Private finance and its role in supporting the transition to net zero
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Image: Torteval, Guernsey
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Report authored by baringa partners in association with guernsey finance
Guernsey Finance is a joint industry and government initiative established to promote Guernsey’s financial services sector internationally, under the brand WE ARE GUERNSEY.
This report was commissioned by Guernsey Finance and provides practical guidance for the financial services sector towards achieving a net zero future.
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About Guernsey Finance
Regulatory trends and “greenwashing” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Why is Guernsey strongly positioned to support the transition? . . . . . . . . . . . 30
What do net zero commitments mean for financial services firms? . . . . . . . . . 20
Structure of this report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Transition for Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . 16
Glossary of key terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Guernsey’s role in the transition . . . . . . . . . . . . . . . . . . . . . . . . . 28
Research objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The role of finance and the transition to net zero . . . . . . . . . . . . . . . . . . . . . . . . 16
Summary of key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
What is sustainable vs green vs transition vs social finance? . . . . . . . . . . . . . . 21
Estimating the scale of opportunity for Guernsey . . . . . . . . . . . . . . . . . . . . . . . . 32
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
An overview of the Guernsey finance industry . . . . . . . . . . . . . . . . . . . . . . . . . . 28
What is a just transition, and why is it important? . . . . . . . . . . . . . . . . . . . . . . . . . 18
4 030201contents1.12.13.11.22.23.21.32.33.31.42.42.53.4
Identifying Transition Finance Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Insurance Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Horizon 3: the 2040s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Step 2: Develop a just transition strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Appendix A - Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
5 1009090708060504 6.56.44.46.35.34.36.25.24.26.15.14.1
Appendix B - Market Sizing Methodology . . . . . . . . . . . . . . . . . 90
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Charting the transition to net zero . . . . . . . . . . . . . . . . . . . . . . . . 40
Key steps for the finance industry . . . . . . . . . . . . . . . . . . . . . . . 48
Guernsey and the just transition: sector-specific guidance . . 58
Appendix C - Technology Maturity Assessment . . . . . . . . . . . . 92
Step 1: Build understanding around the just transition . . . . . . . . . . . . . . . . . . . . 48
Trust & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Horizon 2: the 2030s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Horizon 1: the 2020s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Step 3: Translate strategy into action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Image: Pea Stacks, Guernsey
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This report leverages a combination of engagement with key representatives from the Guernsey finance industry, analysis using Baringa’s energy and environmental expertise, and market sizing performed using credible, industry accepted sources.1.
Whilst there has been rapid growth in net zero commitments across the global financial community, the concept of the “just transition” has received relatively less focus whilst becoming increasingly critical within the present geopolitical context. This is also the area for which there is least practical guidance around what it means, and what firms can do to support it. The purpose of this report is to address some of this need for the Guernsey financial services industry specifically. It outlines why Guernsey is strongly positioned to play a key role in supporting a just transition, and provides practical guidance around the actions that firms within the sector can apply.
This research has been developed by Guernsey Finance in partnership with Baringa Partners, a global leader in energy and environmental consulting. Baringa is a purpose driven organisation committed to maximising positive impact on people, clients, the community, and the environment. We are a global consulting firm with hubs in Europe, the US, Asia and Australia, and clients in every sector from FTSE 100 names to bright new start-ups. Baringa are also a certified B corporation. We strive to embed environmental and social sustainability into everything we do, including ensuring our approach is aligned to our chosen UN Sustainable Development Goals.
1 See footnotes for sources used; see Appendix B for the market sizing methodology 1.1.1
objectivesResearchexecutivesummary
Science
“A just transition means greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind” (International Labour Organisation)
Environmental, Social and Governance - a consistent framework and lens used by firms to evaluate company performance and risk across key criteria within each of the “E”, “S” and “G” domains
Glossary of key terms
2 Based Targets initiative, Foundations for science-based net zero target setting in the Financial sector, April 2022, SBTi-FinanceNet-Zero-Foundations-paper.pdf (sciencebasedtargets.org) Nations Sustainable Development Goals, THE 17 GOALS | Sustainable Development (un.org)
Note that the above definition relates to carbon dioxide only, however we suggest all greenhouse gases should be considered in the transition to net zero
“Transition finance is intended for economic activities that are emissions-intensive, do not currently have a viable green substitute (technologically, economically or both), but are important for socio-economic development” (OECD)
8 Term Definition
1.2
3 United
“Align all financing with pathways that align global warming to 1.5° with no or limited overshoot, and neutralises all residual emissions through the financing of activities that permanently remove an equivalent amount of atmospheric carbon dioxide 2 ” (SBTi)
Just
Finance targeted towards generating positive impacts for people, planet – or a combination of the two, often using the “ESG” framework and/or aligned to the UN’s Sustainable Development Goals (SDGs)
UN Sustainable Development Goals – established in 2015 with a target year of 2030; these are 17 broad objectives across a range of social, economic and environmental themes; Nations report data to the UN against specific indicators, which is aggregated and reported on annually 3
Net zero for financial services
SustainabletransitionESGfinanceTransitionfinanceUNSDGs
Section 5
KeyGuernsey’sroleinjusttransitionstepsforthefinanceindustry
BackgroundExecutiveSummary
Charting sectorGuernseytransitionthetonetzeroandthetransition:specificguidance
Provides a narrative to describe the transition to net zero across three horizons: the 2020s, 2030s and 2040s. It includes key transition opportunities, risks and actions for the industry to consider across each horizon, to support strategic planning
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Background around the transition and key research findings
Overview of what net zero means for financial services firms, definitions around sustainable finance and associated regulation, context and initial identification of opportunities for Guernsey
Overview of the Guernsey finance industry, its key differentiators relevant to supporting the transition, and estimates the scale of opportunity for the investment sector in doing so
Section
Section 4
Research objectives, report structure and glossary of key terms
Section Title Contents
Section 6
Section 1 2
1.3
A view of the key opportunities, risks and mitigations for each sub-sector within Guernsey – covering Insurance & Insurance Management, Investment Funds & Management, Trust & Company, Private Banking and Pensions
Practical guidance on key actions for firms to take to support a just transition to net zero. These are actions that apply across sectors within the industry
structure of this report
Net zero forservicesfinancialSection 3
Section 7
Summary of key findings
5 World Economic Forum, Why net zero without a ‘just transition’ is not an option | World Economic Forum (weforum.org)
The transition to net zero requires a fundamental rewiring of our global energy system. It will drive disruptive innovation across almost every sector and every region globally. This represents an enormous financing opportunity – with estimates ranging from $125 to $350 trillion of total investment required to reach net zero by 2050.4 Yet, with this opportunity also comes risk. Key to realising this opportunity whilst supporting a measured, orderly and just transition will be making balanced decisions across environmental, social and governance (ESG) themes.
10 1.4
In the present context, geopolitical tensions and energy price shocks are creating substantial social and economic instability both in the UK and globally. This reinforces the need to strive for what is known as a “just” transition. This means a measured transition, with a variable pace and scale for distinct groups depending on their resources and ability to change. This protects key industries and disadvantaged social groups, and enables less economically developed regions to decarbonise at different rates to accommodate economic growth and increasing energy access.
6 For example, see media commentary Energy crisis turns investors off prescriptive shareholder resolutions - Top1000funds.com; BlackRock to back fewer shareholder resolutions in this AGM season | Reuters
The concept of a just transition has never been more critical to securing the net zero goal than it is now.5 However, this may also be the time when it is at most risk. Whilst investment in longer-term infrastructure such as renewable energy is critical to stimulating growth, inflationary pressures and market uncertainty threaten this. Furthermore, some investor groups are showing signs of turning away from backing shareholder resolutions on climate change, in light of the present energy crisis.6
4 GFANZ (Glasgow Financial Alliance for Net Zero) Financing Roadmaps estimated $125trillion of direct capital expenditure required, Financing Roadmaps (gfanzero.com), McKinsey estimated $275 trillion, A net-zero economy: The impact of decarbonization | McKinsey, Baringa estimated $350trillion using Blackrock/Baringa scenarios; differences due to differing sources and methodologies used
There is a significant opportunity for the Guernsey finance industry to drive a proactive sustainability agenda, and establish itself as a leading global centre for financing a just transition to net zero. This includes traditional sectors such as insurance and investment management, as well as the development of new specialist expertise and support services, for example around ESG, data and fintech. As a jurisdiction with over 60% of its GDP attributable to the finance sector, harnessing this opportunity could be critical to support Guernsey in remaining competitive within the context of wider movements towards sustainability in global financial markets.
A strong track-record for innovation
Fast, easy access to global markets
A trusted home of specialist solutions
Key differentiators that enable Guernsey to capture this opportunity are:
Despite these headwinds, there is a significant opportunity available; we estimate that within the Guernsey investment sector alone, the total Net Asset Value (NAV) of “Green” funds could grow from £4.5bn at end 2021 to £56bn in 2040.7 This estimate is based on the global investment required to support the transition to net zero. This represents a substantial untapped opportunity for product innovation – and one that Guernsey is uniquely positioned to seize, with its agility in bringing new products to market, and strong track record for innovation. Transition finance will also be key to supporting a just transition, financing solutions to help turn “brown” activities to “green” and protect value that would otherwise become “stranded.”
A strong, stable, trusted home for private capital
A strong pool of experienced advisors
An engaged, supportive regulator
11 7 Baringa Analysis leveraging GFANZ Financing roadmaps, see chapter 4 for more detail
Investment Funds & Management: opportunity to grow the Guernsey green investment sector from a total NAV of almost £5bn in 2022 to over £56 billion by 2040, assuming a proactive transition strategy and broader suite of products and frameworks including transition finance and natural capital specifically. Wider opportunities exist in leveraging EU work to develop a social taxonomy, and being early to market with new socially focused products and solutions
Private Banking: opportunity to become the transition partner of choice for private banking, offering green portfolio advice, real estate lending and advisory, carbon footprint services and products to support the transition
Insurance: opportunity to grow the existing innovation presence to facilitate a just transition through products and services that bridge the protection gap and support transition technologies
Data & Analytics: opportunity to develop specialist solutions around ESG data, for example to develop solutions around biodiversity and natural capital accounting for investment portfolios, or improve alignment of supply and demand by analysing and matching investors with ESG commitments to suppliers of ESG products
This report has highlighted that opportunities exist for each sector within the Guernsey finance industry to play its role. For example:
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Pensions: opportunity to protect and create value for pension funds, using their role as advisors to influence and steer trustees towards integrating just transition principles into investment mandates and strategies
Trust & Company; opportunity to become a leading hub for sustainable investing within the industry, integrating the sustainability values and objectives of the next generation, whilst targeting long-term value creation and wider ESG risk management alongside more specific philanthropic/impact objectives
Capabilities, upskilling and awareness raising. Invest in people and in the short term to realise the opportunity over the longer-term. This means recruiting the right capabilities and skills into the industry, alongside provision of more specialist/targeted advice to help point sectors that are further behind to help steer them towards the relevant courses and information
1.2.3.4.
New ways of thinking about risk. To understand and make balanced decisions across E, S and G will involve thinking about risk in a different way, moving away from narrow risk analysis using traditional models and overlaying this with more forward-looking, qualitative analysis
It is not going to be easy, realising these opportunities will require substantial focused time and investment to enable Guernsey to maximise them. Key next steps broadly applicable across the industry include the following, but should be prioritised by relevancy per sector:
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Start with the just transition in mind. Make balanced decisions across E, S and G when developing strategies, frameworks and products; consider a holistic range of environmental, social and governance factors. This will be required to support just transition objectives; working with specialists, data providers and companies to develop an understanding of each of these factors will be key
Framework for transition finance. Develop a clear, transparent framework, inclusive of a consistent approach to identify, evaluate and monitor progress of companies, portfolios and assets that are “transitioning,” with specific guidance for key sectors
Understand that no action is not an option. The market is moving towards ESG and net zero, and for Guernsey to remain relevant on the global stage, it will need to act now and adopt these trends even where regulation does not yet apply, or where the guidance is lacking
Strengthen networking and collaboration. Promote knowledge-sharing and innovation across sub-sectors. Pockets of specialist expertise sit in key areas and can be shared across the wider industry. Stronger collaboration with stakeholders that are not yet engaged in the green agenda could also help to incorporate different views and access a wider range of opportunities. This could help to address the mismatch between client demand, level of expertise and the availability of sustainability opportunities in the market. Collaboration should also extend to new partners to develop new solutions in the fields of fintech and data
Face up to tough decisions. The path to net zero won’t always be green. Some tough choices will be required along the way, including how to time a measured and orderly divestment from fossil fuels, whilst mitigating wider social and economic disruptions. Risk management and mitigation strategies will be required, where environmental, social and governance objectives cannot be aligned
Demonstrate transparency and accountability. Introduce strong backstops and proof points to validate product labelling, alongside robust reporting expectations to counter greenwashing risk; for example, through broadening the recent inclusion of climate risk within the Guernsey Corporate Governance Code to also include wider environmental, social and governance risks and impacts. This should also be supported by a stronger publicity campaign to raise general awareness both within and around the islands regarding this proactive approach to ESG
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5.6.7.8.
Image: Le Gouffre, Guernsey
2.1 the role of finance and the transition to net zero
2. Transition for financial services
This chapter provides an overview of what net zero means for the financial services industry, including definitions around sustainable finance products and associated regulation. This provides some context and initial identification of opportunities for Guernsey, to explore in more detail in section 3.
In the momentum surrounding COP26 in November 2021, financial services firms responsible for over $130 trillion in AUM rallied to join the Race to Zero. Under the GFANZ (Glasgow Financial Alliance for Net Zero) umbrella spearheaded by Mark Carney, asset owners, asset managers, insurers and banks came together and committed to aligning their financial flows to the net zero goal. This is widely viewed as one of COP26’s big wins, and a watershed moment where global private finance stepped up to the net zero challenge.
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Total estimated investment to reach net zero ranges from anywhere between $125 to $350 trillion by 2050.
8 See footnote 3 9 See
Net zero means reducing global greenhouse gas emissions to the point at which emissions we produce are equivalent to the emissions we sequester or remove globally. This requires a fundamental redesign of the energy system, alongside changes to almost every sector consuming it globally. Total estimated investment to reach net zero ranges from anywhere between $125 to $350 trillion by 2050.8 This being a broad range, there is still some uncertainty around the estimates, particularly in technology costs over the longer term. Even so, what’s clear is that the investment needed is substantial and will touch almost every sector and region globally.
17
Within this, there is a role for each player in the financial ecosystem to help drive this change. This will require it to act more as an integrated system, developing new models and new ways of thinking to do so. As a leading international finance centre and green finance hub, Guernsey can play a role disproportionate to its size in supporting the transition. Before we get to that, there are some key terms to define, and some challenges to overcome. Further, while these sums cover the investments in key technologies required to get to net zero, they don’t include the broader social and environmental requirements to meet net zero sustainably.9 Permission to transition: ESG considerations to achieve net zero | Baringa for more Baringa perspectives on the just transition
12 IEA (International Energy Agency) in collaboration with the World Economic Forum and the World Bank, Financing Clean Energy Transitions in Emerging and Developing Economies, 2021
“A just transition means greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind.” 10
More than $130trillon in AUM is now committed to net zero; despite this, the investment gap is still enormous – and is greatest in emerging markets
The idea behind a just transition is to ensure the energy transition is fair and inclusive. We cannot get to net zero without both collaboration and innovation to bring everyone along with us. This stretches from emerging markets, to disadvantaged social groups and supporting brown sectors in becoming green.
International Labour Organisation
Despite the scale of the opportunity, the size of the investment gap is enormous – and is greatest in emerging markets. Driven in part by the impacts of COVID-19, 2020 witnessed a great accumulation of private wealth combined with rapid inflows of capital into green or ESG linked financial products. However, this was mainly concentrated in developed economies; emerging markets received only 20% share of total investment into clean energy. Meanwhile the Paris Agreement target for developed economies to invest $100bn annually into transitioning emerging markets has been missed every year since 2013.
11 World Economic Forum, March 2022, Here’s how clean energy will change the global jobs market | World Economic Forum (weforum.org)
13 UK Parliament: House of Commons Library, November 2021, COP26: Delivering on $100 billion climate finance (parliament.uk)
14 Amount of finance committed to achieving 1.5°C now at scale needed to deliver the transition | Glasgow Financial Alliance for Net Zero (gfanzero.com) , IEA with the World Economic Forum and the World Bank, Financing Clean Energy Transitions, 2021
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Although transitioning away from carbon-intensive activities presents all the potential social and political tensions associated with moving from one economic model to another, on the flipside there are huge opportunities available around creating decent, sustainable work opportunities through infrastructure development and reskilling programmes. The World Economic Forum estimates there will be 10.3 million net new jobs globally by 2030 in clean energy, by far outweighing the 2.7 million jobs lost from fossil fuel sectors.
14 2.2
What is a just transition, and why is it important?
10 International Labour Organisation, Frequently Asked Questions on just transition (ilo.org)
Making the economics work for investors will be critical to addressing this imbalance, and the market is working hard to develop new solutions to do so. One clear opportunity here is the scaling up of blended finance models to de-risk investments for private capital with both public and philanthropic sources.15 With its strong track record for innovation, global network and fast, flexible approach, Guernsey can play a differential role in developing such solutions.
19 15 Organisation for Economic Co-operation and Development Key_Messages_EMnet_Green_Economy_EnergyTransitionEmergingMarkets.pdf(OECD)ECD, (oecd.org)
What does net zero actually mean for financial services firms, and how can they support the wider economy in getting there?
How to balance the move away from carbon-intensive activities, with the wider social impacts of the transition?
How to identify the key investment opportunities across sectors and Howtechnologies?totrackwhere
Doing so raises some key questions and challenges to explore:
Emerging and developing markets are typically producer economies: highly dependent on their local natural resources for economic health, and with that, their political and social stability. These are also the markets that are set to drive the lion’s share of emissions growth going forwards due to faster rates of population growth, urbanisation and industrialisation. Driving responsible investment into these markets will be key to supporting them in achieving sustainable growth, whilst avoiding local resistance and political fragmentation.
How to define “transition finance” versus “green” or “sustainable finance” and “ESG”?
finance is flowing, and what the policy, political and environmental drivers are that attract capital?
16 PCAF (Partnership for Carbon Accounting Financials), 2020, The Global GHG Accounting and Reporting Standard for the Financial Industry. First edition, The Global GHG Accounting and Reporting Standard for the Financial Industry (ghgprotocol.org)
In its simplest form, committing to net zero means committing to reduce a firm’s emissions on a pathway that aligns to limiting global temperature rise to no more than 1.5° above pre-industrial levels. This commitment should cover all three scopes of emissions in the table below:
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17 PCAF, GHG emissions associated to insurance and reinsurance underwriting portfolios, scoping document, March 2022, PCAF Insurance-Associated Emissions Scoping Document (carbonaccountingfinancials.com)
Scope 3: Value Chain
What do net commitmentszeromean for Financial services firms?
Although a standard does not yet exist for underwriting portfolios, PCAF has recently published a draft scoping document for this (April 2022), developed via industry consultation.17 Firms should consider monitoring such frameworks, and proactively engaging via their working groups and consultations to support their evolution, where possible.
Scope 2: Indirect emissions from the electricity generated by sources owned or controlled by the company – i.e. electricity to power a firm’s branches and office space.
For most financial services firms, scope 3 (category 15) emissions are both the majority of its footprint, and the toughest nut to crack. Commonly referred to as “financed emissions” – meaning specifically the emissions facilitated via a firm’s lending, investment or underwriting portfolios or individual company -level emissions assessments. To measure these emissions, many are aligning to the PCAF (Partnership for Carbon Accounting Financials) standard.16
2.3
Scope 1: Direct emissions from fossil fuel combustion by sources owned or controlled by the company – i.e. heating a firm’s own company-ownedbuildings,vehicles,etc.
all other emissions across the value chain; for FS this is both upstream supply chain emissions, and downstream lending and investment - known as ‘Financed Emissions.’
What is sustainable vs green vs transition vs Social finance?
Social
Generate solutions to reduce the emissions associated with carbonintensive activities, or to enable “brown,” activities, to transition to become “green” or “greener.”
Sustainable finance is the broadest term, covering a wide range of both social and environmental activities. Firms are commonly using the UN SDGs as a consistent framework through which to describe the objectives of these products. “Climate” or “green” finance is a narrower subset, focused on environmental objectives only. This is the area that has received the most regulatory focus to date, and as a result is both the most mature and common in the market. The “social” and “transition” groupings are the least mature by comparison.
As a relatively new domain, there are currently no universally agreed definitions for “green”, “climate”, “social” and “transition” finance products. At the highest level, there is some consensus around the objectives of each category of finance described in the diagram below:
Sustainable Finance
21
Climate/Green Generate biodiversityenvironmentalpositiveimpacts,forexample,throughactivitiesthatsupportemissionsreductions,conservationorrestoration.
Transition
Generate a positive impacts for people, planet – or a combination of the two, often using the “ESG” framework and/or aligned to the UN’s Sustainable Development Goals.
Generate positive social outcomes, for example to promote access to healthcare, education, gender or racial equality, decent jobs and fair living wages.
2.4
“Green” bonds for specific projects/activities e.g. solar, windfarms, etc.
22
Sustainability-linked bonds for general purposes but linked to achievement of specific sustainability outcomes. Frameworks exist for these e.g. Climate Bonds Initiative (Climate Bonds Standard and Certification Scheme), ICMA (Green and Social Bond Principles)
Funds that invest sustainably or impact objectives, e.g. Generation IM, Clim8
Funds that target companies aligning to a certain emissions reduction requirement – e.g. L&G ESG Paris Aligned World Equity Index Fund, Robeco - Paris Aligned Benchmark
Increased consumer demand has driven exponential growth in the number of sustainably-branded investment products – with huge increases particularly over 2020-21, when large savings piled up due to global lockdowns. Some of the most common products in the market are listed below:
Investing
“Blue” bonds for ocean or marine life preservation and/or restoration
Similarly, the gathering momentum behind net zero commitments amongst major global corporations as well as the major global banks that finance them has driven an increase in the availability of corporate lending products geared towards incentivising sustainability outcomes:
Lending
Supply Chain Finance: loans to incentivise certain sustainability objectives across a firm’s supply chain e.g. Walmart’s Project Gigaton in partnership with HSBC
Frameworks exist for dedicated purpose lending e.g. LMA (Sustainability-Linked Loan principles, Green Loan Principles, Social Loan Principles)
23
Sustainability-linked loans: multi-stage financing linked to achievement of specific sustainability KPIs e.g. 10.1 billion revolving credit facility for AB InBev, with built-in incentives to improve efficiency, recycle more, use more renewable electricity, and reduce emissions
Sustainable linked Revolving Credit Facilities: linked to specific sustainability or ESG indicators e.g. Dunelm Group’s RCF linked to a range of indicators including emissions/net zero objectives and responsible supply chain objectives
Momentum has been building, particularly in the UK and the EU, around integration of climate risk into regulatory regimes. This has helped to build an understanding around climate risk across the finance industry which is now expanding towards wider environmental and social themes. Integrating these wider externalities into financial risk management is forcing firms to change the way they think about and measure risk, and ultimately factor it into pricing models and capital holdings. This creates further incentives for firms to develop sustainable finance products with lower risk weights.
Confusion around what ESG products and labels actually mean has driven increased regulatory interest and scrutiny over potential “greenwashing” or misrepresentation of sustainability claims associated with such products. To counter this, regulators have focused on the definition of sustainable finance, alongside the establishment or reinforcement of sustainability disclosure requirements. In EMEA, the EU is at the forefront of this movement with the EU Taxonomy and SFDR.19 The impact of SFDR is already being seen in the market; in February 2022, Morningstar removed the “sustainable” tag from 1300 funds following analysis using the enhanced ESG data disclosed in line with SFDR (Sustainable Finance Disclosure Regulation).20
Beyond this, sustainable finance and greenwashing have featured in regulatory dialogues in the UK, US, Japan, China, France and Netherlands. In October 2021, OECD analysis of several regimes found that: “there is already a basis for a common language on sustainable finance taxonomies for international issuers and investors that are willing to use such a tool. In individual jurisdictions, well-designed taxonomies can help policy makers to develop and grow sustainable finance markets to support the achievement of environmental and other sustainable development goals.” Regulatory trends and “greenwashing” Economic Forum, Why ESG Exchange-Traded Funds might not be as green as you Economic Forum (weforum.org) Principles for Responsible Investment (PRI), Sustainable2 finance policy reform: building momentum in 2022 | Blog post | PRI (unpri.org) ESG Clarity on Morningstar, February 2022 Morningstar drops sustainable tag from 1,200 funds - ESG Clarity OECD, October 2020, Developing Sustainable Finance Definitions and Taxonomies OECD iLibrary (oecd-ilibrary.org)
|
21 2.5
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Growth in sustainable finance products has been particularly strong in the investment market, and particularly in sustainable or ESG branded ETFs (Exchange Traded Funds). However, there is substantial variation in the metrics and rules used to develop these funds, and many focus on ESG exclusion criteria, rather than on delivering specific sustainability or ESG objectives. Some are simply pre-existing funds that have been re-branded as sustainable.18
18 World
think | World
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24 OECD, Transition finance: Investigating the state of play : A stocktake of emerging approaches and financial instruments | OECD Environment Working Papers | OECD iLibrary (oecd-ilibrary.org)
25
23 EU Platform on Sustainable Finance, Transition finance report, March 2021, p.
22 See questions asked at the European Parliament Inclusion of natural gas and nuclear energy in the EU taxonomy (europa.eu); S&P Global, What the inclusion of gas and nuclear in the EU taxonomy could mean for investors and asset managers | S&P Global (spglobal.com)
This is broadly consistent with the OECD definition: “transition finance is intended for economic activities that are emissions-intensive, do not currently have a viable green substitute (technologically, economically or both), but are important for socio-economic development. The essence of transition finance is triggering entity- wide change to reduce exposure to transition risk”24
However, even in the EU where the regulation is most advanced, debate remains over which specific activities can be defined as sustainable, with natural gas and nuclear power being key examples.22 This is a critical debate at the heart of the just transition challenge. Countries that are highly dependent on fossil fuels may need to use gas as a tool to displace coal, provide flexibility and ensure stability of energy supply in the short term, whilst still planning for and transitioning towards renewables. The EU taxonomy helps to identify which activities to invest in, but not those that must be phased out, and over what timeline.
The EU Taxonomy has defined transitional activities as being: “an economic activity for which there is no technologically and economically feasible low-carbon alternative shall qualify as contributing substantially to climate change mitigation where it directly supports the transition to a climate-neutral economy consistent with a pathway to limit the temperature increase to 1.5° C” 23
26
25 Bloomberg, Greenwashing Is Increasingly Making ESG Investing Moot: Green Insight - Bloomberg 26 Guernsey Financial Services Commission (GFSC), Consultation Paper on Proposed Measures to Counter the Risk of Greenwashing, May 2022
To protect against potential greenwashing risk, there is a need for a clear, transparent set of rules to govern which activities fall into scope for transition finance. This scope is wider today than it will be in a future world in which key transition technologies are more advanced, and dependency on fossil fuels in developing markets is reduced. These rules must therefore be both sensitive to the varying technical and economic capacities of different industries and geographies today, but also responsive to changes in these conditions over time. Guernsey is already actively exploring opportunities around transition finance. Guernsey is an agile jurisdiction, and well placed to develop a flexible, adaptive model for transition finance and mature this in line with the global environment as it evolves.
Critical to achieving this objective is to ensure that sufficient protections are put in place against the risk of greenwashing. A key hot topic amongst the press, regulators and legal advisors, greenwashing accusations have grown almost as fast as the market they relate to.25 Indeed, Guernsey has already launched a consultation in May 2022 on measures covering both transparency of environmental sustainability related claims and promotion of such products.26 Guernsey has a strong, proactive regulatory regime and is already actively exploring measures to safeguard against potential greenwashing risk.
With transition finance, two key criterion are i) whether the finance is used to invest in or insure activities that are “green” or ”going greener,” and ii) whether it is required to support social or economic objectives. Transition finance represents the greatest untapped opportunity for finance to drive differential change within the wider economy, whilst supporting a just transition objective. With its key differentiators of a fast and flexible regime, strong track record for innovation, and connection to major global markets, Guernsey is strongly positioned to innovate and develop a market-first, industry-leading product in this space.
Image: St Peter Port, Guernsey
This chapter provides an overview of the Guernsey finance industry, its differentiators that enable it to play a key role in supporting the transition, and estimates the scale of opportunity for the Guernsey investment sector.
InvestmentInsurancefunds
Home to specialised insurance products such as insurance linked securities (ILS)
Leading specialist centre for alternative assets including PA, infrastructure, and alternative debt
3.1
Total NAV £314bn across all funds at end March ’22
>600 insurance companies and cells
28
3. guernsey’s role in the just transition
Leading centre for captive insurance and protected cell companies (PCCs), pioneered in Guernsey
an overview of the guernsey finance industry
150 fund managers, and 100 Guernsey companies listed on the London Stock Exchange
Guernsey is a leading global finance centre and home to a suite of specialist finance capabilities. These include the sectors illustrated in the diagram below:
and
Provides establishment, administration and management of pension plans
Home to specialist legal, tax and actuarial advisers Nearly 150 regulated trust companies
Established centre for specialist services, with strong tradition for breadth and depth of expertise
Holistic service offering to clients across financial management, philanthropy and succession planning
>20 private and international banks from the UK, Europe, South Africa, North America and beyond
29
TrustManagementInvestmentBankingPensions&Company
Diverse range of specialists across fund management, discretionary investment management, advised execution-only broking to a diverse range of clients
Strong industry network & collaboration via Guernsey Investment & Funds Association (GIFA)
Total deposits held £110billion in June 2022
Full service offering, strong reputation as safe and secure
Centre of excellence for international retirement benefit plans, broad range of products and services
TISE Sustainable – Headquartered in Guernsey, The International Stock Exchange (TISE) hosts one of Europe’s most comprehensive sustainable market segments, and is aligned to the UN’s Sustainable Stock Exchange initiative
30 3.2
Guidance and frameworks – developing industry-first frameworks and guidance including an ESG framework for insurers and the green private equity principles
Guernsey Green Fund – the world’s first regulated product in this space, now channelling close to £5bn into green projects
Via Guernsey Green Finance, Guernsey has already proven itself to be at the forefront of innovation in the green and sustainable finance sector. A number of key examples include:
Why is guernsey strongly positioned to support the just transition?
Guernsey has committed to a 2050 net zero target and an interim policy commitment to reducing emissions by 57% of 1990 levels by 2030.27 Together with the States of Guernsey, Guernsey Finance has set a clear ambition for Guernsey to play a leading role in driving the transition towards a greener, more sustainable future globally.
27 States of Guernsey, Committee for the Environment & Infrastructure, Energy Policy 2020 – 2050 Vision, March 2020
Emerging initiatives: on anti-greenwashing and the development of a Natural Capital Fund Regime
Collaboration & Engagement – e.g. Sustainable Finance Week, bringing together global leaders and experts in this field, to act as a catalytic force for innovation and collaboration. Guernsey also actively participates in a number of key international initiatives and networks, e.g. UN Financial Centres for Sustainability (FC4S) Network, UK Green Finance and Network for Greening the Financial System (NGFS)
Guernsey has a strong pool of experienced advisors. Providing support to the key finance sectors in investment advisory, impact advisory, and experienced legal and tax expertise
31
Guernsey is a strong, stable, trusted home for private capital. Private finance will play a key role in closing the investment gap to reach net zero. To do so, investors need confidence that their money is being managed with due care
Guernsey has an engaged, supportive regulator. At the forefront of integrating climate (e.g. integrated Climate Change into Code of Corporate Governance) into regulation. This enables it to be responsive to ESG trends, whilst remaining pragmatic and proportionate for the size and scale of the industry in Guernsey
Guernsey has fast, easy access to global markets. Opportunities to connect international capital to transition opportunities across key markets globally
Guernsey has a strong track-record for innovation. Transition presents the ultimate innovation challenge and opportunity to create new structures that promote blended finance and risk-sharing across the industry, as well as new analytical tools for analysing risk. Through its industry networks, Guernsey is well placed to bring stakeholders together and develop solutions quickly
Guernsey is a trusted home of specialist solutions. Providing specialist solutions to sophisticated clients for more than 50 years
Through a set of tight-knit industry networks, engaged and committed stakeholders, strong reputation for specialist expertise, and progressive regulatory regime, Guernsey has a number of key strengths to support its sustainability objectives. A few key points to highlight:
32 3.3
28 GFANZ Financing Roadmaps, Financing Roadmaps (gfanzero.com)
Estimating the scale of the opportunity for Guernsey
Given the large growth in net zero commitments, firms are now also increasingly using climate scenario analysis to support the development of their net zero strategies. As outlined in more detail in section 5, there are a growing number of tools available to support firms in this activity. For this research, we have leveraged the GFANZ net zero financing roadmaps as the key source.28 These roadmaps estimate the total investment required globally to achieve the core net zero objective of limiting global temperature rise to no more than 1.5° above pre-industrial levels.
Using this source, the scale of opportunity for the Guernsey green investment regime has been estimated based on a market share approach, with conservative assumption that Guernsey will grow its market share in this sector by 5% in 2030 and 7% in 2040, rising from 0.14% of the total market globally today to 0.16% in 2040. This is outlined in more detail in Appendix B.
Using this approach, the total Net Asset Value of funds in Guernsey invested into the transition rises from a baseline of £4.2billion in 2021 to £13.9billion in 2025, 32.3 billion in 2030 and £56 billion in 2040. This represents investment opportunities for a range of actors within the industry, from fund managers to pension providers, insurers and private investors seeking to improve the long-term sustainability of their assets.
Estimated Growth in Investment into the Guernsey Green Sector, 2020-2040 Annual Investments Total Net Asset Value at Year-End 6050403020100 2020 2025 2030 2035 2040
33
Total
To achieve this growth, Guernsey annual investment into transition opportunities globally needs to scale up from baseline average of £1.33bn29 to £3.7 by 2025, £5.6bn in 2030, and £7.7bn in 2040.30
34 29 Historic average annual investment into the Guernsey Green Fund, 2019-2021, GSFC data 30 Estimated using the methodology outlined in Appendix B
The focus of net zero scenarios to date has been on the most material sectors globally. The six key sectors above are not an exhaustive list of all sectors that will require support to transition. For example, technology, apparel, consumer packaged goods and other resource-intensive sectors are not covered in depth by the GFANZ roadmaps or other commonly used frameworks, but will require investment to align to sustainability objectives and net zero goals and represent a wider opportunity for the finance industry. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0
202520302040 0.0
fuelsLowIndustryBuildingsTransportElectricityemission
Guernsey Sustainable Investments, Estimate annual investments by sector (£billions), 2025-2040
35
31 UNEP FI, Insuring the net-zero transition: Evolving thinking and practices, April 2022
32 Commentary by London & International Insurance Brokers’ Association (LIIBA) CEO Christopher Croft, Global net zero transition could double size of London insurance market – LIIBA | Latest News | Insurance Times
The sector requiring the most investment overall is electricity, followed by transport and buildings. The proportion of investment into each sector remains broadly consistent throughout, although there is a slight rebalancing from electricity towards transport over the latter period. This is due to substantial upfront investment required to build the required infrastructure in the earlier decades, in order to generate additional capacity to facilitate electrification across a number of key sectors globally, and mainly the transport sector.
Whilst this analysis focuses on estimating the investment opportunity, the insurance sector will play a critical role in underwriting activities to support the transition to net zero. Key opportunities include growth in premiums from insuring a new range of physical and transition risks, as well as advisory and administration services leveraging their expertise in risk analytics, natural catastrophe modelling and loss prevention measures.31 Given that the market around net zero insurance is less developed, there is insufficient data available to provide a similar opportunity sizing for the Guernsey insurance market. Nevertheless, initial commentary within the London insurance market suggests that the market could double from today’s levels by 2030, bringing it up to £99.4bn of additional insurance-related spend on the transition.32
There are a wide range of technologies required to support the transition. Some are already highly mature and require a combination of public and private support to create the conditions in the market to achieve scale, such as electric heat pumps. Others are at the earliest stages of innovation, with much greater uncertainty over their viability. They have different financing needs and risk profiles, and will be suitable for different financial instruments and actors.
36 3.4
33 Baringa analysis using sources such as the IEA’s Energy Technology Perspectives, IRENA’s Renewable Technology Innovation Indicators, World Resources Institute, Food & Land Use Coalition
To support firms in identifying some of the investment opportunities, we have performed a transition technology maturity assessment. This covers each of the six sectors analysed in this report, shown in the following table.33 It should be noted that each of the technology groups referenced in the graphic below are broad categories, constituted of a range of individual technologies; some of which are at either end of the maturity scale. In these instances, an average maturity score has been applied. This is intended as an illustrative guide.
Identifying transition finance opportunities
37 Source: Baringa diagram illustrating some examples, not an exhaustive list Commercial Financial Institutions: Broad range of generic and special purpose lending & investment products across all sectors Households/Individuals: Personal savings & loans Governments, Public & Central Banks Create fiscal incentives and grants alongside blended finance solutions to stimulate supply of private capital into net zero Institutional Investors: Integrate net zero into investment mandates for asset managers across all funds under management Private Wealth: Sustainable investing Solar LabSynthetic/grownproteins RetrofitWind engineeringBio- PumpsHeat Hydrogen inhibitorsMethane HydrogenBoilersthermalGeo- ProtectionNaturalCapital DistrictHeat Energy Agriculture & Land Use Buildings Hydro-power MachineryElectricFarm EfficientAirConCCUS SolutionsFarmingDigital Development Funds & Philanthropic Institutions: Scale up blended finance solutions to improve risk-sharing and channel public-private financing into emerging markets Property Funds: NZ property portfolios PE/VC Funds: Innovation & scale-up technologies across a range of sectors Infastructure Funds: Energy & industrial infastructureLow-carbonSteel Batteries Charging&MetalsClean&Mining VehiclesElectric & Buses Corporations: Investors, IPOs, equity raises and corporate loans to invest in emissions reductions in the real economy substitutesCement Hydrogen&ElectricTrainsChemicalsHydrogenpowered Hydrogen&ElectricHGVs Industry Transport ProductionCircularModels Hydrogen&ElectricShippingRecyclingWasteEfficient& SustainableAviationFuels CookingElectric Gardening& Identifying transition finance opportunities
Electric Aircraft
Cellulosic ethanol
Hydrogen fuelled road transport inc. use in HGVs, refuelling stations
Ammonia Fuelled vessels
Ethanol derived from sugar crops
Electric Trains
0 1 2 3 Innovation/Prototype4 Stage
Low-carbon hydrogen
Early Mature/ScalableAdoption solution
Green Ports e.g. cold ironing
fuelsemissionLowIndustryTransport
Commercial demonstration
Biodiesel from wastes and residues (HVO)
Electrification of Hydrogen-basedHGVs/Haulageammonia
Feedstock substitution within chemical production
Hydrogen-based iron and steel production
Hydrogen-based cement production
Hydrogen-based chemical production
Direct electrification of the cement production
Biomass-to-liquid (BTL) thermochemically produced fuels
ElectricvehiclesBuses
Electricproductionvessels
38
Biojet fuel from wastes and residues (HEFA)
Raw material substitutions in cement production
Direct electrification of the chemical production
Biodiesel produced from oilseed crops
Bioenergy-based iron and steel production
CCUS in chemical
CCUS in cement production
Hydrogen fuelled vessels
CCUS iron and steel production
Synthetic Hydrocarbons (methane, diesel, kerosene and methanol)
Fuel-efficient aviation engines (open rotor, UHRB)
Optimising technology in cement production
Vessel efficiency e.g. assisted propulsion technologies
Bioenergy-based chemical production
Road Transport Efficiency e.g. Electric road systems, platooning, autonomous
Direct Electrification of the iron and steel production
39 Wind offshore and Solaronshorethermal fuelsemissionLowIndustryTransport Geothermal Fast frequency response Building retrofits and efficiency Next gen nuclear (Small Modular EvaporatedReactors)coolingBatterystorage Forest, mangrove and peatland LowUltraRecyclingConventionalrestorationnuclearFastchargingandwastereductionNaturalgaswithCCUSSmartcharginghigh-voltagetransmissionElectricheatpumpsSolid-statecoolingDigitalisationofFarmingAnaerobicmanureprocessingSolarPVOceanenergyCoalwithCCUSDynamicchargingMethaneinhibitorsLarge-scaleheatpumpsMechanicalstorageElectriccookingRenewableequipmentBioengineeringAlternativeproteinsBiomasswithCCUSDemandresponseorNoCarbonfarmequipmentHydrogenturbinesFlexible high-voltage or alternating current transmission District Heat networks Hydrogen boilers and fuel cells 0 1 2 3 4
The narratives outlined in each horizon overleaf illustrate a macro view of how the world evolves in a net zero scenario. They are not fully comprehensive, precise predictions of the future. However, they enable firms to identify some key changes and risks to consider in longer-term strategy development and risk management going forwards. Indeed, as noted above, regulators including the Guernsey Financial Services Commission require financial firms to consider their exposures to climate risks across a longer-term time frame. The below narratives serve as a useful introduction to this activity. Furthermore, they build on the net zero literature to consider the “just transition” objective and a wider range of environmental, social and governance considerations. introduction
40
4.1
This chapter provides a narrative to describe the transition to net zero across three horizons: the 2020s, 2030s and 2040s. It includes identification of key transition opportunities, risks and mitigating actions to consider across each horizon.
Charting nettransitionthetozero
4.
Horizon 1: the 2020s
Build more nuclear capacity; invest in R&D and trials to test business models for Hydrogen & CCUS
The key technologies required in this decade are already available; mainstream capital must focus on the rapid scale up of renewable energy, whilst the more risk/innovation focused investors can invest in the burgeoning market in cleantech/ climate-tech, as well as innovation in the energy industry across hydrogen, batteries/storage, efficiency and CCUS. Key opportunities, challenges and actions for firms to consider during the 2020s include:
Roll-out decentralised, distributed renewables in remote areas e.g. Sub-Saharan Africa
Global price inflation, in particular energy price rise linked to Russia-Ukraine conflict, driving global economic instability and affordability or “cost of living” crisis
Encourage electrification and energy efficiency measures where applicable
Major push on scaling up renewable infrastructure and established technologies to electrify transport and improve mobility
Invest in T&D networks and grid reinforcements
Key transition challenges
Rapid scale-up of renewables to displace/ repurpose fossil fuel infrastructure
Emerging markets
Key transition opportunities
Lobbying/resistance in regions with higher dependence on fossil fuels, and concerns around impacts on local economy and jobs
41
Developed markets
Financial risks around “green bubble” and crowding new technology investment into ESG/net zero aligned technologies, due rapid growth in investor demand in developed markets (green premium)
Political upheaval relating to economic challenge stalling momentum around net zero commitments
Identify options for nuclear, geothermal and other low-carbon sources where financially viable
High upfront capital investment required to build up infrastructure and increase renewable generation capacity
4.2
Establishing secure/robust supply chains around new business models in emerging markets with higher risk ratings
Electrify light vehicles and promote customer adoption
into emerging markets and credible carbon removals, biodiversity and natural capital Assets: As institutional investors, commit to Net Zero Asset Owners initiatives and targets to align investment portfolios to net zero, via committed fund managers; incorporate holistic ESG and net zero objectives into investment mandates
For governments and regulators
42
Clients: Proactively engage with client base to inform them of their forward-looking risk profile and likely changes to key policy terms and exclusions over time, including physical, transition and wider ESG risks, innovate to support and facilitate new business models associated with the transition, for example collective insurance products supporting new transport models and ride-sharing solutions.36
Work with regulators and industry associations to combat shared challenges, and develop common standards around ESG and climate investing (e.g. taxonomies, metrics, data, etc)
Harmonise ESG risk management and disclosures regulation to improve consistency, quality and availability of data, and encourage/incentivise integration into financial markets and valuations, including development of proposals for natural capital
Collaborate with government, central banks and development banks to promote risk-sharing through blended financial models
Liabilities: Understand transition pathways for relevant product lines to build a forward-looking view of how your underwriting portfolio will need to adapt to take advantage of opportunities whilst balancing target loss ratios; Consider product development opportunities presented by development and scale-up of both emerging markets and natural capital focused solutions e.g. protections for coral reefs34; Consider policies around underwriting of fossil fuel infrastructure/production activities, particularly in developed markets35; communicate clear timeline for emerging markets; start to develop/refine pricing models around wider ESG and natural capital assets
Adapt public funding models and policies to remove any fossil fuel subsidies, encourage phase-out fossils and ensure any imports from emerging markets are from existing not new plants
Integrate holistic ESG and net zero principles into investment objectives to promote sustainable investing in line with net zero and UN SDGs
Key actions and mitigations
Develop new public-private partnerships and blended finance models to promote risk-sharing and drive additional investment into renewables and emerging markets to address funding gaps
For insurers
For investors
34 International Coral Reef Initiative, New Parametric Insurance for Endangered Mesoamerican Coral Reef | ICRI (icriforum.org) 35 Reported by the Financial Times, Australian mine contractor fails to obtain insurance on ESG concerns | Financial Times (ft.com) 36 For example, see Laka collective cover for e-bikes Collective Cover for Cyclists by Laka | Bicycle Insurance
Proactively engage with and promote sustainable investing to clients, including any innovation in green Encouragefunds/solutionsfurtherinvestments
4.3
Continued roll-out of renewable infrastructure
The key technologies required in the 2030s are currently only at the earlier stages of maturity, but will be moving from PE/ VC funding to commercial demonstration in the coming decade in order to develop and test business models for market entry in the 2030s. Key opportunities, challenges and actions for firms to consider during the 2030s include:
Job losses from shifts to new models - 71 million jobs estimated at risk in move to circularity; greater impacts in areas where local economy is more material-intensive; jobs in manufacturing expected to decrease globally;
Develop low carbon fuels and solutions for ScaleAviationupinvestment into CCUS and Green DevelopHydrogensolutions for electrification of heavy manufacturing and industrial processes
Build sustainable urban infrastructure, services and housing; inc. medium sized cities to reduce distances, promote inclusivity, jobs and income diversification
Resource scarcity challenges around natural resources, e.g. copper, nickel, cobalt required for electrification
Health issues around urbanisation and growing risk of air pollution; 37% of the projected urban growth will be in India, China and Nigeria. Cities drive 70% global CO2; expansion of slums; lack of proper housing and basic Environmentalservices;risks of scaling up new technologies into emerging markets, if not supported by sufficient safeguards; financial risks around pricing in local currency, reliance on domestic demand, counterparties and less developed risk management processes
Electrification of heavy transport and haulage
Horizon 2: the 2030s
Key transition challenges
Expensive retrofitting needed in traditional cities
Emerging markets
Roll-out urban projects e.g. smart cities with smart grids, electric mobility, smart buildings
43
Developed markets
Develop fossil plant decommission plans, and test business models to repurpose e.g. Blue hydrogen w/CCUS
Key transition opportunities
Transport network upgrades and electrification to support economic growth and urban development
Clients: continue to monitor transition impacts across policies engage with client base to inform them of their forward-looking risk profile, use learnings from the 2020s to educate clients on insurance related transition considerations, such as fire protection and response standards for Lithium-ion batteries37 as they scale up to achieve mass market adoption in the 2030s
For insurers
For governments and regulators
For investors
Drive innovation through PE/VC funding into new climate/green tech solutions, new circular business models e.g. around metals, mining, end-user manufacturers and consumer goods sectors to combat waste of natural resources
Natural capital: key focus on new and evolving products and propositions to support integration of valuation metrics around natural capital into investment processes
37 Marsh, April 2022, https://www.marsh.com/ma/services/risk-consulting/insights/fire-protection-and-property-insurance-considerations. html, Gcaptain, February 2022, Lithium-ion Batteries From Electric Vehicles Aboard The Felicity Ace Are Keeping The Fire Alive (gcaptain.com)
44
Impact investing: in emerging markets services that promote asset-sharing, maintenance, and lifetime extension
Liabilities: continue to monitor transition pathways for relevant product lines to adapt forward-looking view of your underwriting portfolio, increase focus on development and scale-up of both emerging markets and natural capital focused solutions, commence timeline for reducing underwriting of fossil fuel infrastructure/ production activities in emerging markets; embed ESG and natural capital asset pricing into BAU
Emerging markets skills programmes to build local capabilities across sectors; collaborate with local communities to develop shared benefits models around local infrastructure changes
Improved standardisation of regulation around emissions accounting and carbon markets; introduction of further standards around natural capital disclosures and accounting
Assets: increase ambition for 2040 investment and emissions targets, including scale-up into funds in emerging markets to support energy infrastructure change, protect natural capital and create jobs
Global policy co-ordination to harmonise and allocate resources, reduce financial risk, enable continued investment in transition whilst removing loopholes in cross-border energy imports/exports
Encourage fund managers to further scale-up provision of funds with just transition objectives and emerging markets focus
Blended finance e.g. Urban Planning Santiago and Bogotá electrified public transport via public-private JVs
Key actions and mitigations
Key transition opportunities
4.4 Horizon
Increasing risks around sustainable, equitable provision of clean water and food to meet population growth
Key transition challenges
Developed markets
Scale up of investment into clean hydrogen, CCUS and associated infrastructure required
Security/stability issues around natural resources move from fossil fuels to metals/mining
additional risk of political/civil unrest in markets where supply chains are not yet Populationdevelopedgrowth and urban expansion place added pressures on agriculture and land use change sectors
CCUS to abate residual emissions from fossils e.g. China 3: the 2040s
Emerging markets
Potential challenges in meeting global energy demand with intermittent renewables, if storage solutions and alternative energy sources are not successful
New agritech, practices and models to improve yields/food supply to sustain a growing Continuedpopulationsustainable urban development to support growth
Acceleration of stranded asset risk in emerging markets, as the last fossil producing infrastructure is Furtherdecommissionedjoblossescreate
Continued growth in renewables to achieve mass market; opportunities to decommission existing fossil fuel infrastructure and repurpose e.g. hydrogen
45
The key technologies required in the 2040s are currently only at the very earliest stage of development, and are unlikely to move to commercial demonstration within the next decade. Critical regulatory, social and energy price conditions in the wider environment will need to be in place before these are technologically viable, and tested for scalability in the 2030s and beyond. The opportunities, challenges and key actions for firms to consider during the 2040s include:
New business models and technologies to replace finite natural resources (e.g. metals) with circular/renewable options in electricity generation
Innovative technologies to neutralise/address residual emissions in hard-to-abate sectors e.g. agriculture, aviation, international shipping and heavy industry
For governments and regulators
46
For investors
Infrastructure renewal programmes in emerging markets to utilise remaining decommissioned fossil fuel assets and drive continued development in local areas
For insurers
Global policy co-ordination to develop international action to combat resource scarcity challenges vs growing population, and encourage equitable access to food and water, and use of natural resources
Encourage fund managers to scale-up biodiversity and natural capital funds geared towards restoration and permanent carbon sequestration
Key actions and mitigations
Drive innovation through PE/VC funding to innovation in nature-based solutions to address residual emissions e.g. agricultural production of methane
Regulatory consensus emerges around accounting and disclosure rules for natural capital and biodiversity protection
Liabilities: cease all insurance to any fossil fuel infrastructure/production activities in emerging markets; Continue to focus on underwriting product and pricing innovation to support embedding the net zero economy, with further integration of natural capital assets into risk and pricing calculations, and particular focus on careful consideration of policies around underwriting for natural resources (for example, Lithium, nickel and cobalt are required for EV production and may come under increasing strain without further innovation to reduce dependency)
Assets: increase ambition for 2050 investment and emissions targets, including scale-up into funds in CCUS, and protection and restoration of natural capital
Clients: Continue to facilitate the net zero economy by providing insurance solutions for new technologies, including expanding to wider product sets around natural capital protection
Focus of impact investing and philanthropic funds moves to just and equitable access to natural resources, clean water, sanitation and food e.g. in growing urban populations in developing economies
Image: Fort Grey, Guernsey
Step 1: Build understanding around the just transition
48
5. key steps for the finance industry
Hot topics across the finance industry have moved from climate risk, to net zero, and now increasingly ESG and the just transition, with the present economic climate driving this up firms’ agendas. However, the relationship between each of these themes is not well understood. In larger organisations, they are often managed as distinct programmes operating in silos. Firms in Guernsey can be nimble here, and get on the front foot by starting with a holistic sustainability strategy centred around a just transition. This is one that weaves together net zero with ESG, rather than considering them as separate challenges.
This chapter provides practical guidance on key actions for firms to take to support a just transition to net zero. These are high level actions that apply across the main sub-sectors within the Guernsey finance industry.
5.1
Whilst the literature around climate risk and net zero has evolved substantially over the past 2-3 years, just transition has received significantly less focus. In the first instance, firms must start by establishing a strong understanding of the concept of the “just transition,” and the relationships between ESG and net zero. At its core, delivering a just transition for finance firms means developing a forward looking strategy to facilitate the transition to low-emissions alternatives, whilst balancing positive outcomes for people and planet via a holistic approach to managing environmental, social and governance risks and opportunities.
Ensure that financial flows are aligned to companies with holistic alongsidechainenvironmental,commitmentssustainabilitycoveringsocial,supplyandhumanrightspolicies,transparentdisclosuresdemonstratingclear,seniorstewardshipandaccountability
Just Transition
Social
Reduce GHG emissions in line with sustainable pathways, differentiated by sector and region to accommodate different ranges of economic growth. Include both emission reduction objectives and those targeted towards natural capital
Forward looking strategy to facilitate a transition to a low-carbon economy, balancing positive outcomes for people and planet through a holistic approach to managing Environmental, Social and Governance risks and opportunities
Environment
Consider social impacts of portfolio re-allocation or policy withdrawal decisions; balance any negative screening or divestment actions with positive actions e.g. to invest in green infrastructure programmes in markets that are transitioning to support job creation
Governance
49
To drive a truly holistic strategy centred around the just transition will require strong support and stewardship throughout an organisation, starting from the very top. This means more than signing up to the idea, but also the cultural and organisational changes it will require. It is critical to integrate these concepts throughout every team in a firm, as opposed to via siloed ESG or sustainability teams. It means setting this out as a priority, and investing in an educational campaign around why it is so critical, how it impacts the business model, and why it represents an opportunity to drive differential impact in the wider market.
A critical element of a truly holistic strategy is how it is embedded throughout an organisation, from the operating model, through to processes, policies and decisions and the ongoing monitoring of those decisions. Given this is such a nascent field, never has embedding been as important as it is when considering a just transition, understanding the consequences of any actions and then course correcting will be critical.
38 NYU
Plus Studies Published between 2015 –
Words alone will not be enough; the economics of course have to stack up. This means building a business case to substantiate this campaign with concrete numbers around the opportunity available to drive value and protect against risk. A growing number of sources can support this – including those cited in the tables in 5.2 overleaf. Stern, ESG and financial performance: Uncovering the Relationship by Aggregating Evidence from 1,000 2020,
published in 2021 39 PRI, How ESG engagement creates value for investors and companies, April 2018
50
Broadening the scope of a firms’ strategy from net zero to just transition and applying systems thinking can help to identify wider value generating opportunities within and across each of the ESG domains. Beyond technologies to facilitate emission reductions, investment into ESG opens up a range of key sectors such as healthcare and education, alongside business and operating model improvements across the board. Studies have consistently shown that this can add financial value, e.g. through improvement of employee retention, or better risk management.38 Furthermore, ESG engagement can help to strengthen client relationships and develop more meaningful learning and knowledge sharing across investors and companies.39
Applying the wider ESG framework throughout net zero strategy is critical to ensuring a just transition. Net zero is still a relatively new discipline for financial services firms and the landscape is fast evolving. Substantial variation exists across firms’ net zero commitments, driven by differences in scope, methodologies, and the availability of data.
To help drive consistency and support the industry in transitioning, a range of frameworks and tools have emerged. However, there is still limited guidance available on how to apply these within the context of the just transition. To do so, firms will need to use a range of sources, combining available tools and sources that outline the key ESG risks across sectors and geographies today, with forward-looking, science-based net zero scenarios to outline changes required within these sectors to meet the energy transition challenge.
Science-based scenarios come from credible sources, and differentiate between key sectors and markets that will adapt at different rates to enable continued growth in emerging markets.40 Whilst these scenarios are primarily focused on emissions reduction metrics, they often provide useful data on the level of investment required and jobs created to facilitate the transition. Collaboration with sustainability SMEs to build on these scenarios and develop qualitative, forward-looking narratives around the just transition – such as those outlined in section 4 – can be useful tools to help guide strategy development.
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40 Such as the IEA’
5.2
step 2: Develop a just transition strategy Net Zero Emissions Scenario, one of the main sources used in the GFANZ Net Zero financing roadmaps
Map out main sectoral and geographical exposures across a firm’s value chain; heatmap key sectors and regions within high ESG risks today. If sufficient data exists, measure baseline emissions associated with a firm’s portfolio, where methodologies are available via the PCAF standard. Sector-based proxies can be used as a guide where data is not available.
Example questions to ask during forward-looking analysis around a just transition:
When is the right time to disengage from high-emissions activities, to align with the net zero future?
Are there initiatives we could support to help promote transferability of this value into new industries, jobs and skills?
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Define sustainability goals, including a holistic range of Environmental, Social and Governance objectives, e.g. emissions reduction targets aligned to net zero, alongside social KPIs, engagement targets and sustainable finance targets with both social and climate/ green products, as well as transition-labelled products
Which sectors/jobs are being displaced, and what social, environmental and economic value do they contribute?
The below table outlines key activities for firms to consider when developing their just transition strategies, supported by some examples of key frameworks and tools that can be helpful.
C: Set a holistic range of goals, as part of a just transition strategy
A: Map out considerationsESGacrossthevaluechain
B: Explore forward-looking scenarios to estimate how they might evolve Perform forward-looking analysis to consider how the key ESG risks identified could evolve in the transition to net zero; use a comprehensive range of sources across ESG themes, and identify both risks and opportunities to help manage and mitigate them. Firms can use net zero scenarios, or can use external tools from third party providers.
To support firms in evaluating exposures at the company level, additional helpful tools are: Climate Action 100 Transition Pathway Initiative Other private tools42
Business loans and unlisted CommercialProjectequityFinanceRealestateMortgagesMotorVehicleLoans
C: Set a holistic range of goals, as part of a just transition strategy
A: Map out considerationsESGacrossthevaluechain
43 PRI, Climate change and the just transition: A guide for investor action, 2018, download (unpri.org), and NZIA, Insuring the net-zero transition: Evolving thinking and practices, April 2022, Insuring-the-net-zero-transition.pdf (unepfi.org)
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Listed equity and bonds
In addition, in 2021, consultations were issued on the following: Green Bonds, Sovereign Bonds and Carbon Removals Capital Market instruments
42 For further detail on some of these tools, UNEP FI have evaluated a range of solutions available to measure climate risk, The Climate Risk Tool Landscape: 2022 supplement – United Nations Environment – Finance Initiative (unepfi.org)
PACTA: Paris Agreement Capital Transition Assessment
NZBA – Net Zero Banking Alliance
IEA NZE IPCCIRENARCPsNGFS
NZIA – Net Zero Insurance Alliance
The world Benchmarking Alliance’s Just Transition Assessment41 is the best available source that currently evaluates company-level transition to a low carbon economy, in the context of just keyanalysisscenariosScience-basedtransitionnetzerocansupportmacro-ofhowfirms’businessmodelsandportfoliosinthetransitiontonetzero,acrosssectorswithintheirportfolios.Thereareanumberofcrediblesources:
SBTi – Science Based Targets Initiative – covers a range of sectors (not limited to Finance)
The most popular are:
To understand portfolio emissions, PCAF has emerged as the industry standard for emissions accounting across the finance industry; the standard currently covers these asset classes:
Appendix A: Specific guidance on the just transition is limited, however the PRI has provided some high level guidance for investors and the NZIA for AppendixAppendixinsurers.43BC:Arange of target-setting frameworks and initiatives have emerged.
B: Explore forward-looking scenarios to estimate how they might evolve
NZAM – Net Zero Asset managers Initiative
S&P Global, Refinitive, Sustainalytics, MSCI and CDP can all be useful sources to evaluate exposure to ESG risks across sectors, regions and through individual companies.
GFANZ & UNEP FI – for all sectors, with consistent principles on net zero, and specific commitments led via the industry initiatives:
NZAOA – Net Zero Asset Owners Alliance
41 World Benchmarking Alliance, 2021 Just Transition Assessment, November 2021
Embedded: include across the operating model, from processes, to policies procedures and management information, including the ongoing monitoring and course correction – it won’t be right all of the time, but should be directionally correct
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Whilst the above steps will not be directly applicable to the wider community of financial advisors and administrators within Guernsey, there are nevertheless key opportunities within each of these areas to provide differentiated offerings, data solutions and advisory services to clients in the industry.
Although navigating this so-called “alphabet soup” can feel daunting, consensus is starting to emerge in some key areas such as emissions accounting and disclosure. Guernsey has the benefit of having a fast, nimble regulatory regime, which enables it to quickly respond to these standards as they evolve, and to do so in a flexible and proportionate manner.
Initiative: Just start somewhere. Smaller firms may feel that a lack of resources/skills mean they have no capacity to act, but they absolutely do. Just starting somewhere – even if they are small first steps – is better than not starting at all
Accountability: Clear KPIs and objectives tied to clear milestones that drive action in the short term as well as the long-term
Pragmatism: data, for example, is not going to be perfect – but don’t let the perfect be the enemy of the good. Qualitative data can be a good supplement for gaps in quantitative data, whilst using your influence to articulate the type of data you need.
Key principles to support firms in developing their transition strategies:
Sponsorship: Get your key stakeholders bought in early; don’t neglect the need for both education or raising awareness, alongside cultural change, led by leadership behaviours
Materiality: start with a scope focused on the areas within your value chain that are most material to the transition challenge and your business, and build it up over time
Holistic: Don’t view any individual carbon reduction or net zero objectives in isolation. View within the context of wider E, S & G impacts (or the UN SDGs) and establish goals or objectives linked to each, to help support the just transition
7.6.5.4.3.2.1.
B: Disclose progress
A: Translate strategy into action
Transparent disclosure of progress towards climate and net zero goals is critical to ensuring accountability, and to driving improved consistency and comparability across the industry.
The table below outlines some of the sources and frameworks available to guide firms in translating strategy into action. Most are focused on net zero, with limited guidance on the just transition. This paper addresses some of this gap by providing guidance as to key principles to apply in translating just transition strategy into action. Further guidance is provided for each sector within the Guernsey finance industry in chapter 6.
Just transition: PRI has provided some high level guidance for investors and the NZIA for insurers.44
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CDP – Carbon Disclosure Project; covers a range of sustainability and environmental disclosures
44 PRI, Climate change and the just transition: A guide for investor action, 2018, download (unpri.org), and NZIA, Insuring the net-zero transition: Evolving thinking and practices, April 2022, Insuring-the-net-zero-transition.pdf (unepfi.org)
A range of actions will be required to integrate just transition objectives into a business and steer towards climate goals. Some are common to most firms, whilst others will vary based on the firm’s strategy, structure and business model.
ESG Ratings and benchmarks – although there are known inconsistencies in the data and methodologies used, monitoring and disclosing ESG ratings and scores can still help to drive accountability to ESG factors
UN Global Compact, PRI – reporting and disclosing via external initiatives can help to hold you to account
5.3 step 3: strategytranslateintoaction
For insurers – CISL – Insurers in a Paris-aligned Climate Transition – provides overview of available tools for net zero underwriting and examples of best practice for insurers
For investment funds and managers: NZIF –Net Zero Investment Framework – investment industry-led initiative, includes guidance on both target-setting and implementation, across key themes such as governance, portfolio management and asset allocation, and engagement
Most larger firms and corporates are now subject to one or more of the following disclosure regimes, each of which provides a framework for the sustainability disclosures required – either as a standalone report, or via a firm’s annual reports and accounts:
TCFD – Task force for Climate related Financial Disclosures – voluntary framework, moving into mandatory disclosure regulation in the UK and G7
IFRS & ISSB – International Sustainability Standards Board – developing a consolidated international standard for sustainability reporting, building on the TCFD foundations
Whilst limited guidance exists on just transition or implementation of net zero strategies, some sector-based frameworks can be helpful
For asset owners: NZAOA Target Setting Protocol – UN-Led initiative, like the NZIF, this includes broad guidance on targets and some aspects of implementation
RiskProductsEngagementEngagementClientPolicyandPricingManagementandPricingPartnerships
Raise awareness amongst governments and regulators around the regulatory frameworks, enablers and tools required to support you in transitioning – for example clarity and consistency in sustainability disclosures and taxonomies
Identify, measure and integrate ESG risks into both risk management and, where necessary and aligned to transition strategy, into pricing. Whilst negative pricing can be contentious, it may be necessary to ensure financial stability as we transition
There are some common levers available to financial services firms to steer towards their sustainability goals, however some will be more relevant than others depending on the goal itself, as well as the specialism, structure and business model of the firm. These tools are:
Engagement means more than simply raising awareness. It means becoming trusted partners, helping clients to develop their transition plans, and build confidence in their plans. This creates stronger, longer-lasting relationships, whilst enabling firms to make more informed financing decisions
Work with new partners to identify wider systemic opportunities to collaborate, innovate, and spread risk of transition across the industry, for example through blended finance
This includes development of new products, entering new markets, and using pricing incentives to encourage and facilitate just transition objectives, linked to clear, measurable KPIs
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Engagement over divestment: A just transition enables companies with the opportunity to transition in an orderly fashion, retaining their workforce and preserving their economic value. Divestment should only occur when an entity has been engaged and consistently failed to produce a credible transition plan or positive ESG outcomes
Regular Refresh: To ensure targets/goals/objectives/approach evolves as science evolves, as data improves and the macroenvironment changes to ensure this remains in line with just objectives
Incentives: Develop a meaningful package of incentives and ensure this is driven throughout the firm, and is tied to clear, near-term milestones and indicators
Holistic approach to metrics: Measure and monitor a range of environmental and social metrics, where material to the asset/sector/geography. Although sound ESG data is difficult to source and ESG ratings are far from perfect, continue to deploy a pragmatic approach whilst encouraging providers and companies to improve their reporting
Balanced decisions: Consider the social and environmental impact of key decisions. A siloed approach will fail to identify wider E, S and G factors. Develop mitigation strategies where ESG objectives are not perfectly aligned. For example, balancing fossil fuel displacement with investment in job creation opportunities in the same area
7.6.5.4.3.2.1.
The following principles can help firms as they consider which of these tools to apply in translating a just transition strategy into action:
Cautious Offsetting: Avoidance is always better than offsetting; focus on reducing emissions directly through engagement to encourage wider change and emissions reduction in the real world. Offsetting should only be used where residual emissions remain that cannot be addressed by technologically or commercially viable options (SBTi). Whilst investing in carbon removal and natural capital should absolutely be part of a holistic just transition strategy, this should be additive and not replace emissions reduction; if using offsets then best to align to industry accepted frameworks e.g. Oxford principles
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Transparency: Make clear, credible and transparent disclosure of ESG impacts to counter and protect against potential greenwashing accusations
6.
This chapter provides specific overview of the key opportunities, risks and mitigations for each sub-sector within the Guernsey finance industry – covering insurance and insurance management, investment funds and management, trust and company, private banking and pensions.
Insurance and insurance management
Guernsey and the just guidancesector-specifictransition:
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45 Guernsey Financial Services Commission Statistics as at 31st December 2021, Statistics | GFSC
6.1
Guernsey is home to over 600 insurance companies and cells, with gross assets valued at £31.4 billion and gross written premiums standing at approximately £4.62 billion.45 Renowned as a leading global centre for non-US and international captive insurance, Guernsey is already recognised as a leader for innovation in the insurance sector.
47 Reported by the Wall Street Journal, October 2017, Mexico to Collect $150 Million From Catastrophe Bond - WSJ
In its core role, insurers provide resilience, by funding the fix, supporting individuals, businesses and communities to build back and recover from loss events. As asset owners, insurers also have a key role to play in faciliating the allocation of capital towards just transition objectives. In Guernsey, there are a number of unique strengths that can be leveraged to help support this:
Reinsurers: As the severity and frequency of climate events increases, reinsurers are well placed to provide collateralised catastrophe reinsurance (via insurance linked securities) and must facilitate climate-centric product innovation by working with insurers to adjust their risk appetite and pricing strategies to protect balance sheets, by realigning their pricing, attachment and deductible structures (including the reassessment and sale of legacy assets/liabilities).
46 Guernsey Finance, Captive insurance: Expert solutions provided from Guernsey, 01 February 2020
Insurance Linked Securities: Financial instruments designed to fill the gap between insurance capital and the potential losses from natural catastrophe events, with their value driven by an insured loss event. ILS can be thought of as a climate-indexed investment issued to trigger resilience funding following a loss event and enable a rapid and efficient response to those affected (for example catastrophe bonds ‘cat’ issued by the government of Mexico to manage its hurricane and earthquake risk47 or longevity risks for life insurance).
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Captive insurance: Guernsey is home to captives for almost 40% of the FTSE 100 companies, with 37% of European captive market and 5% of the global market domiciled in Guernsey.46 Captives can be used to warehouse acute perils that are deemed too expensive to place in a traditional insurance market, and provide alternative risk transfer solutions for emerging technologies or negative externalities such as GHG emissions, nature loss and human rights violations.
What role can it play?
Protected Cell Company (PCC) and Incorporated Cell Company (ICC): Designed for use in the captive insurance sector, PCCs and ICCs were pioneered by Guernsey to provide legal segregation between assets and liabilities. PCCs could be used to support the transition, for example, to ring-fence risk around assets that are transitioning, and allow stop-loss reinsurance to cover catastrophe exposures on investments.
Insurance Intermediaries: Are key for positioning the importance of positive transition strategies with insurers. As insurers begin to pay attention to individual company profiles in relation to climate, intermediaries are crucial to aligning the C-suite of a company to the market requirements.
Transparent governance structures and disclosures: To enable these opportunities, Guernsey must leverage its strong reputation as a stable jurisdiction and “good governor” to support and facilitate the measured, orderly transition around “brown” assets through transparent governance structures and disclosures. This is absolutely critical to counter any greenwashing risks associated with housing these assets.
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General Insurance: General Insurance for Guernsey Residents can continue to innovate new products that can help their clients with transition risk, for example, around buildings and use of sustainable building material in property or construction underwriting criteria, or to create incentives e.g. lower premiums for customers making green choices such as adoption of heat pumps.
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Innovative ESG Framework and kitemark for insurers: GIIA was involved in the development of a pioneering ESG framework for insurers to help them align to the UN SDGs across key underwriting, investment and reporting activities, and achieve a kitemark for doing so. A private catastrophe (CAT) bond was first to achieve the GIIA ESG kitemark in March 2021, listed on TISE sustainable in November 2021. An initial $3 million was raised through private placement with specialist bond investors to cover the risk of 10 volcanic eruptions across three continents.48
Adoption of the Principles for Sustainable Insurance: The Guernsey International Insurance Association (GIIA) represents both Guernsey insurers and Guernsey insurance managers. GIIA has signed up to the UNEP Principles for Sustainable Insurance (PSI) which dictate that all their members embed ESG issues into decision making, raise awareness of ESG issues, manage ESG risk and develop solutions, work with governments and other key stakeholders, and disclose progress in implementing the principles.
49 Guernsey Financial Services Commission (GFSC), Consultation Paper on Proposals for a Green Investment Discount for life insurer capital requirements, October 2020
What has been done to date?
48 The International Stock Exchange, November 2021, TISE lists world-first humanitarian catastrophe bond | TISE (tisegroup.com)
Capital requirements for life insurers: In 2020, the GFSC issued a consultation to incentivise green investing within the insurance sector, reduce capital requirements for green fixed income assets of commercial life insurers and commercial life reinsurers.49
Meeting net zero will require action across the full scope of insurance operations, supply chain, underwriting and investments.
Sustainable Operations: Develop a clear strategy and timeline to reduce emissions across the operating model, for example, renewable energy contracts, carbon removal for unavoidable emissions, reduce business travel, waste management, recycling and consumables policies, conservation and biodiversity planning for premises
Underwriting:Investment Portfolio:Sustainable Operations:
Target Net Zero ‘insurance associated emissions’ using “follow the risk” principle
Continue to develop Climate Risk analysis and Climate-centricCATActuarial-basedmodellingandstress-testingproductinnovationandriskfactorsforpricing
Reduce Operational Scope 1, 2 and 3 emissions, offset via credibleinitiativescarbon
Realistically and sensitively reduce ‘financed emissions’ using the “follow the money” principle
62 50 Net Zero Asset Owner Alliance, Inaugural 2025 Target Setting Protocol, January 2021
A set of holistic actions applicable to all firms are described in section 5 above. To steer towards net zero goals and facilitate emissions reduction in each of the three domains above for insurers will require a combination of:
Net Zero value chain/ supply SustainableUnderstandingchainimplicationsofNZinitiatives(e.g.buildingtypes)Claims-Repair,Recycle,SalvagefirstBuildBackGreener-Incentivisechangethroughclaims(settlementincentives)
Sustainable Investment Portfolio: Use the role and influence as an Asset Owner to drive a holistic set of ESG objectives into your investment mandates, including the objective to transition invested portfolios in line with the net zero goal for managed funds. The Net Zero Asset Owner’s Alliance (NZAOA) provides some guidance around this via its target-setting protocol.50
Carbon accounting in line with industry standards (PCAF etc)
Support industry in Net Zero underwriting and carbon accounting efforts
What are the key levers the sector has to pull?
Investment mandate (AO) and Investment decisions (AM) in line with your top-down Net Zero plan and reflected across the business
Sustainable Underwriting and Claims: Following the steps outlined in section 5.3 and 5.4, build an understanding of how your business can support a just transition. Key steps include:
Identify opportunities to bridge the protection gap52 by continuing to develop risk and pricing models that optimise pricing or utilising parametric policies, Lloyds has suggested that just a 1% increase in insurance coverage could reduce the global cost of climate-related disasters to taxpayers and governments by 22%53
Assess ESG factors across your underwriting portfolio in order to identify those relevant to each product, for example, decarbonisation in property (E), human trafficking or controversial weapons in cargo (S), or bribery and corruption in D&O (G)
Engage with the wider industry networks e.g. GIIA, NZIA and NZAOA, to help collaborate and improve practical advice around underwriting for a just transition to net zero, as an area with limited guidance available to date
Influence consumer behaviour with pricing incentives in GI and use your position as a captive to demand parent company ESG policies and transition plans meet your expectations
Carbon accounting and adoption of standards51
PCAF, GHG emissions associated to insurance and reinsurance underwriting portfolios, Scoping document March 2022
63 51
|
Incentivise change through claims with build back greener settlement incentives, address both industry and consumer behaviours by forcing change in manufacturing, repair, re-use, recycle
The Insurer, August 2021, Why climate risk matters and how the insurance industry can close the protection gap Viewpoint | The Insurer
The Geneva Association, Understanding and Addressing Global Insurance Protection Gaps, April 2018
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Evolve your underwriting portfolio plan in line with the wider economic transition by balancing risk and opportunities against target loss ratios
Help educate and inform clients about ESG factors that impact pricing and policy or a roadmap for underwriting exclusion; Share the emerging financial risks for ‘brown assets’ such as litigation, increased taxation, asset deterioration and increased insurance costs associated with the ‘greening’ of the brown asset
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The insurance sector faces risks around delivering a just and equitable transition to net zero, with stranded asset risk and the lack of data amongst the most commonly cited. The table below outlines some of these risks in more detail, alongside some example mitigations:
A stranded asset is an asset that has suffered from unanticipated or premature write-downs, devaluation or conversion to liabilities, for example property with increasing risk of sea level
Ensuring a just transition means insurers must strive to close the protection gap, treatment of stranded assets must be solved, for example, insuring as a separate product, reinsurance or parametric policies.
Societal pressure will increasingly demand that insurers innovative products for those adversely affected by transition (i.e. loss of work in carbon intensive sectors).
What are the key risks, and how can we mitigate them?
Similar to the treatment of stranded assets, the Guernsey insurance sector is well placed to offer innovative solutions. Examples include parametric insurance and ILS.
MitigationRisk
gapprotectionBridgingassetStrandedThemeriskthe
The insurance protection gap is the difference between the amount of insurance that is economically beneficial and the amount of coverage actually purchased. Those assets lost due to an event are written off, or often recovered by taxpayers and governments.
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risk that in the pursuit of net zero, ‘brown assets’ become ‘stranded assets’.
Thererise.isa
Traditionalclients.insurance
With the exception of the Poseidon Principles for Marine there are not yet formal principles for the measurement of GHG emissions in an underwriting portfolio, however, the NZIA is collaborating PCAF to produce a target-setting protocol by January 2023 in collaboration with the Science Based Targets Initiative (SBTi).
MitigationRisk
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As catastrophe modelling is becoming less and less predictable, there is a risk that pricing and reserves are not appropriately managed to cover losses.
At present, insurers have limited access to ESG data for their insured assets of clients, nor standardised methodology/ rules for what should be captured to support assessment of assets vs
risk models rely on historical loss and exposure data, though in recent years, increased intensity of severe weather in areas of high population and economic value have demonstrated that real-world risk dynamics are changing.
The sustainability disclosure regulation, e.g. SFDR in the EU will drive improvements in wider ESG metrics over time, but to bridge the gap, Lloyds have requested that all managing agents create a first version of their own ESG frameworks, governance and strategies which will drive change across the industry.
To improve the basis of sustainable underwriting and investment decision-making, modelling tools are adapting to reflect both past experience, and present and likely future Changesdevelopments.inmodelling and inclusion of transition plans will support the development of new technologies and net zero products, service and technologies (i.e. innovative construction methods or new manufacturing processes).
RiskandRiskassets:forandavailabilityDataThemeaccuracyinsuredmodellingpricing
uncertaintyPolicyguidanceLackunderwritingnetaroundchallengesculturalUnderstandingThemezeroof
The lack of clarity on policy landscape to support delivery of net zero goals (e.g. energy transition or deforestation policies) may lead to mispricing of risks associated with transition, if not factored in correctly or in time.
Reduce regulatory barriers: The Commission can take action in trying to reduce the national regulatory barriers that stand in the way of catastrophic reinsurance (either alternative or traditional) written out of IFCs such as Guernsey.
MitigationRisk
With policies renewed on an annual basis, risk has been viewed through a short-term lens, as an instrument to absorb financial shocks or to transfer risk but without a holistic or long-term view of systemic risks; although physical risk analytics have been long established, measuring and insuring transition risks is much less Lackfamiliar.54ofguidance
66 54 UNEP FI, Insuring the net-zero transition: Evolving thinking and practices, April 2022
around what to do for insurance, including standardised definitions on insurance-associated emissions, or applicability of certain frameworks for insurers, is a key challenge that the sector is grappling with.
Framework: Extend the GIIA ESG framework to include and define just transition, review and adopt frameworks emerging from the Lloyds market through 2023 onwards. Practical guidance on transition for insurers should include definitions of key terms, as well as further guidance on underwriting activities.
Cultural change is needed across the industry to recognise that the transition journey can be driven by underwriting behaviours, and a just transition can only be achieved with insurers working at the heart to provide social protection through financing resilience.
Case study: World-first catastrophe bond issued via Guernsey ILS structure55
55 WE ARE GUERNSEY, World-first catastrophe bond issued via Guernsey ILS structure | WE ARE GUERNSEY, TISE, TISE lists world-first humanitarian catastrophe bond | TISE (tisegroup.com) and Insurance Journal, World’s 1st Catastrophe Bond for Volcanic Eruptions Aims to Improve Disaster Relief (insurancejournal.com)
Guernsey facilitates innovation in catastrophe insurance: A pioneering $3 million Cat bond, brought to market in March 2021 using a Guernsey insurance-linked securities (ILS) structure, was the first ever bond to provide humanitarian cover for pure volcanic eruption. This was later listed on Guernsey’s sustainable stock exchange, TISE Sustainable, in November 2021. It was also the first insurance entity to be accredited under GIIA’s ESG Framework.
Humanitarian Threat Mitigation: The bond covers the risk of eruption for 10 volcanoes across three continents with at least 700,000 individuals living within 60 miles (100km) radius. The bond is designed to support fast humanitarian aid in the event of an eruption, supported by predictive modelling developed by Mitiga Solutions to estimate when and where funds will be needed and facilitate faster pay-outs.
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Leveraging the Blockchain: The bond also sits on Replexus’ unique ILS Blockchain platform to provide a lower-cost solution for processing transactions on the secondary market, where initial investors included Plenum Investments, Schroder Investment Management and Solidum Partners.
What role can it play?
Knowledge and Experience: Guernsey’s strong reputation for the depth of knowledge possessed by its fund managers for value investing within its key asset classes (i.e. Private Equity, Alternatives, Property Funds, Debt Funds and Fund of Funds), to support long term sustainable investments that align to transition objectives.
68 Investment funds domiciled in Guernsey reached total net asset values of £314 billion as of the end of March 2022, including almost £5 billion in funds managed under the Guernsey Green Fund regime.56 Guernsey is a specialist centre for investing into alternative assets such as private equity, infrastructure and alternative debt.
This sector has a crucial role to play, given its role as asset allocators on behalf of global investors. Guernsey is strongly positioned to channel this international capital into the just transition, leveraging its access to global markets, innovative products and structures, while supported by a strong but flexible governance regime that has made sustainability a key priority.
Key Sector opportunities: Private equity and venture capital are a core part of Guernsey’s investment sector, and are critical to investing new and emerging new technologies at the earliest stages of development. This is crucial for the transition, as the technologies required in 2050 are still in their infancy today. Infrastructure and property funds are also important, with buildings representing approximately 20% of our emissions in the UK. Guernsey could play a key role in helping those clients transition successfully as buildings emit around c15% direct CO2 globally (IEA). FundsInvestment
Global Access: Guernsey provides fast, flexible and low-cost access to global markets. Guernsey is also home to The International Stock Exchange (TISE), providing opportunities to raise capital from global investors. Currently there are 2,000 issuers from over 35 countries with more than 3,500 listed securities and a total market value of more than £500 billion listed on TISE.57
Innovation: Guernsey’s supportive regulatory regime is open to the development of new structures and products driven by client demand, with innovation such as its market leading Guernsey Green Funds, and proposed Natural Capital Fund. Going forwards, innovation is needed to develop more blended finance offerings, which can promote risk-sharing across the industry and encourage sustainable investments into a range of environmental, social and governance themes. More product innovation is also required to encourage growth in social investing, and support the just transition objective.
6.2
56 Guernsey Financial Services Commission Statistics as at 31st March 2022, Statistics | GFSC 57 The International Stock Exchange, Company Profile | TISE (tisegroup.com)
Consider new asset classes, markets and products to enable you to invest in a holistic range of just transition objectives
59 The International Stock Exchange, TISE Sustainable Brochure, 2022, 60 Guernsey Green Finance, Guernsey Green Finance Strategy Report 2022, March 2022
What are the key levers the sector has to pull?
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Emissions associated with your firm’s offices, branches, company-owned vehicles, business travel
– vote for
ESG resolutions in line with net zero and just transition goals
Consider key tools e.g. ECO Vadis to monitor this.
Green Private Equity Principles: 2019 developed a two-pillar framework of principles for green private equity investing.
Meeting net zero for asset managers requires action across the firm’s own operations and supply chain, as well as the investment portfolios it manages on behalf of its clients.
Green Fund Regime: In July 2018, GFSC created the world’s first regulated green investment fund regime with internationally agreed objectives of mitigating environmental damage and climate change. Comprised mainly by 10 funds, registered Green Funds in Guernsey had assets in value totaling £4.65bn at the end of 2021.60
Understand the emissions associated with your supply chain, as well as any wider E, S and G risks with key suppliers.
Guernsey Green Finance, Guernsey Green Finance Strategy Report 2022, March 2022
What has been done to date?
Integration of ESG principles: 75% of AUM of funds in Guernsey are managed, administered or sponsored by firms adopting the United Nations’ Principles for Responsible Investment.58
Sustainable Investment Portfolio:Sustainable Operations:
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Develop a clear plan with near term milestones for how you will reduce emissions
TISE Sustainable: A partner exchange of the United Nations Sustainable Stock Exchange Initiative (UN SSE) and with a comprehensive sustainable market segment. As of the end of March 2022, TISE sustainable had more than £12 billion in listings for entities meeting a range of environmental, social and governance criteria.59
Measure and disclose portfolio emissions in line with industry standards (PCAF), or develop solutions to support measurement of portfolio emissions
Reduce operational Scope 1, 2 and 3
Encourage reduction of ‘financed emissions’ across your portfolio or client base through engagement, influence and incentives to drive emissions reductions in the wider StewardshipeconomyandEngagement
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Perform an end-to-end review across fund objectives and mandates to identify any conflicts with E, S and G principles
A set of holistic actions applicable to all firms are described in section 5 above. To steer towards net zero goals and facilitate a just transition in each of the domains above for investment managers will require a combination of strategies across:
Sustainable Operations: Developing a clear strategy and timeline to reduce emissions across your operating model, for example, through renewable energy contracts, electric vehicles for employees, and improved waste and recycling processes; invest in carbon removals via credible initiatives, leveraging the Oxford Principles
Engage with policy makers as well as the wider industry via key networks e.g. GIFA (Guernsey Investment & Funds Association), IIGCC and NZAM, to help collaborate and improve practical advice around investing for a just transition
Consider adopting pricing incentives to encourage customers to transition their business models in line with the required changes, e.g. lower management fees for ESG/sustainably branded products
Prioritise facilitating the reduction of emissions in the real economy through engagement, influence and voting policy – using divestment as a last port-of-call, where certain just transition or ESG tests have been failed
Adopt a clear engagement and stewardship strategy and use your voting rights, where applicable, to vote for ESG resolutions in line with sustainability and just transition goals
Sustainable Investment Portfolio: using your role and influence as an asset manager, advisor, or administrator to encourage the introduction of E, S and G into investment objectives, including the objective to transition invested portfolios in line with net zero on behalf of clients
Consider the changes required to your own business model and product set, including whether some products will be viable in the future and how they could adapt to evolve in line with the just transition; e.g. updating fund objectives
Help educate and inform clients about potential ESG or transition risk exposures, and encourage asset owner clients to integrate these factors into their investment mandates going forwards
MitigationRisk
Lack of consistency and reliability of ESG data, posing challenges around integrating this into financial analysis and measuring impact of investments
71
What are the key risks, and how can we mitigate them?
DataawarenessEducationThemeand
Emerging regulation will help improve data, for example, SFDR in the EU, the Sustainability Disclosure Regime in the UK and ISSB globally are all moving in the same direction. However, this will take too long; investment managers and advisors have a key role in defining requirements for ESG data and requesting this from the companies/assets they invest in; smaller firms can collaborate with data providers to outsource and reduce friction in the ESG data gathering process
Provide further education on various topics to level the playing field; promote new courses e.g. CFA certificate in climate investing; continue to facilitate regular dialogues to promote knowledge sharing across the wider sector
Variable level of expertise and awareness around ESG risks and opportunities across the island
Short versus longer term prioritisation of climate change investing over other investment opportunities and themes e.g. cyber
Transition investing does not mean ceasing to invest in such technologies; it simply means applying the transition test across valuation models and estimates performed on all investments to determine whether it will be a long term value driving opportunity
Whilst ESG or transition specific products are helpful to drive additional investment into the transition, ESG integration is a key requirement into all sustainable investing going forwards to protect value on behalf of asset owners
failuresmarketFinancialprioritiesCompetingdutyfiduciaryaroundPerceptionsTheme
72
Creationsecurityof“green bubble” around ESG linked products bubble Withdrawalburstof funding and “stranded asset risk” in key sectors/markets that still need to transition
MitigationRisk
Perception that fiduciary duty requires managers to meet certain performance standards, or to make short term financial returns over the longer-term;
Move from inferred to evidencebased assessment of fiduciary duty; perform an end-to-end review of funds to identify concrete conflicts between the existing fund objectives and ESG objectives; consider updating/engaging asset owners to change mandates where conflicts do exist; integrate ESG principles into all new funds going forwards – to ensure no misalignment with transition objectives; engage myth-busting exercises to debunk assumptions around level of performance required by fund managers to discharge of fiduciary duty, and associated litigation risk
73 61 CIBUS Sustainability Process, Sustainability - Cibus Fund by ADM Capital Europe LLP
Accountability to Sustainability Action Plans: Independent ESG consultants create an ESAP (Environmental and Social Action Plan), which outlines processes for improving Governance practices or how to add value to the company whilst improving its ESG credentials. The ESAP also provides guidance on sustainability mitigation, and ensures the company is compliant with Cibus’s sustainability standards. The ESAP is agreed by the Cibus team, the operating partners, management and stakeholders of the company, and includes identifiable and measurable actions against which management is held to account, and are questioned if targets not met.
Value creation through ESG improvement: Cibus sets ESG KPIs with the companies it invests in, in order to track their performance and continuously identify areas of improvement. Cibus is a great example of investments that are evaluated on their environmental sustainability and leverages this as a key source of value creation opportunities, focused specifically in the sustainable food processing and production sector. Cibus has raised a total of $769m to date.
A Guernsey-domiciled Green Fund: The CIBUS Fund, launched in 2016, was the first to be accredited by the Guernsey Green Fund regime in 2018. The fund focuses on technology innovation to change the way food is produced, increasing resource efficiency and enabling sustainability within the Agricultural sector. They do this using two strategies: firstly through private equity, predominantly through buyouts and growth equity opportunities, and through the Cibus Enterprise strategy, which invests in late-stage disruptive solutions in the agrifood tech space.
Case Study: Cibus Funds-Value Creation through Sustainability61
ESG Focus: Due diligence is key for Cibus Funds before they embark on providing capital to businesses. This includes standard tests around operational, legal and commercial viability, in addition to an extensive independent sustainability review conducted by an external ESG consultancy.
-
Guernsey is home to 150 regulated trust companies, servicing a range of clients from large corporates to private individuals. This sector can play a key role in supporting the just transition through its role in providing specialist advisory services and allocating capital on behalf of private wealth towards sustainability objectives. The baby boomer generation holds wealth estimated to be as high as $30 to $40 trillion, much of which is set to transfer to millennial and Gen X children over the coming decades.62 Green and sustainable investing is becoming more and more important to these younger generations, hence developing such solutions will become increasingly central to this sector.63
What role can it play?
Active engagement with asset managers: alongside proactively engaging with asset managers to understand how they deliver on these objectives and encourage them to do more, where required. Build on Guernsey’s strong reputation for local collaboration and engagement to support this.
Active asset ownership: Trustees can engage with high-net-worth clients and beneficiaries to understand longer-term risks and impacts associated with climate and ESG risks on the value of their investments, and help them to integrate these into trust objectives, letters of wishes and investment mandates with fund managers.
74
Innovation in trust & company structures: leverage Guernsey’s strong track record for innovation and collaboration to develop and share new templates that support and encourage the integration of sustainability objectives into trust structures. For example, development of ESG friendly trust deeds, or design of a corporate entity with sustainability integrated into its articles of association. Guernsey Green Finance has already provided some examples, summarised in the section below.
Bespoke solutions and tailored advice: Guernsey’s advisors are well practiced in providing specialist advice and solutions tailored to a diverse range of private and institutional clients. Guernsey can build on this to tradition to advise clients on specific, specialised trust structures and investment vehicles to protect the long-term value of their assets or investments. This includes having rich, meaningful dialogues to raise awareness and generate demand for sustainable investing amongst their client base. Trust Company& May 2021, Millennials spurred growth in ESG investing July generational investment aspirations have shifted FTAdviser.com
6.3
(cnbc.com) 63 FT Advisor,
62 CNBC,
2021, How
Powers of Investment: explicit reference to trustees having the power to invest in Sustainable Investments, or preference investing in ESG related endeavours before any other funds/asset classes
Wishes of the Settlor: explicit reference to settlors wishes for sustainable or socially responsible investments to be taken into account by the Trustee before investing.65
65 WE ARE GUERNSEY, Sustainable Investing for Private Wealth and Family Offices, December 2020
What has been done to date?
WE ARE GUERNSEY, Family offices financing sustainability; encouraging demand and transparency in climate finance family-officesfinancing-sustainability.pdf (weareguernsey.com), We Are Guernsey, Fiduciary duty in the 21 century: Understanding Guernsey’s position, October 2021, and We Are Guernsey, Effective Philanthropy: trends and structures in global giving, April 2022
75
Consultation by Trustees: trustees to consult a professional service or person for advice on socially responsible investing
Engagement with beneficiaries: engagement with beneficiaries indicates that families are starting to think about pivoting their traditional investment portfolios to those that have some form of sustainability objectives within them. Whilst this is impossible to measure within such a private sector, anecdotal evidence suggests that amongst Guernsey’s clientele, demand from beneficiaries for sustainable wealth solutions is on the increase.
Education and awareness raising across the sector: Guernsey Green Finance has developed educational materials and guides to promote awareness and understanding around ESG related issues relevant to private trusts and companies, including redefining fiduciary duty within the current context to associate environmental, social and government themes with long-term value protection and creation, and a guide to philanthropic investing.64
64
Specific guidance on structuring trust deeds: Guernsey Green Finance has also developed specific guidance on how to incorporate sustainable investment objectives into the design of a trust deed, from which some examples have been drawn below:
Delegation by Trustees: trustee to delegate the power of investments to an investment agent/ advisor with the requirement to always consider socially responsible investments or sustainable investments before all other investments
Emissions associated with your firm’s offices, branches, company-owned vehicles, business travel
What are the key levers the sector has to pull?
76 Sustainable Investment Portfolio:Sustainable Operations:
ESG resolutions in line with net zero and just transition goals
Reduce operational Scope 1, 2 and 3
Understand the emissions associated with your supply chain, as well as any wider ESG risks with key suppliers. Consider key tools e.g. ECO Vadis to monitor this.
Consider new asset classes, markets and products to enable you to invest in a holistic range of just transition objectives
Meeting net zero for asset managers requires action across the firm’s own operations and supply chain, as well as the investment portfolios it manages on behalf of its clients.
Measure and disclose portfolio emissions in line with industry standards (PCAF), or develop solutions to support measurement of portfolio emissions
Develop a clear plan with near term milestones for how you will reduce emissions
Encourage reduction of ‘financed emissions’ across your portfolio or client base through engagement, influence and incentives to drive emissions reductions in the wider Stewardshipeconomy&Engagement – vote for
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A set of holistic actions applicable to all firms are described in section 5 above. To steer towards net zero goals and facilitate a just transition in the trust and company sector, a combination of strategies will be required across:
Work with investment managers to integrate sustainability objectives into investment mandates and understand how they discharge these, and use their role and influence to deliver on sustainability objectives
Integrate explicit clauses and structures into the design of the trust or company, if appropriate, to provide a clearer legal basis on which to direct funds towards sustainability objectives, for example, through explicit consideration of impact on wider stakeholders, people and planet, beyond shareholders and/or beneficiaries
Sustainable Trustee/Director: using your role and influence as a trustee or corporate director to help beneficiaries and/or shareholders reassess their objectives with respect to sustainability or ESG themes, and integrate these into the design of the trust deed, or the articles of association for a company
Engage with clients and beneficiaries to better understand their goals in relation to wider just transition risks and opportunities, and help advise them around these risks and the best ways to manage them where they are less familiar
Sustainable Operations: Developing a clear strategy and timeline to reduce emissions across your operating model, for example, through renewable energy contracts, electric vehicles for employees, and improved waste and recycling processes; invest in carbon removals via credible initiatives, leveraging the Oxford Principles
Evidence of stable value creation through sustainable investments to aid
RequesteducationESGdata from investment managers and feed this into reporting for beneficiaries; voluntary disclosures can riskcriteriaestablishWorksustainabilitysupporttoinvestingskilledEnsurewithinsupportedwithMythreputational/strategicprovidegainsbustingperceivedconflictfiduciaryduties,ifneeded,byspecificinclusionstheTrust’slegalstructuretrusteesareappropriatelyonESGandclimate(e.g.viaCFAcourses)beabletoeducateandclientswithobjectiveswithbeneficiariestoaholisticsetofESGandframeworktobalanceacrossthesethemes.
What are the key challenges and risks? There are some key challenges and risks which are unique to this sector:
MitigationRisk
Wider social and economic impacts of exiting investments in key sectors, given current instability in the market and the global economy
Lack of clarity or outdated perceptions around the role of the trustee with regards to value creation on behalf of accusationsRiskbeneficiariesofgreenwashingisgreater where sustainability services and advice is offered by non-specialists
78
ContextandWiderknowledgespecialistLimitedtrusteesthedutiesFiduciaryrequirementsandregulatoryduetransparencyLackawarenessdemand/LackThemeofclientoftolimitedreportingandroleofSocialEconomic
Perception that returns on sustainable investments are not comparable to mainstream Limitedinvestmentsrequirement for disclosures creates lack of transparency around impact of investment decisions
79
Climate Portfolio for a Family Trust: Next generation beneficiaries of a family trust wished to create a positive impact on the climate crises through impact investing. The Trustees appointed an impact advisor, who after extensive research presented various options which helped form the multi-million-dollar portfolio which comprised of green funds, agricultural funds and alternative energy funds.
Case Study: Climate Portfolio for a Family Trust Trust and company client success stories are less commonly available in the public domain, due to the sensitive and often confidential nature of their arrangements. The below example remains anonymised to protect the trust’s confidentiality:
Specialist structures: such as occupational pensions/international pension plans (IPP): international and savings plans (ISPs): can provide short or long-term savings vehicles with the objective of offering an efficient savings facility, rather than a retirement facility; Guernsey is considered as a centre of excellence in Qualifying Non-UK Pension Scheme (QNUPS); these can be leveraged to support sustainable savings and retirement solutions, through integration of ESG factors into the design of the plans
66 Guernsey Green Forum website, About › Guernsey Green Forum
Guernsey has through 40 years’ experience proven itself as a centre of excellence for International Retirement Plans, offering a whole suite of services and products to suit the unique requirements and objectives of the scheme sponsors and members. In 2001 Guernsey became one of the first jurisdictions in the world to regulate pensions provision, followed in 2017 by pension scheme rules to provide further protection for its members.
There are varying forms of pension schemes that Guernsey offers which can play a key role as asset owners, directing capital towards sustainability and just transition objectives on behalf of their clients, whilst protecting the longer term value of their assets.
Sustainable Trustees: Pension scheme trustees can discharge of their fiduciary duty to manage and protect the long-term value of the fund by integrating environmental, social and governance risks and impacts into the scheme’s investment mandates, and how they evaluate the performance of the pensions assets and external fund managers. This is critical to protecting the long-term value of their investments and mitigating longevity risk.
What has been done to date?
Education and awareness raising: around sustainability themes, via Guernsey Green Finance and associated initiatives, such as Sustainable Finance Week
Guernsey Green Forum: provides advice and guidance for local businesses around integration of environmental, social and governance themes into pension scheme structures66
What role can it play?
6.4
Pensions
80
Emissions associated with your firm’s offices, branches, company-owned vehicles, business travel and understand the emissions associated with your supply chain, as well as any wider ESG risks with key suppliers. Consider key tools e.g. ECO Vadis to monitor this.
Develop a clear plan with near term milestones for how you will reduce emissions
Much like the insurance and trust & company sectors, pension funds can drive sustainability and just transition objectives through their own operations and through their role and influence as asset owners:
Sustainable Investment Portfolio: using your role and influence as an Asset Owner to drive a holistic set of E, S and G objectives into your investment mandates, including the objective to transition invested portfolios in line with the net zero goal for managed funds
Sustainable Operations: Developing a clear strategy and timeline to reduce emissions across your operating model, for example, through renewable energy contracts, electric vehicles for employees, and improved waste and recycling processes
Creating returns for the longer term: Balancing and matching investment returns with funds’ liabilities via investment strategies that counter short term pay outs to members with long term sustainability objectives
81 Sustainable Investment Portfolio:
Require asset managers to measure and disclose portfolio emissions in line with industry standards (PCAF etc)
What are the key levers the sector has to pull?
Reduce operational Scope 1, 2 and 3
Sustainable Operations:
considering new asset classes which provide a holistic range of green and sustainable offerings to propel just transition objectives
Align to frameworks such as the NZAOA to support you in developing strategies to reduce ‘financed emissions’ across your investment portfolio through engagement, influence and incentives to drive emissions reductions in the wider Balanceeconomyshortterm pay outs while
Investment modelling is heavily dependent on the core data sets being used and the ability for the pension organisation to understand the outputs of the modelling
MitigationRisk
Variable level of expertise and awareness around ESG risks and opportunities across the island
Lack of demand for sustainability investing
What are the key challenges and risks?
Provide further education on various topics to level the playing field; promote new courses e.g. CFA certificate in Climate Investing; continue to facilitate regular dialogues to promote knowledge-sharing across the wider Preferentialsectorfunding for sustainable companies and other sustainable products such as SLL’s and Sustainability Trade
Assessfinancetheappetite to complete climate and net zero modelling in house. Where investment mandates are used, use the investment manager for related climate data and insights on your portfolios
There are some key challenges and risks which are unique to this sector:
82
modellingandESGClimateQualitydemandLackawarenessEducationThemeandofofanddatascenario
83 67 Guernsey Green Forum Case study, GGF-Template.pdf (guernseygreenforum.gg)
Specialist Advisors: The employer referred this issue to the Trustees and asked them to provide proposals to address this issue. Given the complexity of the issues, specialist advisors were enlisted to provide professional advice which highlighted that climate change was a considerable risk to the value of the pension fund’s assets. As the scheme was not large enough to create its own pooled fund, they provided a comprehensive review of available options in the market.
Next Steps: Once the company agreed to the proposal of funds, they carried out member briefings which generated a very positive response. The Trustees made all three funds available under the self-select option and agreed with the employer to keep the options under review.
Background: An employer with 100 employees did not provide an ESG or “Green” pension option through its Defined Contribution scheme. The company was made aware of the opportunities and risks these ESG issues posed to its members as well as to its own business. They realised that ignoring ESG issues could compromise investment performance and create financial risk.
Market Review: The Trustees commissioned a review, which included the assessment of the risk and return of the investment as well as compliance with a climate change mandate. There were three funds that were chosen by the specialist advisors which met the risk/return profile along with the climate change mandate plus one fund that would be integrated into the company’s default strategy.
Case Study: Employer provides sustainable pension solutions67
69 Guernsey Financial Services Commission, Banking in Guernsey | Industry Sectors | GFSC 70 Banking in Guernsey | Industry Sectors | GFSC
Climate risk management and disclosure: As with all other regulated entities in the Guernsey Finance industry, banks in Guernsey must comply with the Finance Sector Code of Corporate Governance which requests that that Boards consider the impact of climate change on their strategy and risk profile and, where appropriate, make climate related disclosures.70 Whilst disclosure is not a firm requirement, banks would benefit from making voluntary disclosures to demonstrate their leadership in this area. Banking
What has been done to date?
The banking sector in Guernsey offers the full suite of core banking services ranging from savings and investments to lending and mortgages for both local and international retail clients, and ultra high net worth individuals. Today there are 23 licensed banks in the island.69
84
What role can it play?
6.4
Guernsey can leverage its sustainability expertise on the island to position itself as a home for customers seeking to entrust their assets to strong, stable and sustainable private banks. They can do so by evidencing that they are integrating environmental, social and governance risk into their financial risk assessment and management processes, alongside developing solutions around the opportunities associated with ESG. This could include proposition development across the core lending, cash and mortgages product lines, as outlined in the sections below.
Client engagement and advisory: Deepen relationships with banking clients by becoming a transition partner, helping advise clients on key environmental and social risks to their assets, and developing innovative lending solutions and vehicles that incentivise sustainable outcomes, for example around incentives for mortgage customers to improve the energy efficiency of their homes
Consider physical and transition risks and the impact of that on current and future EmbedlendingESGframeworks which support
Develop a clear plan with near term milestones for how you will reduce emissions
What are the key levers the sector has to pull?
Networks and associations: Consider aligning to key frameworks such as the PRB (Principles for Responsible Banking) or the NZBA (Net Zero Banking Alliance)
Understand the emissions associated with your supply chain, as well as any wider ESG risks with key suppliers. Consider key tools e.g. ECO Vadis to monitor this.
Guernsey can leverage its sustainability expertise in the investment and insurance sectors to support sustainable banking for local firms in the two key areas outlined below:
Sustainable Operations: Developing a clear strategy and timeline to reduce emissions across your operating model, for example, through renewable energy contracts, electric vehicles for employees, and improved waste and recycling processes
Sustainable Investment Portfolio:
Emissions associated with your firm’s offices, branches, company-owned vehicles, business travel
Sustainable Lending: Using your role and influence as a lender to drive a holistic set of ESG criteria into risk assessments and credit granting processes
Reduce operational Scope 1, 2 and 3
Reduce ‘financed emissions’ across your portfolios through engagement, influence and incentives to drive emissions reductions in the wider economy
Measure and disclose corporate, mortgage and retail lending portfolio emissions in line with industry standards (PCAF )
Sustainable Operations:
Sustainable Mortgages: Opportunity to become a leading advisor around net zero buildings/property (e.g. via partnerships with expert developers) offering real estate lending and advisory carbon footprint services and products to support the transition
Sustainable Investments: Green deposits, with funds allocated to advancing the just transition, Green Portfolio Advisory and Education (for assets in custody)
85
transition objectives into lending criteria across all sectors
What are the key challenges and risks?
MitigationRisk
Preferential funding for Sustainable companies and other sustainable products such as SLL’s and Sustainable Supply Chain or Trade finance
adoptReluctancedemandLackcapabilitiesLackThemeofofclienttochange
Given knowledge in other parts of the financial industry and potential for referrals (with higher margin than banking products), Banks can leverage on other third parties forming Preferentialpartnerships.funding for Sustainable companies and other sustainable products such as SLL’s and Sustainable Supply Chain or Trade finance
There are some key challenges and risks which are unique to this sector:
Inability to educate customers on Sustainability and ESG topics could result in technologybehaviours(sustainabilitySlowofferingsLackgreenwashing.involuntaryofdemandforsustainabilityandpropositionadoptionofnewlinked)clientanddatacapturingsystems
86
Background: Skipton International was the first Channel Island based bank to join the UNEP FI’s ‘Principles for Responsible Banking’, an important step signalling the bank’s commitment towards aligning with the Paris Agreement on Climate Change and the UN’s Sustainable Development Goals. The request from signatories is to analyse their impact on people and the planet, set and implement targets and publicly report on their progress.
Sustainable Cities and Communities: target to help 200 first-time buyers annually
87 71 Skipton International, Sustainability Report, 2021
Decent Work and Economic Growth: S target to Score 9 out of 10 on their annual Employee Engagement Survey, and retain at least 90% of their employees annually
Peace, Justice and Strong Institutions: maintaining Feefo Platinum Trusted Service Provider status and by Committing to a Graduate / School Leaver Programme by 2023
Case Study: Skipton International Commits to UNEP-FI Initiative71
Skipton International’s 2021 sustainability report discloses progress against the 4 priority goals selected from the 17 SDGs
Responsible Consumption and Production: offset 125% of their annual Carbon Footprint, to achieve Carbon Neutral status by 2024 and Carbon Negative status by 2026. They also plan to reduce paper consumption by 20% per customer by 2025.
In addition, it outlines the risks and actions necessary and provides practical guidance that organisations can take in order to embark on this most important of journeys
Guernsey Finance is grateful to the following organisations and individuals for their contributions in developing this research report
The Guernsey Green Finance – Research and Literature Committee members
This report demonstrates that Guernsey and the finance industry has a disproportionately large role to play in enabling and supporting the just transition to a net zero economy
Mark Oliphant – The International Stock Exchange
The members of the Guernsey Green Finance Strategy Group Guernsey industry associations
7.0
The challenges are serious, but the solutions are there and Guernsey, as a force for global good, has a fundamental role to play in securing a net zero future.
Not only can the industry continue driving towards a proactive sustainability agenda, it further cements Guernsey’s position as a leading centre for financing the just transition
Josephine Bush – Guernsey Green Finance
cONCLUSIONS
This report provides a roadmap to net zero and shows that a holistic approach to managing the transition is needed. Guernsey as an international finance centre can support holistic changes across the whole of the finance industry
Thanks and acknowledgements
Jennifer Strachan - IAM Advisory Adele Gale – Robus
The report demonstrates the scale of opportunities available to the various pillars of Guernsey’s finance industry and provides a narrative to describe the transition to net zero across three time horizons that cover the next three decades
Kelly Moore-Vieira - Butterfield Bank (Guernsey) Limited.
Lesley Howgego - Strategic Risks Solutions
88
Image: Moulin Huet, Guernsey
Carbon capture, utilisation and storage
Network for Greening the Financial System
Net Zero Investment Framework Sustainable Finance Disclosure Regulation
Carbon Disclosure Project
International Sustainability Standards Board
Abbreviations used in this report Appendix a - glossary
Cambridge Institute for Sustainability Leadership
Net Zero Asset Managers Initiative
International Energy Agency Net Zero Emissions by 2050
Partnership for Carbon Accounting Financials Venture Capital
Global Financial Alliance for Net Zero Private Equity
Joint Ventures (JVs)
International Renewable Energy Agency
Full Name
Assets Under Management
Net Zero Asset Owners Alliance
Principles for Responsible Investment
Environmental, Social and Governance
Paris Agreement Capital Transition Assessment
UN Financial Centres for Sustainability
Intergovernmental Panel on Climate Change Representative Concentration Pathway
International Financial Reporting Standards
Task force for Climate related Financial Disclosures
Organisation for Economic Co-operation and Development
United Nations Environment Programme Finance Initiative.
Net Asset Value
90
Protected Cell Company
Network for Greening the Financial System
Net Zero Banking Alliance
Key Performance Indicator
AcronymESGOECDIEANZENZAOAGFNAZPEPACTACISLPCCNGFSIRENAUNPRIUNSDGsJVsNZIASBTiIFRSNAVFC4SIPCCRCPsNZAMPCAFVCKPITCFDAUMCCUSNGFSNZIFSFDRCDPNZBAUNEPFIISSB
Science Based Targets Initiative – covers a range of sectors
Net Zero Insurance Alliance
United Nations Sustainable Development Goals
72 GFANZ, Net Zero Financing Roadmaps Methodology Document, NZFRs-Methodology.pdf (bbhub.io)
The GFANZ definition of climate investment covers a broader range than just the products that are labelled as “green” or “climate” products today. This is because there are wider investments into transition-related activities that exist outside of these product/labelling regimes. Similarly, going forwards, the scale of investment required to reach net zero will not all be delivered by dedicated purpose lending or investment products. Some of this will necessarily come from more mainstream, general purpose instruments. In contrast, the starting point used to estimate Guernsey’s market share in global climate investment today is the total annual investments into the Guernsey Green Fund regime. Whilst this is a narrower definition, this is the only segment for which we have sufficient data to accurately attribute it to climate-related objectives.
91
Transition Finance Estimation Appendix b - Market Sizing Methodology
Estimates are based on GFANZ financing roadmaps, as recently published analysis that provides broad coverage of sectors including both supply and demand side energy, and agricultural and land use change. It rests on widely used and highly credible sources such as the IEA’s Net Zero Emissions scenario, the International Renewable Energy Agency (IRENA) and the Food and Land Use Coalition.72
92
Calculated from 2020 baseline; assuming 10 year average maturity
Annual Investment required in the Transition
Guernsey Growth in Market Share
Projected NAV of Guernsey Green Fund, out to 2040
Assumptions on Guernsey growth in market share (+0% by 2025 at 0.14%, +5% by 2030 to 0.15%, +7% by 2040 to 0.16%)
Although it may underplay Guernsey’s current market share, we have applied market growth assumptions to capture the increased investment opportunities available to the Guernsey sustainable investment market, should it pursue a proactive strategy geared towards capturing these wider investments into both existing and new instruments, for example, through the development of new transition and natural capital related product labels and regimes. This is a relatively conservative estimation of holding its share of 0.14% of the global market by 2025, growing this share by 5% to 0.15% in 2030 and 7% to 0.16% of the global market in 2040.
GFANZ total Global investment required * Guernsey projected market
/ Average total investment in climate globally (2016-2020)
Baseline Market Share (0.14%)
Average investment into Guernsey Green Funds Regime (2018-2021)
Ammonia fuelled vessels
DistrictBioengineeringBusesHeatnetworks
Sector average
Electric e.g. batteries for HGVs, Megachargers, fuel cells
Transport
Renewable equipment
Electric ElectrificationAircraftof HGVs/haulage
AFOLU 3 1 2 3 1.5 2.69 3 2.5 1.90 2.5 1.5
Sector average
Digitalisation of Farming
TransportTransport 1.752
Building retrofits and efficiency
AFOLU 1 Buildings
Hydrogen fuelled vessels Vessel efficiency e.g. assisted propolsion technologies
Sector average
Green Ports e.g. cold ironing
Alternative proteins
Evaporated Cooling
1 Buildings
Buildings
Transport
Buildings
Buildings
Fuel-efficient aviation engines (open rotor, UHRB)
Buildings
AFOLU 3 Buildings 1 Transport 1 Transport
Batteriesvesselsandcharging
raw Appendixdata c - Technology Maturity assessment
AFOLU 3 4
TransportTransport 21 AFOLU
Recycling and waste reduction
Transport 1 Transport
Forest, mangrove and peatland restoration
Electric cooking Electric AnaerobicTrainsmanure processing
Solid-state cooling
AFOLU 3 4 3.5
Low or No Carbon farm equipment
Road Efficiency e.g. Electric road systems, platooning, autonomous vehicles
Transport
TransportTransport 31 AFOLU 1 Buildings
Transport 3 AFOLU 1 Buildings
Methane inhibitors
93 TechnologySector Score AFOLU 2.00
Hydrogen boilers and fuel cells
Electric heat pumps Electric
Hydrogen fuelled road transport inc. use in HGVs, refuelling stations
Low-carbon hydrogen
Optimising technology in cement production
Sector average Biojet fuel from wastes and residues (HEFA)
Fast frequency response
CCUS in chemical production
Industry 431
94
Electricity (infrastructure)
Electricity (power gen) 3
Industry
Low emission fuels
Natural gas with Biomass-to-liquidCCUS(BTL)
Demand response
233
Fast charging
Wind offshore and onshore
Hydrogen-based chemical production
Flexible high-voltage or alternating current transmission Geothermal Sector average
Electricity (infrastructure)
Electricity (power gen) 2
Electricity (power gen)
Industry 2.751.533
Electricity (infrastructure)
Electricity (power gen)
Low emission fuels
Coal with CCUS Ocean Bioenergy-basedenergy chemical production
CCUS iron and steel production Solar CCUSthermalincement production
Ethanol derived from sugar crops
Industry Low emission fuels
Low emission fuels
Low emission fuels Low emission fuels Industry
Industry 2.54413
Electricity (power gen)
Electricity (power gen) 3
Low emission fuels Industry Low emission fuels Industry
Electricity (power gen)
Direct Electrification of the chemical production
3
Electricity (power gen) 2
thermochemically produced fuels
Electricity (infrastructure)
Dynamic charging Biomass with CCUS
Biodiesel produced from oilseed crops
Sector average Smart charging Ultra high-voltage transmission
Raw material substitution in cement production
Electricity (power gen) 2
Hydrogen-based iron and steel production
Hydrogen turbines
Electricity (infrastructure)
Direct Electrification of the cement production
Electricity (infrastructure)
Electricity (infrastructure)
Direct Electrification of the iron and steel production
Industry
Hydrogen-based ammonia
Large-scale heat pumps
Battery storage
Industry 2.722
Electricity (infrastructure)
Electricity (power gen) Industry
2.532
Low emission fuels
Mechanical storage
Biodiesel from wastes and residues (HVO)
Electricity (infrastructure)
TechnologySector Score
2.441
Electricity (power gen)
Industry 31
Electricity (power gen) 4
Synthetic hydrocarbons (methane, diesel, kerosene, methanol)
Industry
Feedstock substitution within chemical production
23
Low emission fuels
Sector average Cellulosic Hydrogen-basedethanolcement production
Electricity (power gen) 4
Next gen nuclear (Small Modular Reactors)
Conventional nuclear Solar Bioenergy-basedPV iron and steel production
Industry
Electricity (infrastructure)
1.681
23111
Industry 2.5222122
Image: St Peter Port, Guernsey
96 Guernsey Finance, PO Box 655, St Peter Port, Guernsey, GY1 3PN +44(0) 1481 720 071 info@weareguernsey.com Please recycle me 70% of the wood used in creating this brochure is recycled material, with the remaining 30% from a ‘controlled/sustainable’ wood forest
