8 minute read
Investment Funds
6.2 Investment Funds
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.
What role can it play?
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.
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.
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.
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).
56 Guernsey Financial Services Commission Statistics as at 31st March 2022, Statistics | GFSC
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
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
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
Green Private Equity Principles: 2019 developed a two-pillar framework of principles for green private equity investing.
What are the key levers the sector has to pull?
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.
Reduce operational Scope 1, 2 and 3
Emissions associated with your firm’s offices, branches, company-owned vehicles, business travel
Understand the emissions associated with your supply chain, as well as any wider E, S and G 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 Measure and disclose portfolio emissions in line with industry standards (PCAF), or develop solutions to support measurement of portfolio emissions
Encourage reduction of ‘financed emissions’ across your portfolio or client base through engagement, influence and incentives to drive emissions reductions in the wider economy
Stewardship and Engagement – vote for ESG resolutions in line with net zero and just transition goals
Consider new asset classes, markets and products to enable you to invest in a holistic range of just transition objectives
58 Guernsey Green Finance, Guernsey Green Finance Strategy Report 2022, March 2022
59 The International Stock Exchange, TISE Sustainable Brochure, 2022,
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
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
Perform an end-to-end review across fund objectives and mandates to identify any conflicts with E, S and G principles
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
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
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 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
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
What are the key risks, and how can we mitigate them?
Theme
Education and awareness Risk
Variable level of expertise and awareness around ESG risks and opportunities across the island
Lack of consistency and reliability of ESG data, posing challenges around integrating this into financial analysis and measuring impact of investments 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
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
Data Mitigation
Theme
Perceptions around fiduciary duty Risk
Perception that fiduciary duty requires managers to meet certain performance standards, or to make short term financial returns over the longer-term;
Short versus longer term prioritisation of climate change investing over other investment opportunities and themes e.g. cyber security
Creation of “green bubble” around ESG linked products bubble burst
Withdrawal of funding and “stranded asset risk” in key sectors/markets that still need to transition 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
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
Competing priorities
Financial market failures Mitigation
Case Study: Cibus Funds-Value Creation through Sustainability61
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.
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.
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.
