Will Guernsey's Regulated ESG Funds End Greenwashing?

Written by Kees Jager, Intertrust

Launching a regulated ESG fund in Guernsey can benefit family offices and asset managers as funds come under increased pressure from their investor base. Intertrust Guernsey Director of Fund Services Kees Jager explains more...

Green finance is on the rise. Sustainability-focused funds captured a record $51.1bn of net new money from investors in 2020, more than double the previous year, according to Morningstar.

But all is not well in the environmental, social and governance (ESG) space. A Securities and Exchange Commission (SEC) ESG taskforce claims some funds and corporates are showing signs of misconduct.

This is often linked to the scarcity of data provided by portfolio companies - and highlights the need for them to work with asset managers on a consistent, pragmatic but ambitious approach to ESG.

Jessica McDougall, a Director for Investment Stewardship at BlackRock, told a governance summit that patience was running thin with companies slow to disclose ESG data.

Using sophisticated data analysis, the SEC is now looking for gaps or misstatements in issuers' disclosure of climate risks under existing rules. Next it will analyse disclosure and compliance issues relating to investment advisers' and funds' green finance strategies.

So should ESG-focused policies and fund remits be subject to regulation in the first place?

Accreditation: how Guernsey-based funds can avoid greenwashing

The Guernsey Green Fund Initiative's clear parameters could be the closest guarantee for fund sponsors and limited partners (LPs) structuring a legitimate green fund. They are largely aligned to the EU's SFDR which sets out ESG classification criteria.

For example, 75% of assets by value in a Guernsey green fund must meet green finance criteria. And the remainder must not counteract this - investors can expect a green fund to do what it says on the tin.

However, the Guernsey Financial Services Commission (GFSC) allows any class of Guernsey fund to be designated as a Guernsey Green Fund as long as it meets the eligibility criteria.

Clients of services providers in Guernsey can be awarded green fund accreditation via the GFSC, reassuring LPs that they are investing in genuinely sustainable companies or projects, with third-party ESG governance.

Guernsey corporate governance has a green future

Companies that currently manage assets or funds in Guernsey should already be preparing for changes to the island's Finance Sector Code of Corporate Governance.

These will necessitate that all fund managers and boards consider the climate and social impact of their strategies and risk profiles and make disclosures where appropriate. Fund portfolio managers may see this as an onerous task.

We are working with clients now to write up ESG business risk assessments - core board competencies and frameworks to ensure their policies are aligned with regulations and any green-minded LPs they target or co-invest with.

The challenges of green finance

The question is not whether more promoters will look to engage in green finance, but if they will be confident enough to label their fund 'green'. Mandatory global reporting on ESG is coming, but nobody yet knows how it will look.

Investors, even infrastructure funds with commitments to zero-carbon technologies, will find it challenging to back green funds when they don't know how regulators will measure ESG investments or policies.

Yet the same institutional investors backing infrastructure funds are demanding more ESG exposure.

However, unlike their family office counterparts, managers cannot waive returns for social impact. They must manage a diverse investor base, often with differing expectations. It is still unclear whether ESG-focused portfolio companies or funds outperform others solely because they are green.

How many green funds have launched in Guernsey?

At the time of writing there are 14 regulated green funds in Guernsey, and momentum has been growing since the initiative went live in July 2018. With the governance code on ESG disclosure changing in October, there is potential for more to emerge.

Guernsey Green Funds held a total net asset value of Ł3.9bn at the end of the second quarter of 2021, according to the GFSC. Although there is limited public information available, some well-known investors are making moves in this space.

Guernsey's ESG appeal for US fund managers

With the Biden administration increasing pressure on US corporates to achieve net-zero, companies and managers will seek innovative fund structures, politically stable jurisdictions and nimble regulators for their green products.

It is widely anticipated that investment demand for regulated ESG funds will outweigh supply. Investors increasingly recognise that risk associated with zero carbon and other sustainable investments is now easier to mitigate. Building regulated green guarantees into any fund or product can only increase its attractiveness.

Additional info

Guernsey is a member of the UN Finance Centre for Sustainability, the Network for Greening the Financial System and the UN's Sustainable Insurance Forum.

Guernsey's regulated approach ensures that clients' portfolios help mitigate environmental damage and climate change, a significant step that helps clients navigate an increasingly complex area.

Guernsey is an increasingly popular location for fund managers, with more than 1,000 currently domiciled there.

This article first appeared on Intertrust's website, 11 October 2021.

For more information about Guernsey's finance industry please visit www.weareguernsey.com.

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.

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