ESG

ESG

By JEFFREY KIRK and TOM JOHNSON

Environmental, social and governance ( ESG ) is a topic likely to be high on the agenda in boardrooms across the global community. This is mainly due to the fact that ESG principles now account for a significant element of the analysis undertaken by potential investors when identifying both material risks and growth opportunities associated with both funds and individual companies.

Global events such as the Covid-19 pandemic and a greater focus on issues such as environmental sustainability and diversity in society are all factors that have continued to drive ESG.

Over recent years, there has been significant growth in ESGlabelled investments and the BVI’s commitment to building a flexible yet effective and credible regulatory regime whilst maintaining a tax neutral environment provides a fertile setting for ESG fund structures to thrive.

WHAT IS ESG?

In its essence, ESG is a measure employed by investors to determine the environmental and social impact of a company but also how the company performs in relation to its governance. There is no exhaustive list of the criteria that may factor into an ESG based assessment of a company however there are certain common themes.

To assess a company’s impact on the environment, the approach the company takes towards issues such as climate change, emissions, energy efficiency, pollution, usage of land, waste and depletion of resources will likely be considered. The social impact element of ESG focuses on the company’s treatment of its employees and/or customers and also on the impact it has on the wider community. Specific factors that may be considered are working conditions, human rights, slavery, diversity and health and safety. In terms of governance, an ESG conscious investor will consider issues such as the company’s activities and policies in relation to bribery, corruption, political lobbying, executive remuneration, tax strategies, anti-money laundering and the independence and structure of the board.

THE GROWTH OF ESG

There are a number of driving factors behind the growth of ESG. As referenced above, the Covid-19 pandemic brought issues such as environmental sustainability to the forefront of public mindsets and this in turn lead to it becoming high on the list of corporate agendas. A number of modern investors will now choose to incorporate ESG considerations into investment strategy purely on the basis of ethics and it being viewed as morally the desirable course of action to take. Public attitudes towards environmental sustainability alone has changed dramatically within recent years and it is likely to shift further in the short to mid-term future. The same can be said to be true of public attitudes towards issues linked to diversity. Many investors now consider ESG focused companies as having a better risk profile than those that have yet to take any steps or decisive action to formulate ESG policies.

There are also more financially driven factors, many ESG funds are now outperforming traditional indices and it is becoming increasingly common for longer term investors to target ESG focused products which are seen as a safer more sustainable investment. The likely long-term cost base of a company with a clear ESG strategy compared with that of a company that has yet to even consider formulating appropriate policies can also be seen as more desirable from an ESG conscious investor’s perspective.

REGULATION

As referred to above, the growth in ESG-labelled investments has prompted the implementation of a number of ESG focused laws and regulations across various jurisdictions worldwide.

The EU has introduced a package of sustainable finance regulations and more specifically a regime relating to ESG disclosure.

Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment came into effect on 12 July 2020 (Taxonomy Regulation). The Taxonomy Regulation implemented a system of classification for the assessment of how sustainable certain economic activities are. This in turn allows for the assessment of the ESG credentials of a particular company or portfolio. It also introduced disclosure obligations that will apply to financial market participants under the Taxonomy Regulation. Participants will have to disclose information on how, and to what extent, the underlying product meets the criteria to be classed as environmentally sustainable.

BVI

The BVI’s various cost-effective fund products and vehicles and the proven capabilities of its business services and industry professionals mean that it is well placed as a jurisdiction to support the growth of ESG focused products.

Bespoke provisions incorporated within the constitutional documents of a BVI corporate is a common way for ESG focused funds to implement and safeguard its investment and operating principles. For instance, the memorandum and articles of association can contain provisions dealing with environmental, social and/or health

and safety objectives along with prohibited activities restricting areas or sectors within which the fund can invest.

The prohibited activities can prevent the fund from investing in businesses which support issues such as forced or child labour, trade in environmental waste products, radioactive materials, pornography or prostitution, racist and/or undemocratic media or where the primary business activities deal in alcohol, tobacco, weapons or gambling. A fund could also be restricted from dealing in certain countries or jurisdictions.

The BVI, as of yet, has not enacted any specific legislation incorporating ESG principles but the flexibility offered by the current corporate and funds’ regime in the BVI permits ESG fund managers the freedom to structure funds as they desire and to therefore achieve and enforce ESG specific principles.

If ESG focused investment continues to out perform traditional investment products and if public opinion follows the same trajectory then ESG funds and sustainable investment will no doubt continue to grow. The BVI as a jurisdiction is well-placed to support this growth and to offer a framework within which ESG focused products can continue to thrive.

Jeffrey Kirk

Managing Partner, Appleby (BVI) Limited

Mr. Kirk is the managing partner of the Appleby British Virgin Islands office and he leads the BVI office Corporate Practice Group. He advises on public and private M&A, capital markets, banking & finance, FinTech including digital assets, investment funds & services, private equity, (re) insurance and other corporate matters. He is also the global head of the Appleby Islamic Finance Practice Group.

Tom Johnson

Associate, Bedell Cristin

Mr. Johnson specializes in banking, finance, corporate law, and regulatory compliance. He brings experience from renowned firms like Freshfields Bruckhaus Deringer and others. Based in Jersey, he also advises on BVI matters.