centres for Sustainability Assessment Programme. This initiative has contributed to:
- mapping, measuring and understanding Jersey's relative position against best-in-class practices; and
- identifying market failures and barriers that prevent sustainable financial markets from developing.
2 Scope of application
2.1 Which entities are captured by the rules and codes that make up the principal elements of the ESG framework in your jurisdiction?
See question 1. The entities operating within the areas of activity caught by the relevant guide and codes of practice could be within the mandatory framework, to the extent that such activities relate to sustainable investments.
2.2 How are entities in your jurisdiction that are not subject to specific rules or codes implementing ESG?
As noted in question 1.5, many Jersey entities in the financial services sector have touchpoints in multiple jurisdictions. This means that Jersey entities may be signatories (directly or at a group level) to a range of international standards and frameworks, including:
- International Environmental Management ISO 14001;
- the International Finance Corporation's Operating Principles for Impact Management (World Bank);
- the United Nations Principles for Responsible Investment;
- the Principles for Responsible Banking;
- the Equator Principles;
- the United Nations Global Compact; and
- the Science Based Targets Initiative.
Certain international organisations in sector-specific areas are also issuing their own guidance and recommendations for member organisations in sector-specific areas – for example, for listed real estate companies, the European Public Real Estate Association offers its Sustainability Best Practices Recommendations Guidelines.
2.3 What are the principal ESG issues in your jurisdiction that are either part of the ESG framework or part of the implementation of ESG?
Climate change is a key area of focus for Jersey as an island jurisdiction. In 2019, the States of Jersey (the island's legislature) declared a climate emergency. This has triggered a process of policy development, culminating in the adoption of Jersey's Carbon Neutral Roadmap in April 2022, setting out a range of actions over the coming decade to put the island on a pathway to net zero.
In the run-up to the COP26 summit in 2021, the government of Jersey announced its intention to seek the extension of the Paris Agreement on climate change as part of its constitutional relationship on foreign affairs with the United Kingdom. Following the adoption of the Carbon Neutral Roadmap, in May 2022, UK Foreign Secretary Liz Truss formally approved the extension of the Paris Agreement on Climate Change (2016 to include Jersey. This means that the United Kingdom's ratification of the Paris Agreement will now cover the island and the United Kingdom's climate-related obligations under the agreement will thus now include Jersey and its territorial waters.
3 Disclosure and transparency
3.1 What primary disclosure obligations relating to ESG apply in your jurisdiction?
See question 1 regarding Jersey mandatory disclosures. Alongside the disclosure obligations introduced by the Jersey Financial Services Commission, for Jersey funds and registered persons, compliance with the EU Regulation on Sustainability‐Related Disclosures in the Financial Services Sector (SFDR) for those funds marketing into the European Union is the predominant disclosure obligation in the market.
Jersey-incorporated companies or entities that are listed on stock exchanges may also fall in scope for reporting obligations such as the Taskforce for Climate-related Financial Disclosures (TCFD) aligned disclosures required in the United Kingdom for premium-listed companies. Similarly, disclosure obligations may apply to Jersey vehicles that choose to list securities on the sustainable market segment of The International Stock Exchange, a leading global exchange with offices in Jersey and a popular listing venue for Jersey issuers.
As further jurisdictions introduce mandatory sustainability reporting requirements (eg, the United Kingdom's upcoming Sustainability Disclosure Rules), and as the new International Sustainability Standards Board begins the process of convergence for global ESG transparency standards, it is likely that Jersey companies and entities will increasingly be subject to mandatory ESG reporting obligations.
3.2 What voluntary ESG disclosures are also commonly made in your jurisdiction?
In terms of emerging best practice for corporate sustainability, firms in Jersey are increasingly making voluntary disclosures of their carbon footprint. A range of local providers are supporting this process, providing data collection tools and verification in line with the Greenhouse Gas Protocol.
Large accountancy firms and ESG consultants are also reporting increased interest from Jersey-based clients, including corporate and finance/fund vehicles, wishing to make voluntary disclosures on their climate risk exposure and governance processes in line with the TCFD recommendations, as this emerges as a global standard (perhaps seeking to pre-empt such requirements becoming mandatory).
In terms of broader sustainability disclosures, some firms in Jersey have adopted reporting in line with the standards set by the Sustainability Accounting Standards Board and the Global Reporting Initiative.
Jersey firms from across different sectors of the international finance industry are increasingly making disclosures under sector-specific voluntary frameworks to which they are signatories, such as those set out in question 2.2.
Certain international organisations in sector-specific areas are also issuing their own guidance and recommendations for member organisations in areas that represent important asset classes for Jersey financing structures as also set out in question 2.2.
Finally, as noted in question 3.1, Jersey issuers that have opted to have their securities listed on an exchange may be caught by specific ongoing disclosure requirements under the relevant listing rules or regulatory obligations applicable in other jurisdictions.
3.3 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?
The role of the board and other corporate bodies/officers in the context of disclosure obligations relating to ESG (whether in a local or international facing company) is generally to:
- assist in shaping and deciding on the strategic direction of the company as regards ESG and the relevant ESG disclosure obligations (if they choose to do so), which may also include adequate consideration and disclosure of climate-related business/investment risks and stakeholder requirements;
- suitably monitor progress towards the achievement of objectives and compliance with the chosen ESG disclosure obligations, and can overlap with appropriate ongoing commercial monitoring of business risks and requirements (both internally and externally regarding ESG);
- facilitate the availability of internal/external resources and expertise required to support the company's strategy and objectives, including obtaining sufficient data and information to enable proper reporting and disclosures that may be required;
- give an account of the company's activities to the parties to which an account is properly due and suitable communication to stakeholders;
- arrange the preparation of the accounts/financial records of the company; and
- ensure the adequacy of any offering documents issued by the company.
The strategic direction and objectives of the company as regards ESG and the relevant ESG disclosure obligations should also continue to be periodically reviewed and updated if required to reflect changes that impact the company's position, including:
- emerging ESG risks;
- new regulatory requirements;
- improved data;
- new stakeholder needs; and
- technological advancements.
Depending on the context, the relevant disclosure obligations may be mandatory (eg, for a listed company that must make certain ESG-related disclosures) and therefore fall squarely within the general duties of the directors to act in the best interests of the company (in addition to any commercial imperative for companies generally that also aligns with that general duty).
In Jersey, international structures can also include trusts (including unit trusts) and limited partnerships, among others. In those contexts, trustees of trusts and general partners of limited partnerships also have statutory and customary law duties (including fiduciary duties) to act in the best interests of beneficiaries or limited partners (as appropriate), which means that they can broadly have similar roles and responsibilities to those set out above in the context of ESG disclosure obligations.
Often, discharging these functions for ESG disclosure obligations can involve the appointment of specialists as advisers or the appointment of a non-executive director to the board with relevant ESG experience. Audit committees in larger public and listed companies are also likely to have a developing and larger role in the consideration of reporting on internal controls, risk management and disclosures being made regarding items such as climate change impact.
In relation to Jersey's larger trading companies, as well as certain listed financial services businesses, we are increasingly seeing the emergence of ESG-specific functions at board level within the business, such as chief sustainability officer positions and other similar roles. With at least 78 companies listed on worldwide stock exchanges in centres such as London and New York (with a combined market capitalisation of approximately £172 billion at September 2021), this is likely to become an increasingly common feature of the governance structure of Jersey companies.
With regard to companies such as investment vehicles and special purpose vehicles that are administered by regulated service providers in Jersey, the sustainability functions of the entity (eg, data analysis, risk management, reporting) may be delegated to that regulated provider. The finance industry in Jersey is expanding the range of services it can offer in this regard, with many trust and company service providers and fund administrators now offering services such as:
- virtual chief sustainability officer functions;
- ESG investor reporting dashboards;
- ESG analysis for the underlying portfolio assets; and
- compliance services to meet the reporting obligations under regulatory frameworks such as SFDR.
When overseeing reporting on ESG, boards of directors should be mindful of, and attempt to mitigate, any potential liability (including any secondary market liability) on issuers, officers and directors. They should further ensure that there is reasonable scrutiny applied as regards:
- risk factors;
- accuracy of disclosures and ESG claims; and
- appropriate cautionary language.
3.4 What best practices should be considered in relation to ESG reporting and disclosure?
As noted in relation to question 3.2, the adoption of voluntary standards is increasingly seen as a driver of value and good risk management for firms. It is also a way of meeting investor expectations and requirements on disclosure and reporting – particularly where large institutional investors or private equity funds are involved.
In relation to investment funds, compliance with SFDR is seen as an important standard for certain markets, particularly for Nordic fund managers. A number of Jersey funds are classified as ‘Article 8' funds (ie, promoting environmental or social characteristics) for SFDR purposes. This classification brings with it certain obligations in terms of reporting and disclosures.
4 Strategy and governance
4.1 How is ESG strategy typically designed and implemented in companies in your jurisdiction?
Many firms now regard ESG as part of a broader imperative to transform every aspect of their organisations rather than as an exercise in regulatory compliance and responding to specific drivers.
As a result, particularly as regards the larger firms in the finance sector (eg, investment managers, trust and company service providers), there is an understanding of the need to embrace transformation, looking beyond simply a product offering or ESG investment policy. This type of transformation must be driven from the top down – that is, with strong board-level buy-in. Inevitably, this requires a level of upskilling for the board, but often also requires external input; and we have seen the emergence in Jersey of a number of ESG consultants with sector-specific expertise which can support boards in driving this type of change.
4.2 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?
See questions 3.3 and 4.1.
4.3 What mechanisms are typically utilised to monitor the implementation of ESG strategy in your jurisdiction?
A range of approaches may be taken depending on factors such as the sector, size and nature (eg, financing vehicle versus trading company) of the entity.
However, the emergence of standards on governance in relation to climate risk under the Taskforce for Climate-related Financial Disclosures recommendations, as well as sector-specific frameworks such as the Principles for Responsible Investment, are increasingly leading to the integration of ESG monitoring into wider good governance processes.
From an external perspective, the Jersey Financial Services Commission is anticipated to monitor compliance with the regulatory framework it has implemented (noted in question 1.1) periodically through supervisory visits that it conducts with regulated service providers and any funds that the service providers administer. Investors are also expected to consider and review disclosures provided to them in relation to offering documents prior to investment, as well as the nature of ongoing reporting and disclosure obligations.
Internally, see question 3.3 for details of how companies and other entities can monitor the implementation of their ESG strategy and its progress, as well as its effectiveness.
4.4 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?
See questions 3.3, 4.1 and 4.3.
4.5 How is executive compensation typically aligned with ESG strategy in your jurisdiction?
We are not aware at this time of a generalised trend for ESG targets, such as environmental metrics to directly impact (or form part of) executive compensation packages, outside of certain specific sectors.
Indirectly, however, many ESG-related considerations – particularly of a social and/or governance nature – do form part executive performance considerations, especially where intrinsic climate-related risks can materially impact on other commercial metrics. In the finance sector, these will include factors such as staff and client retention, and regulatory supervision outcomes.
4.6 What best practices should be considered in relation to the design and implementation of ESG strategy?
In the funds space, there is growing awareness among managers of alternative investment funds in particular of the need to align their strategies and operations with specific global climate commitments, particularly through the introduction of science-based targets (SBTs). SBTs seek to promote climate action through emissions reduction targets that are grounded in science, are validated and bring greater transparency and consistency to reporting.
Others in the finance sector have become signatories to the UN Global Compact, which seeks to align corporate strategy to the United Nations' 17 Sustainable Development Goals (SDGs). This is part of a broader trend within the financial services sector, with many institutions now reporting that their strategies are aligned with, or their corporate vision/goals take account of, the SDGs.
Another emerging feature in Jersey is the trend for businesses to become more values driven. Several financial services businesses are in the process of seeking certification as B corps, for instance, which requires a full pivot of their activities and strategy towards a sustainable model.
Within the wider economy, under the influence of locally developed standards such as the Jersey Good Business Charter and bodies such as the Institute of Directors, companies are increasingly seeking to embed ESG factors into their corporate objectives and strategy through specific measurable actions. This has led to the growth of specific initiatives, particularly in relation to improving social outcomes within the local community. Examples include:
- the adoption of diversity and inclusion commitments;
- gender pay gap reporting;
- the development of tools for measurement and reporting of social value; and
- more structured approaches to delivering employee wellbeing.
5.1 What is the general approach of lenders towards ESG in your jurisdiction? What internal and external information regarding a prospective borrower will they typically consider in this regard?
In general terms, commercial lending activities by banks in Jersey are typically aligned to group-level international standards such as the Equator Principles and the Principles for Responsible Banking (PRBs). Jersey banks with strong UK connections may also be in scope for UK policy measures such as mandatory transition planning.
Increasingly, the assessment of counterparty and reputational risk for borrowers includes considerations driven by ESG factors. COVID-19 also led to a renewed focus on greater social and community engagement in their lending activities, including support for ‘bounce-back' loan facilities and financial inclusion initiatives.
As regards specific sustainable finance products, ESG-linked lending is now gaining traction in Jersey. Lenders are increasingly seeking to deploy lending in a way which aligns with specific group-level sustainable finance targets, particularly in relation to institutions that are signatories to initiatives such as:
- the Net-Zero Banking Alliance (NZBA);
- the banking element of Glasgow Financial Alliance for Net Zero; and
- the Race to Zero.
Jersey's banks have been involved in a number of recent high-value, ESG-linked syndicated facilities to fund managers. These types of facilities may involve a penalty and reward mechanism to ensure that targets such as the Principles for Responsible Investment or the Sustainable Development Goals are upheld, increasing or decreasing the cost of the facility in line with goals such as:
- reducing carbon footprint;
- improving gender equality at board level; and
- demonstrating strong corporate governance.
In relation to private equity funds, the relevant key performance indicators (KPIs) will typically cover all ESG factors where the manager has a direct impact, both within its own organisation and its portfolio companies – thereby helping to integrate sustainability considerations into the investment process as well as encouraging portfolio companies to strive for long-term continuous improvement on sustainability matters.
These types of facilities are typically aligned with global standard documentation in terms of representations, warranties, KPIs and ongoing obligations. Such standards include the Sustainability Linked Loan Principles, published by the Loan Market Association, the Asia Pacific Loan Market Association and the Loans Syndication and Trading Association. They are particularly relevant to fund structures with an ESG objective that are marketed into the European Union under the EU Regulation on Sustainability‐Related Disclosures in the Financial Services Sector regime.
In the broader local corporate lending market, we are beginning to see the emergence of green lending products, typically linked to climate-related KPIs. Examples of such facilities include the recent financing of a multimillion-pound office development in Jersey to British Council for Offices Category A specification and BREEAM ‘Excellent' rating – standards that underpin the relevant green loan eligibility criteria applied by the lender. As companies across different industries move from commitments on net zero to execution, in line with the government of Jersey's Carbon Neutral Roadmap, lenders expect to see further demand for corporate borrowing for sustainable projects. Similarly, in the retail space, demand for lending linked to decarbonisation of the vehicle fleet and domestic heating is expected to require new green lending products.
5.2 Are bonds/loans that are marketed as green bonds/loans, social bonds/loans, sustainability bonds/loans or similar a feature of the markets in your jurisdiction?
As well as providing access to capital markets in major global financial centres, Jersey has strong ties to The International Stock Exchange (TISE), the regional Guernsey-headquartered stock exchange with an office in Jersey.
TISE originated in 1998 as the Channel Islands Stock Exchange and today is active in Guernsey, Jersey and the Isle of Man. Given its geographic proximity and local presence, and the fact that a significant share of the listed securities (around 10%) are issued by Jersey issuers, TISE is considered an integral part of Jersey's financial infrastructure. In 2021, TISE updated its ‘Green' segment and expanded this into a new TISE Sustainable segment. Admission to this segment requires that either the issuer's business or that of its wider group or use of the proceeds raised by the issuance of a security has been verified as having an environmental, social or sustainable purpose by an independent party against a recognised framework, as determined by TISE as listing authority. This segment therefore caters for the issuance of sustainable equity, debt and fund securities. At the end of Q1 2022, there was £12 billion worth of listings on TISE Sustainable supporting environmental, social and sustainable initiatives.
Jersey-based listing agents and law firms have supported in a number of high-value listings on TISE Sustainable in the past 12 months, including the UK vehicle leasing sector's largest green bond to date.
In terms of sovereign debt, the States of Jersey previously issued a social housing bond in 2014 and is expected to explore further opportunities for sustainability-linked debt issuance in order to fund upcoming infrastructure projects and the local transition to net zero.
5.3 What key developments have taken place in the structuring of these instruments in your jurisdiction?
Jersey has long played an important role for capital intermediation generally and in this role it is increasingly helping to support the deployment of capital into sustainable activities.
The launch of TISE Sustainable (see question 5.2) is helping to raise the profile of Jersey as a platform for the issuance of sustainability-linked securities – particularly in the debt space, where recent transactions supported by Jersey service providers have been aligned with global standards such as the Climate Bonds Initiative and the International Capital Market Association Green Bond Principles.
We have also seen examples of the use of Jersey vehicles for the issuance of equity by companies involved in clean energy. Examples range from a Jersey-incorporated listed investment company with a diversified portfolio of ground-based solar photovoltaic and battery storage assets and a market capitalisation of over £730 million to an AIM-listed sustainable lithium producer which recently carried out its initial public offering through a Jersey listing vehicle.
Recent updates to Jersey's prospectus regime are expected to make it even more attractive for use in capital markets transactions. In October 2021, changes to the definition of a ‘prospectus' in the Jersey Companies (Jersey) Law 1991, as amended, came into force, which introduce familiar UK and EU exemptions that exclude certain categories of debt and equity invitations from being a ‘prospectus' for Jersey law purposes. The result is that such invitations will no longer require approval from the Jersey registrar of companies and will not give rise to a public prospectus filing obligation for Takeover Code purposes.
5.4 What best practices should be considered in relation to ESG in the financing context?
Best practice for lenders in the ESG financing context is driven by the application of emerging global standards. Drawing on the Financial Centres for Sustainability (FC4S) framework criteria as a benchmark, these practices for lenders can be said to include:
- commitments to increase the volumes of sustainable credits and loans, with specific targets and pathways aligned to global initiatives (eg, frameworks such that established by the NZBA);
- commitments to end financing for firms engaging in coal extraction or coal-fired electricity generation (eg, applying the Global Coal Exit List) or other fossil-fuel extraction and development activities;
- the application of the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations;
- being a signatory to the PRBs;
- the application of the Sustainable Development Goals framework, with specific targets; and
- the application of a climate scenario analysis methodology on the corporate lending portfolio, with determination of volume of corporate lending aligned with a two-degree scenario.
A recent survey by Jersey Finance of the top 10 banks by total assets in Jersey for the purposes of the FC4S Assessment Programme indicated that most banks have adopted some of the above practices – with the most common being the Principles for Responsible Lending. More banks are also applying the TCFD recommendations. Climate scenario analysis and targets to reduce exposure to coal remain an area under development.
6 ESG activism
6.1 What role do institutional investors and other activist shareholders play in shaping ESG in your jurisdiction?
Jersey is host to a range of collective investment fund structures and holding vehicles which hold assets for institutional investors. Research conducted in 2017 estimated that around 16% of the funds under administration in Jersey's regulated fund sector came from pension funds, for instance. Applying this proportion to the current net asset value of regulated funds under administration in Jersey (£450 billion), this equates to around £72 billion – a figure which excludes assets held in private special purpose vehicles and similar structures for pension funds (estimated at £120 billion in 2017). This gives an idea of the relative scale of investment deployed through Jersey for institutional investors, including many of the world's largest pension fund asset managers and public superannuation funds.
These investors are coming under increased regulatory, policymaker and beneficiary pressure to improve their ESG credentials. Changes such as amendments to the Stewardship Code in the United Kingdom, as well as voluntary frameworks such as the Principles for Responsible Investment (PRIs) and initiatives such as Glasgow Financial Alliance for Net Zero, are driving a greater emphasis on active ownership and transparency/reporting on ESG factors. This in turn is driving significant changes in the services offered by Jersey's finance sector, with new opportunities arising to meet client requirements. For instance, fund administrators are increasingly offering sustainability compliance, reporting and data analytics solutions, while professional services firms are helping to embed ESG considerations through consultancy and assurance work. Service providers are also seeking to improve their corporate sustainability credentials as they come under scrutiny from clients that are part of the financial services value chain.
Fund managers in the alternatives sector are also coming under increased pressure from their institutional investors to embed ESG factors into their investment processes, including at the due diligence stage and on an ongoing basis – for example, engaging with underlying portfolio companies on sustainability matters in the private equity space.
This trend is, in turn, helping to refocus Jersey's strategic direction as a finance centre. Indeed, research conducted by Jersey Finance and IFI Global in 2021 showed that ESG considerations are also likely to play an increasing role in domiciliation choices: a survey of professionals within the asset management industry revealed that 69% of all interviewees believe that ESG considerations will play a growing, and perhaps even critical, role in their decision making in all areas – including eventually domiciliation. This points to the importance of strategies such as Jersey for Good, which seeks to accelerate Jersey's journey to leadership as a sustainable finance centre.
6.2 How do activist shareholders typically seek to exert influence on corporations in your jurisdiction in relation to ESG?
As noted in question 6.1, institutional investors increasingly factor climate risk and other ESG-linked factors into their own investment decisions. Therefore, sectors such as private equity (in which Jersey is specialised) must develop a greater level of sophistication and knowledge on ESG integration. This is already helping to shape significant change in corporations in Jersey – including the larger listed trust and company services providers and fund administrators that service those markets.
However, looking beyond the immediate client ESG requirements and the risks and opportunities associated therewith, there is also a significant amount of investment by private equity into Jersey's financial services businesses, which is helping to reshape the sector. Indeed, in recent years there has been a spate of high-profile M&A activity in Jersey, particularly in relation to trust and company service providers. Equally, a number of those businesses have gone on to list on major exchanges. This opening up of the capital structure of Jersey's service providers to external investors creates opportunities for influence in relation to ESG to be exerted, either directly by investors or through the increased touchpoints with ESG regulation in other jurisdictions.
Outside of Jersey's financial services sector, many large blue-chip corporates listed on the main market of the London Stock Exchange and other global exchanges use Jersey corporate structures. These large corporates are coming under pressure from activist investors on a range of issues such as supply chain and corporate governance.
6.3 Which areas of ESG are shareholders currently focused on?
Transparency and disclosure remains a key area for ESG activism, as demand for comparable standardised data continues to grow. This is particularly relevant in relation to climate impact – but Jersey is also seeing activism in relation to social factors such as diversity and inclusion, gender equality and pay.
6.4 Have there been any high-profile instances of ESG activism in recent years?
Given Jersey's role as a major platform for private equity funds to deploy capital globally, there have been a number of examples where Jersey-based managers and funds have played an important role in driving tangible ESG improvements in portfolio companies. In a recent example, an Indonesian personal care company was acquired by a Jersey-based private equity fund, which then applied an active ownership approach (aligned with the PRIs) to drive significant sustainability improvements within the investee company. This included the deployment of a sustainability roadmap aligned to the Sustainable Development Goals, carbon footprint reduction targets and the launch of an innovative diaper recycling scheme to reduce the wider environmental impact of the business.
Beyond the international finance sector, there have been some notable examples of shareholder activism involving Jersey companies. In one instance involving a Jersey-incorporated listed commodities and mining multinational, an activist hedge fund investor pushed for significant structural changes in order to spin off the coal business – thereby reducing the group's exposure to coal in order to improve ESG performance.
6.5 Is ESG activism increasing or decreasing in your jurisdiction? How and why?
Although it is difficult to quantify, anecdotal evidence collected by Jersey Finance suggests that ESG activism – particularly in the form of engagement and other forms of active ownership by private equity funds – is on the increase. This is being driven by a combination of:
- pressure from limited partners (particularly institutional investors – as to which see question 6.1);
- regulatory and policy interventions;
- increased uptake of voluntary standards; and
- shifting societal attitudes to ESG credentials as part of the finance sector's ‘licence to operate'.
This activism is also gradually driving change and progress in the financial services sector through supply chain analysis and demand for ESG reporting or status from service providers – currently most prevalent with the trust and corporate administration service providers that typically have long-term relationships with clients such as private equity managers.
7 Other stakeholders and rights holders
7.1 What role do stakeholders or rights holders (eg, employees, pensioners, creditors, customers, suppliers, and Indigenous communities) play in shaping ESG in your jurisdiction? What influence can they exert on a company?
In terms of other stakeholders not covered in question 6, there is growing evidence of indirect pressure on companies (and other entities and service providers) through means such as employee engagement/retention, investor engagement, supply chain and service provider assessment to attract and retain clients; as well as general community pressure through local business organisations which are forming related networks and communities to share and drive best practice, such as the Jersey Institute of Directors and Jersey Finance.
Jersey has a very active third sector, with a strong focus on key ESG issues that generate opportunities for collaboration with the private sector.
By way of a tangible example of such cross-fertilisation between these different sectors, the Durrell Wildlife Conservation Trust – a Jersey-based non-governmental organisation with a global track record of biodiversity preservation – recently launched its ReWild carbon offset programme. This nature-based scheme draws on Durrell's extensive rewilding programmes to generate carbon offsets that in turn meet demand from the private sector in Jersey for credible and science-driven means of achieving net zero. Durrell's approach is to work with local partners, with which it has longstanding relationships, and its projects are designed together with local communities to benefit sustainable livelihoods. Furthermore, ReWild carbon projects are packed with biodiversity and community co-benefits beyond just carbon. Initiatives such as ReWild help to consolidate partnerships and collaboration between the non-profit and private sector in Jersey, which can lead to the adoption of responsible business practices as well as helping to fund sustainable outcomes.
Jersey also has a long track record of overseas development, which draws on its agricultural and financial services heritage. Jersey Overseas Aid has a number of areas of focus – including conservation livelihoods, dairy for development and financial inclusion – which create opportunities for collaboration with the private sector, which Jersey Finance is keen to support.
In 2021, Jersey ran a successful Climate Assembly where ordinary citizens were invited to take part in shaping Jersey's pathway to net zero. As part of the recommendations put forward by the Climate Assembly, the government of Jersey was urged to ensure that public funds such as the public sector pension fund and the island's strategic reserves were invested in accordance with ESG investing principles. The government of Jersey already has a Responsible Investment Policy in respect of these funds and has committed to fully integrating ESG considerations into the investment process and to engaging with underlying portfolio companies. These policies and processes are expected to evolve in line with emerging best practices on ESG investment, transparency and governance.
8 Trends and predictions
8.1 How would you describe the current ESG landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
We expect the evolving ESG landscape in Jersey to be shaped by the following trends in the next 12 months:
- Climate action on the policy agenda: Influenced by global developments such as the outcomes of COP26 and the drive for net zero within the finance sector (eg, the $130 trillion committed by Glasgow Financial Alliance for Net Zero members to decarbonisation), as well as the acceleration of policy intervention in key markets for Jersey such as the United Kingdom, the European Union and the United States, we expect to see significant policy development in Jersey around the climate agenda. This is likely to include further consultation by the government of Jersey and the Jersey Financial Services Commission on the regulatory environment for sustainable finance.
- Greening fund finance: The growth of sustainability-linked lending, particularly in the funds space, is likely to continue apace despite ongoing hurdles around data. Jersey's new anti-greenwashing rules may further support this growth by creating a transparent framework for sustainable investments.
- Sustainable capital markets on the rise: With global sustainable bond deals having reached nearly $1 trillion in 2021, we expect to see a further year of strong growth for issuance on The International Stock Exchange Sustainable supported by the expertise of Jersey's service providers.
- ESG driving decisions for private capital: As investors push for greater ESG integration within the alternatives space, we anticipate that sustainability will be pushed further up the decision-making agenda for asset classes such as private equity. Jersey is likely to see more funds marketing into the European Union on the basis of sustainability‐related disclosures in the financial services sector, and fund managers will be looking to the emergence of similar fund labelling, disclosure and taxonomy rules in the United Kingdom.
- Global standards taking shape: With Taskforce for Climate-related Financial Disclosures emerging as a de facto baseline for climate disclosures, the work of the International Sustainability Standards Board ramping up and the European Union's new corporate sustainability disclosure rules on the horizon, Jersey is gearing up for sustainability reporting to become part of the standardised corporate reporting landscape.
9 Tips and traps
9.1 What are your top tips for effective ESG implementation in your jurisdiction and what potential sticking points would you highlight?
The current top tips for implementation and the main sticking points are as follows:
- Just start: Often the starting point or initial process will not be perfect, particularly where standards are evolving; but by setting some initial metrics and starting to collect reliable data, a frame of reference for improvement and refinement is established, as well as shifting the mindset of the organisation concerned to establish ESG as a priority and a decision-making factor.
- Pick the right standard(s): Context is important and in jurisdictions such as Jersey, you should choose a standard that is either mandatory or relevant to the business concerned, and that facilitates and matches the data that can be collected and reported on meaningfully. In Jersey, the focus is not on which standard or taxonomy is adopted, but rather on whether there is disclosure of all material information in relation to the sustainable investment strategy and objectives chosen.
- Authenticity: It is not enough just to market ESG products or virtue signal. Where an organisation adopts a standard, this should be a prism through which wider business decisions are made; and this requires investment in skills and staff to enable that business to ‘walk the walk' in relation to its approach, including reporting to others.
The information above is a general overview of this topic. It is not legal advice and you may not rely on it. If you would like legal advice on this topic in relation to your individual circumstances, please get in touch with your Collas Crill contact. Jersey Finance's contribution is limited to matters of generally observed market practice and our understanding of policy in Jersey.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.