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Economy & Business

Will backing our ‘Green Finance’ mantra work?

Everyone agrees Green is Good – but joining the bandwagon is only a start

Green finance graphic

In the entrails of Guernsey’s recent budget for 2020, one novelty stands out: the wholehearted support for an amendment to spend more money than the budget’s architects intended.  The proposal was for the Guernsey Finance promotional agency to be handed a one-off £300,000 to promote its much-vaunted “Green Finance” objective.

It succeeded in part because one of the two deputies behind it, Lyndon Trott, is a leading figure on the committee which compiles the budget.  He also happens to be the enthusiastic chairman of Guernsey Finance.  So convinced of the plan was he that he urged the assembly to give it unanimous support.  In the vote later, no other deputy opposed the proposal and one abstained.

Some deputies reportedly checked before they voted that the money was needed and would be put to proper use.  For the island’s finance sector, and particularly its current linchpin the funds industry, this manna from heaven is all too welcome.

Industry participants think the current funding for the agency, now put at £2m a year, is nothing like enough.  A sizeable proportion of this comes from the government, the rest from the industry, but it is a fraction of the spending by Guernsey’s island competitor Jersey Finance – which, to add insult to injury, is wholly funded by its government.

More importantly, they think Green Finance presents a serious opportunity to spur growth in Guernsey’s fund and insurance sectors – perhaps the best since the invention of the Protected Cell Company back in the 1990s.  Other idea, like the International Cell Company and Insurance Linked Securities, have had less impact.

The deputies’ spending decision was not an isolated development.  A few weeks earlier the local Institute of Directors had dedicated the whole of its annual convention, with some 600 guests, to climate change and what Guernsey could do about it.  This in turn marked the culmination of year-long efforts by a triumvirate of Guernsey Finance, the Guernsey Financial Services Commission (the sector regulator) and the States to win support for a Green Finance policy.

Indeed, the promotion has been so relentless that it has left many people bemused, wondering how tiny Guernsey, with its minuscule economic, political and diplomatic clout, can really do something about the complex global challenge posed by climate change.

The answer from Guernsey Finance and the GFSC is Yes, but a qualified one.  To understand this, it is necessary to take a couple of steps back.

Start with the fact that international companies are under increasing pressure to adapt their profit-seeking impulses and start pursuing financial advantage not just for their shareholders and executives but also for a wider range of “stakeholders,” notably employees and communities.

Related to this, note that company strategies are increasingly being monitored in respect of their attitudes towards environmental, social and governance (“ESG”) considerations.  These stretch widely, embracing the highly-interpretable notion of corporate sustainability and including matters of gender diversity, discrimination, inequality and bribery as well as air and water pollution, deforestation and soil degradation and fossil fuel use.

Now insert the bandwagon effect of intense public interest in climate change and what to do about it.  For most people, it means at a minimum sustainable energy use – generating power with near-zero depletion of existing resources, minimising carbon dioxide and similar emissions, and using carbon “offsets” like forest planting to counter these unaccounted-for “externalities”.

The principal target is obviously fossil fuel use (oil and coal), but this is already a tough ask given that most steelmaking requires coal and most plastics manufacture requires oil.  Come to that, most non-fossil fuel energy generation (nuclear, wind, solar) requires steel.  Our best hopes are in tidal energy and nuclear fusion, and neither of these are near being realised.

In any event, it is at this point that the word “Green” becomes ubiquitous and the logic of “Green Finance” takes shape.  First, our pre-occupation with climate change means a veritable “wall of money” ($31 trillion on one estimate) is going to be invested to combat the problems posed.  Second, such mega-scale investment will be channelled in considerable part through financial instruments of different sorts – equity, debt, derivatives, insurance products and investment funds –at the behest of sovereign wealth funds, institutional investors, pension funds, family offices and wealth managers.

There’s plenty of latent scepticism still to be overcome, but Guernsey’s specific proposition, launched in 2018, is to target sponsors who launch funds of different sorts – bond funds, private equity funds, energy funds – which are used to channel investment into climate-related actions.  This is because Guernsey has a whole eco-system to support them in an infrastructure of experienced administrators, accountants, lawyers and directors.  Moreover many of its enterprises are now trans-national, with resources to tap in Guernsey and elsewhere.

With any luck, Guernsey may also be able to claim some more lucrative investment management fees if the new “European economic substance” rules now in force mean that such funds must show the capacity and means to make those more important investment decisions.  True or not, the main feeling is that, with so much investment coming down the track, there will be plenty of crumbs at the table.

Importantly, Guernsey’s attractiveness is heightened by its clever stratagem of creating an independently-run “kitemark,” where a fund which complies with the mark’s specified criteria can advertise this to its prospective investors.  To this end the GFSC offers a “Guernsey Green Fund” designation for funds verified or certified by an independent third party.  Likewise the local stock exchange now has a Green section of its listings where such funds can be found and, potentially, traded.

So far five such funds have been approved and set up in Guernsey with assets of some £2bn, and a green debt fund has listed on the exchange.  Guernsey is also the first island finance centre to become a member of the UN Environment Programme’s network of Financial Centres for Sustainability (FC4S).

All this makes the decision to give £300,000 to Guernsey Finance more understandable.  Those pushing for it talk ambitiously of making Guernsey a “genuine leader in sustainable finance” and maximising the “global promotional potential” in green finance.  Note too, Guernsey Finance, which brands itself rather oddly as “We are Guernsey”, is squarely in the promotion business – take a look at its torrent of press releases and publications, not least on green matters.

The money will therefore be for marketing, which is essential if the strategy is to get anywhere, but it also means flights, hotels, conferences, seminars and materials, plus more press releases.  Rightly, Deputy Chris Green, with his “scrutiny” hat on, has suggested a public hearing to highlight how much “bang for the buck” the funding achieves.  The proof will be in the revenues new Green funds bring to the island, directly or indirectly.  If it comes with new management companies, that will be “new, new” money for the funds sector.

One discordant footnote to the whole matter is that, on the same day the £300,000 funding was approved, another budget amendment sought to protect the island’s remaining natural environment and in particular to promote the development of brownfield sites over greenfield sites through a development levy or tax.

Deputy Gavin St Pier, Guernsey’s top politician – who told the IOD convention Guernsey needed to “walk the walk as well as talk the talk” on climate change – called the proposal poor and dismissed it as hastily drawn up. The amendment was lost 19-16, with three abstentions.

A second footnote should also be noted.  Any really good idea worth its salt is likely to be copied and, contrary to some of the cheerleading, Guernsey’s first mover advantage in this area is mostly as an island financial centre.  Luxembourg set up its green exchange in 2016.  And Dublin has become the European base for the FC4S network.  But Guernsey’s green offering aims to be more coordinated, embracing industry, regulator and government.  If it can outpace the competition, Guernsey Finance will almost certainly be looking for more promotional money for 2021.  May they spend it wisely in the meantime.


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