The Bahamas: A Complete And Compelling Choice August 2023

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BAHAMAS FINANCIAL SERVICES BOARD

Bahamas Financial Services Board

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P.O. Box N-1764

Nassau, The Bahamas

Telephone: (242) 393-7001

www.bfsb-bahamas.com

The Bahamas - A Land Of Innovators

The Heilmeier Catechism, the revolutionary checklist that DARPA, the American Government agency that spawned the Internet (originally called Arpanet), has been using throughout its successful career of innovation, poses several questions that forces one to rethink their objectives to take transformative action and how they hope to achieve them.

What are you trying to do? Articulate your objectives using absolutely no jargon. What is new in your approach and why do you think it will be successful? What are the consequences of doing nothing? How much will it cost? How long will it take? Who needs to be involved to ensure success? Bahamian financial services innovators are employing this same approach and causing disruptive change in many areas of what is a mature and significant pillar of the nation’s economy.

Indeed, the theme of innovation is the dominant one in this report. The rewards of being ‘first to market’ are huge, but they come at a cost – the cost of constant experimentation, failure, recalibration and a humble acceptance of uncertainty throughout the process. This is a cost that many successful Bahamian financial firms gladly pay to maintain their status as trailblazers – and they are right to do so.

Top executives at Bahamian wealth-management firms know that when change efforts experience some resistance, it is a sign that innovation is happening and in such instances, innovators are not afraid of offering their concepts up for scrutiny. More often than not, the experience of a challenge or setback ushers in the next brainwave, or prompts the evolution of an existing concept, leading eventually to success. Some Bahamian firms take inspiration from Amazon’s ‘working backwards’ method, which starts by imagining the first day of a new wealth offering and only then works out the steps that might lead up to it. It is in crucibles such as these that sparks fly, and winning strategies are forged. It is against this backdrop that service providers focus on meeting bespoke client needs. There is no one-size-fits-all approach.

The Bahamas – ever-keen to dominate new trends in financial services – is also promoting a green agenda through financial initiatives designed to reduce greenhouse-gas emissions and pave the way for a low-carbon economy, through blue-carbon initiatives that finance ecosystems that sequester carbon dioxide from the atmosphere, and through carbon trading. The government is, additionally, developing a regime for sovereign carbon credits and the registration of carbon exchanges and related businesses. Last November at COP27, the global climate conference, the Bahamian Prime Minister told world leaders: “Let’s Get Real”.

Meanwhile, the islands’ investment industry is paying more and more attention to Environmental, Social, and Governance-related (ESG) matters, although its regulators have not yet made ESG reporting a top priority.

The Pillars Of Innovation

*By Paul Winder, the Global Head of Wealth Planning at Deltec Bank & Trust Limited

The word “innovation” often calls to mind the technical and the complex. We think of new industrial or biomedical revolutions, perhaps involving re-useable rockets or antibiotics, or ground-breaking consumer products such as smartphones.

owever, more often than not, innovation simply comes in the form of a new process or mode of thought – a more efficient way of doing something, an approach for streamlining business practices or a tool to achieve a goal.

Hexaminers were going to judge their work afterwards, but told another group that they were not. The former group was far less creative than the latter.

This feels counter-intuitive but it is in fact logical at its core. Those who anticipate negative feedback – such as bad marks from an examiner – often do not explore the full depths of their creativity and do not innovate. Instead, they try to impress others and feel no passion or concern for the project in hand beyond any immediate, external reward that they might obtain.

For these reasons, people who spot the white space, the problems to be fixed, the new frontiers to explore and the opportunities to be had are few and far between. This group of rare individuals is in high demand.

Innovation stems from the world around us. Many global citizens innovate by drawing upon their lived experiences, surroundings and networks. At its core, innovation can be broken down into five foundational elements: passion, leadership, collaboration, mobility and humility. We shall explore each element in turn to uncover its role in driving innovation and to explore its implications for business, today and in the future.

PILLAR 1: PASSION

Throughout the centuries, the primary cause of innovation has been passion. Also referred to as ‘intrinsic motivation’, this comes into play during those rare times when people work for enjoyment’s sake.

Passion causes satisfaction and joy, and is responsible for those timeless works of art or engineering masterpieces.

It is people who feel compelled to follow their passions and who do so persistently – rather than the most talented people – who go on to have bold, innovative thoughts. Their motivation is intrinsic; their drive comes from within.

Others slack off because their motivation is extrinsic; in other words it comes from the hope of external rewards bestowed on them by others, such as money or approbation from a judging panel.

Psychologist Teresa Amabile discovered this when she set her students some tasks. She told one group of students that some

PILLAR 2: LEADERSHIP

Good leadership inspires and nurtures innovation, helps businesses to grow and rewards strategic and creative thinking. Good leadership not only produces a robust culture but also cultivates the leaders of tomorrow. It is imperative for a good leader to encourage his colleagues to have innovative ideas.

Good ideas come from a Petri dish that contains many other ideas –some incomplete and some already realised. Incomplete ideas tend to contain grains of brilliance but little else.

A good leader does his best to create a culture in which everyone at his firm has a chance to innovate by dreaming up new processes or products that help the firm. It is a bad idea for the leader to quash ideas that do not appear outstanding at first glance while worrying excessively about returns on investment.

A good culture allows people to try out ideas and fail without fearing reprisals from their leaders. More often than not, the experience of a

“It is a bad idea for a leader to quash ideas that do not appear outstanding at first glance.”

“In an innovative company, leading executives support the ideas that best answer the needs of clients.”

failure ushers in the next idea, or prompts the evolution of an existing concept, leading eventually to success. The corporate culture must allow such a process to take place.

Some have hailed Amazon as a model to follow. It uses the ‘PR/FAQ’ format, by which it invites any employee to write a mock-up of a press release (PR) that it might publish in the future to describe a new product or service on its launch day. This explains the vision behind the product and the ways in which it might benefit the customer. It also invites the employee to concoct a series of questions (described as frequently asked questions or FAQs) that some imaginary prospective customers might want to ask Amazon about the offering, written as though Amazon intends to publish them at the same time as the press release.

Others at Amazon then evaluate these ideas and circulate them amongst other innovators. This collective process is known as the ‘working backwards’ method because it starts by imagining the first day of a new offering and only then works out the steps that might lead up to it. It involves many people and distributes rewards and recognition to all of them, but always takes care to honour the person who first had the idea.

PILLAR 3: COLLABORATION

The next step in the innovation ecosystem is collaboration, the act of coming together, connecting and ideating on a joint project. In an innovative company, leading executives support the ideas that best answer the needs of clients, both now and in the future. They avoid stifling or constraining thinking because they know that their role is to create an inspirational environment that nurtures innovative thought.

The United States’ Defence Advanced Research Projects Agency follows the so-called ‘Heilmeier Catechism’ by which its staff evaluate ideas that they want to propose. This is a set of questions that a team asks itself about an upcoming project. It allows it to assess risks and define its targets, its immediate and long-term needs, and the costs and overall benefits of the project.

PILLAR 4: MOBILITY

Companies in all industries oscillate between ideation, the refinement of ideas and the implementation of ideas. When new ideas and potential new revenue streams become essential to operations, companies are in the ideation phase. When ideas surface, whether organically or through strategic acquisitions, the companies must refine them. Finally, they must implement the ideas.

By focusing on clients first, firms receive ideas that create cost-effective growth. WL Gore, the multibillion materials science company, asks its people explicitly about customers’ needs when proposing new products. Various stakeholders then chime in and judge the merits of the ideas. The firm has a flat, lattice-like organisational structure where there are no chains of command nor any fixed channels of communication. Helped by spontaneous discussion and collaboration, successful ventures circulate across all the company’s departments.

This third step towards innovation defines the client-centric structure and, in doing so, requires discipline. Discipline fans the flame of creativity and brings diverse teams together to celebrate their collective enterprise within a culture that explicitly rewards the group while honouring the initial inventor. Effective government agencies or billion-dollar companies follow this model.

The overall need and life-cycle of the firm in question dictates the relative importance of each. A heavily saturated market desperately in need of new technology or innovation for further growth prompts ideation. Phones before Apple’s iPhone were an example of an existing technology in need of a refresher.

‘Refinement’ refers to the improvement of an existing idea, product, or both. Similar to the continuous improvements of Apple’s products today, it is a process that looks for areas in which to improve things to increase brand power and customer loyalty.

‘Implementation’ refers not only to the doing, but also to the timing. Effective implementation calls for militaristic thinking. The task here remains to identify the best team members to bring the idea to fruition, and then to scale.

This fourth step in the process of innovation involves knowing your team and treating them as individuals with unique passions that probably extend beyond their contractual objectives. You will find that some are highly adept at generating ideas, others at viewing ideas from different angles and others at seeing them come to life.

PILLAR 5: HUMILITY

Corporate hierarchies often operate in a rigid, top-down fashion; innovation demands almost the complete opposite of this. Therefore, it also demands humility.

Top executives at a firm should serve to create a structure and an environment that encourages their employees to generate, refine, and implement ideas. This is the other side of the coin to the generally accepted practice of promoting stock ownership amongst employees and giving them a reason to care about the firm.

World-leading companies have shown us that the generation of revolutionary ideas – the ideas that make the other attempts worthwhile – requires constructive feedback from all departments. In addition, it requires a global corporate culture that positively encourages the occasional failure instead of trying to avoid it. It is the sincere trying that matters, in addition to – or perhaps much more than – the result.

WL Gore and BMC Software stand out here. They encourage employees to fail, which ironically marks them out as inspiring leaders in the field of innovation. When ideas fail, it is a sign that innovation is happening and that employees do not feel afraid to submit their concepts. It is within crucibles such as these that sparks fly and great suggestions come to life.

“By focusing on clients first, firms receive ideas that create cost-effective growth.”

“Intrinsic motivation comes into play during those rare times when people work for enjoyment’s sake.”

TURNING IDEAS INTO ACTION

Today, innovative ideas are needed more than ever as the world faces unprecedented social and environmental challenges. However, these ideas need to be transformed into concrete action, which requires a leap of faith. The Googles, Amazons and Microsofts of this world could not exist without the commitment, faith and continued passion of their entrepreneurial leaders.

to the global innovation ecosystem is built on a belief that embracing calculated risks and investing in bold thinkers forges a better tomorrow.

With tailored financial services that support highly demanding, rapidly scaling and innovative entrepreneurs through global experience and sound risk management, Deltec Bank is dedicated to accelerating the growth of innovation.

* Paul Winder can be reached at info@deltecbank.com or on +1 242 302 4100

For more than 75 years, Deltec Bank & Trust Limited has been a champion of innovators, entrepreneurs and nomads. Our commitment

“The collective process always takes care to honour the person who first had the idea.”

The Bahamas Gets Real About Climate Finance

* By Aliya Allen, a Partner at the law firm of Graham Thompson

The Bahamas is a low-lying archipelagic nation situated in Hurricane Alley, the area of warm water in the Atlantic Ocean that stretches from the west coast of north Africa to the Caribbean and the eastern seaboard of the United States.

urricanes in this zone are increasing in force as the years pass and Bahamians of all ages are becoming climate refugees and leaving the country. Last November, the Bahamian Prime Minister spoke at the 27th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP27) and made a simple request of world leaders: “Let’s Get Real”. In this article, we explore how the Bahamas is promoting a green agenda through green initiatives, blue-carbon initiatives and carbon trading.

CLIMATE FINANCE

The term ‘climate finance’ refers to the financing needed to tackle climate change and to support a country’s transition to a low-carbon and climate-resilient economy. Climate change is now a pressing problem that affects economies, societies and ecosystems worldwide. Banks, capital markets, fintech firms, insurance carriers and investment firms will have to provide green and sustainable financial services on a greater scale in future.

HThe National Investment Funds Act 2023, which provides the legal architecture for the creation of one or more National Investment Funds (NIFs) owned by the Government of The Bahamas, provides that a NIF may be established for a project related to the blue, green or orange economy.

The Bahamas has also been participating in blue-carbon initiatives. The term ‘blue carbon’ refers to the carbon stored in coastal and marine ecosystems such as mangroves, seagrasses and salt marshes. These ecosystems sequester carbon dioxide from the atmosphere and store it in their biomass and sediments. The protection and restoration of these ecosystems can therefore help to mitigate climate change. An article published in the National Geographic notes that The Bahamas is home to 25,000 square miles of lush seagrass meadows that lie on the floor of the ocean and host an abundance of sea life. According to the World Wildlife Federation, seagrass captures carbon up to 35 times faster than tropical rainforests and absorbs 10% of the ocean’s carbon annually.

The United Nations has recognized the importance of blue carbon as a way of addressing climate change, stating that “Protecting and restoring coastal and marine ecosystems can provide significant climate benefits, including through the sequestration and storage of carbon.”

Financial centres, where the demand for and supply of finance come together, must play an active role in green and sustainable finance. The Bahamas, with its strong financial centre, has recognized the importance of green and sustainable finance and has been participating actively in climate-finance initiatives.

GREEN AND BLUE ECONOMIES

Green initiatives are activities that reduce greenhouse gas emissions and pave the way for a low-carbon economy. The Bahamas has been working to promote these initiatives in various sectors such as renewable energy, energy efficiency and sustainable transportation.

The Bahamas is also participating in climate finance by developing a framework for both sovereign carbon credits and the registration of carbon exchanges and other carbon businesses. The term ‘carbon trading’ refers to the buying and selling of carbon credits, which represent reductions in greenhouse-gas emissions. Carbon trading can provide a financial incentive for countries and companies to reduce their greenhouse-gas emissions and to invest in low-carbon technologies. The United Nations has recognized the importance of carbon trading in the fight against climate change, stating that “Carbon-pricing mechanisms, such as carbon taxes and emissions-trading schemes, can provide a powerful incentive for emissions reductions and can help to mobilize climate finance.”

LAWS TO HELP CLIMATE FINANCE

The Climate Change and Carbon Market Initiatives Act 2022 (CMIA) facilitates the Bahamas’ national carbon-credit programme. The Bahamas’ unique topography consists of thousands of miles of mangroves which are more efficient at capturing carbon than just

“The Bahamas is promoting green initiatives, blue carbon initiatives and carbon trading”

about any other environment. The Prime Minister believes that The Bahamas possesses carbon credits that are worth roughly $300 million which the Government can sell on carbon markets in aid of global sovereign and commercial carbon-offsetting initiatives. The CMIA facilitates the mapping, verification and eventual sale of such carbon credits, noting that they are sovereign assets which accrue to the Government of The Bahamas.

“The Bahamas is home to 25,000 square miles of lush seagrass meadows”

The Carbon Credit Trading Act 2022 (CCTA) provides for the registration of carbon-trading businesses in The Bahamas. These include carbon-trading exchanges, carbon registries and “carbon-credit verification bodies.” Such exchanges may facilitate the trading of “carbon-trading products” – a term which, in the words of the Act, covers (a) tradeable carbon credits, (b) carbon-linked digital assets, (c) carbon securities and (d) carbon derivatives.

Any entity that wants to be registered as a carbon-trading registry must verify such products in accordance with the carbon-trading principles set forth in the CMIA, which references the Paris Agreement, the international climate-change treaty. Verification must also be done in line with the standards of the International Accreditation Forum, or other accredited bodies of which the Securities Commission of The Bahamas approves. The CCTA does not address other environmental assets such as water rights and rights to emit pollutants other than carbon dioxide.

ESG TRENDS IN THE BAHAMAS

The investment industry is paying more and more attention to Environmental, Social, and Governance-related (ESG) matters. The idea of ‘ESG’ is to incorporate non-financial factors such as climate change, labour practices, human rights and corporate governance into decisions about investments.

According to the Global Sustainable Investment Alliance, sustainable investments accounted for $35.3 trillion of assets under management in 2020 – an increase of 15% on 2018’s figure. This growth reflects an increase in demand for ESG investing, with more investors looking to allocate their capital to companies that are making positive social and environmental impacts.

The growth of ESG investing can be attributed to a few key factors. Firstly, more and more people are aware of the negative impacts of climate change and environmental degradation on both society and the economy. Investors think it important to consider these issues when making decisions. Secondly, there is a growing demand for corporate accountability, particularly on issues such as executive compensation, diversity, inclusion and human rights. Lastly, a

growing body of research suggests that companies with strong ESG practices can outperform their peers in the long run.

As ESG investing becomes more mainstream, investors are demanding more information about companies’ ESG practices. Companies that can provide them with transparent and accurate data on their ESG performance are more attractive to them.

Although ESG investing has many benefits, there are also challenges associated with it. One is the lack of standardization in ESG reporting. There are no universally-accepted standards for ESG reporting, which can make it difficult for investors to compare companies’ ESG performance. Another challenge is the potential for “greenwashing,” which happens when companies make misleading claims about their ESG practices to attract investors.

ESG investing is likely to continue to grow in importance in the coming years as investors become more aware of the importance of non-financial factors in their decision-making. It does, however, pose some problems and it will be important for the industry to continue to develop standards and best practices to ensure that investors are able to make informed decisions.

THE NEXT STEP?

Although many regulators all over the world have indicated that they intend to make ESG reporting a top priority, The Bahamas still needs to take this step. In the interim, its regulators will probably want to ensure that investment funds that follow ESG strategies and guidelines make material disclosures to investors about those strategies, along with their allocations and ESG-evaluation methods.

Because The Bahamas is a financial centre in possession of thousands of miles of carbon sinks, it is well-placed to facilitate environmental impact investing in a sound and compliant regulatory environment. Its commitment to resolving the earth’s climate crisis is real – let us hope that other nations heed its clarion call.

* Aliya Allen can be reached on +1 242 322 4130 or at aga@gtclaw.com

“Companies with strong ESG practices can outperform their peers in the long run”