Environmental, social and governance (ESG) investing is a topic that is increasingly capturing the attention of investors. With seemingly no let-up in demand for assets with sound ESG principles, Jersey as a leading jurisdiction for alternative funds must consider how it best positions itself in this changing landscape.
Of all global investment centres, Jersey could be strategically well poised to capitalise on this growing trend, especially given its strong credentials around governance.
ESG considerations to shape investment patterns
We can expect ESG to bring about a significant transformation in global investment patterns with two primary drivers:
- Cultural shift in attitude – Driven by Millennials and Generation Z, there will a seismic shift in investment attitudes to the point that sound ESG policies will be a prerequisite to investing
- Tangible returns – The penny is dropping with many managers, who now recognise that a sound ESG proposition will not only be crucial in attracting investors, but it will also help deliver returns, be that during the life of the fund or at exit.
As a fund administrator, IQ-EQ sees first-hand the positive impact a robust ESG strategy has on our clients throughout the lifecycle their funds. This includes:
- GPs who are able to clearly articulate their ESG proposition, exceeding fund raising expectations
- Funds being able use their ESG credentials to build their portfolios more effectively by differentiating themselves from their peers in markets where a lack of supply makes bidding for assets extremely competitive
- The ability to optimise return from portfolio assets. For example, some of our real estate funds have been able to exceed their occupancy targets where others have failed, by attracting tenants with demanding minimum ESG requirements.
Jersey set to embrace ESG-related opportunities…
Through its strategic plan, the Jersey Government has truly embraced ESG in its commitment to deliver positive sustainable economic, social and environmental outcomes for Jersey.
This has been complemented by many businesses in Jersey working closely with industry bodies such as Jersey Finance and the Jersey Funds Association to drive the strategic direction of Jersey in terms of its positioning around ESG.
It is recognised that as a finance industry Jersey must play to its strengths. For example:
Embracing the ‘S’ (Social) in ESG by emphasising our positioning as a jurisdiction that is committed to avoiding harmful tax practices. Other jurisdictions that rely on more aggressive tax structuring arrangements will be hard pushed to label themselves as leaders in ESG. The reality is that Jersey is an uncontroversial tax neutral funds jurisdiction and does not rely on multiple double tax treaties or structuring arrangements such as hybrids, which are subject to BEPS legislation.
In relation to the ‘G’ (Governance), Jersey is a leading force among offshore jurisdictions. Indeed, OECD and Moneyval reviews would suggest that we are in the premier league. The role Jersey could play in the promotion of governance should not be understated. It is fair to say that there is some investor scepticism around how strong the ESG proposition of some funds is, with this lack of trust arising principally as a result of some creative interpretations of principles and best practice. Jersey’s established track record of scrutiny and corporate governance lends itself extremely well to applying rigour around the review and reporting of ESG-focused investments.
The experienced community of Jersey’s independent advisors, administrators, auditors and non-executive directors working together with fund managers to ensure robust and accurate reporting in terms of ESG will be extremely attractive to wary investors.
…but the jurisdiction must be aware of ESG-related threats
It would not be overstating the matter to say that one of the biggest risks for a jurisdiction like Jersey in relation to ESG is the reputational risk of getting things wrong, albeit inadvertently. Jersey will want to avoid a situation of being judged in the court of public opinion if one of its so-called ESG-focused funds turned out to be a prime example of “greenwashing”.
While there are no shortage of standard setters in the ESG space who broadly want the same thing, to date there has been little effective collaboration between them.
This exacerbates a complex situation caused by the subjectivity of what ESG truly means, and the application of some principles but not others can create risk. At best, ESG scoring can be somewhat subjective and at worst deliberately skewed to get the result you want.
Again, all of this comes back to robust governance and reporting, which is why it can be argued that governance is the most important element in the trio that constitutes ESG and why Jersey might be part of the solution.
Forging towards the future with a feeling of ‘cautious optimism’
In the ultimate analysis, we must not forget that although the principles around ESG are not new, the framework around it is in its infancy. This can certainly bring risk in its wake – particularly when there is no common regulatory framework.
However, Jersey is supremely well placed to help fund managers demonstrate robust governance and reporting to satisfy these increasingly sophisticated demands, given that substance is the cornerstone of the island economy as a globally reputed investment centre.
On a concluding note, it is clear that ESG is here to stay and with it comes opportunity for Jersey, which must harness its strengths and apply these to the ESG opportunity to which many interested observers are as excited as they are cautious.