Addressing climate change and global warming and attempting to meet the requirements of the 17 United Nations Sustainable Development Goals has now become a global challenge.
Part of that challenge is finding the money to address these issues. In response, the development of green finance is creating a growing international market of sustainable investments, enabling investors to combine financial return with environmental benefit.
The market is growing, but it is recognized that it needs to accelerate to meet global targets. The numbers required to meet the UN Sustainable Development Goals, adopted by world leaders in 2015, are huge, with an estimated $2.5 trillion annual funding gap.
With much of that money likely to be required from private investors, creating standardized financial tools to encourage this investment is seen as key. The potential is enormous, as currently only a small fraction of global funding is connected with the “green” sector – mostly in the form of bonds.
Against this background, earlier this summer the Guernsey regulator launched the Guernsey Green Fund, in what is being seen as a significant move aimed at going some way to resolving the funding issue, and moving the island along the way to becoming the “go to” global finance center for green finance.
Over the past few months key figures in the development of the island’s financial services sector have been working with the Guernsey Financial Services Commission on progressing the product and have also been looking to develop the relationship with the UK’s green finance sector.
The Green Fund Rules offer a framework upon which international green investments can be encouraged and facilitated in the island, effectively creating a kitemark for green funds. It is intended that this will go some way toward addressing the issue of investor confidence in the authenticity of green funds, which, it is believed, is currently holding back investment in that space. Retail investors are said to be looking for the comfort of labels and standards.
Under the new rules, which have been welcomed positively by the Guernsey funds industry, three-quarters of a green fund’s assets by value must meet specified green criteria invested in certain defined areas. The rules use standards developed by international financial institutions with the appropriate scientific background to ensure 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 several cleantech funds established.
Action in the field of green builds on Guernsey’s strengths and expertise in private equity and infrastructure, supports other initiatives in areas such as impact investing, and is linked to a general repositioning of the island’s financial services offer toward a greater focus on more ethical investment, and altruistically-motivated investing for private clients and institutional investors.
Guernsey as an island is also seeking to play its part in developing its environmental credentials and green-friendly policies, with increasing focus and investment in solar energy, electric vehicles and reducing carbon footprint in energy use.
The Green Fund 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 told the pro-sustainability podcast Planet Pod. “We are seeing regulators begin to pay attention and I hope that’s picked up.”
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 for 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.
I am confident that the green fund 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’s reputation in this area, and the breadth of our funds expertise, positions us perfectly for this emerging sector.
Guernsey’s market developments
A route to avoid Brexit uncertainty
Guernsey has positioned itself as a way for private equity fund managers to avoid uncertainty brought about by Brexit. It has this year promoted its global distribution capabilities to reach institutional investors in more than 50 jurisdictions, across five continents, representing more than 80 percent of the world economy.
NPPR works for Guernsey
NPPR has provided a proven, smarter and faster route to access European investors, Guernsey has said, after the process to secure a European passport was derailed by Brexit. The island has seen a number of significant and well-supported alternative investment fund launches in the past couple of years, and leading funds lawyers in the island say that the EU AIFM Directive has not held Guernsey managers back.
Private Investment Fund
The Private Investment Fund was launched in Guernsey in 2016, as a category of fund where management have a closer-than-typical relationship with investors. A PIF, which can be closed- or open-ended, has no more than 50 investors, but, unlike competitor products, no limit has been prescribed to how many it may be marketed to. The take up of the new product is growing, with 2018 to the end of August outstripping the total year figures for 2017.
Guernsey by numbers
Guernsey funds under management and administration are now at a five-year high of £276.2 billion ($357.7 billion; €308.9 billion). The value of private equity business structured in Guernsey topped £100 billion at the end of 2016 and now has a net asset value of £112 billion as at June 2018.
This article was sponsored by Guernsey Finance and first appeared in the October issue of pfm.