Put simply, sustainable finance is any form of financial service that integrates environmental, social and/or governance (ESG) criteria into investment decisions in order to achieve a lasting positive impact, as well as a financial return.
Now that doing good is a key driver for many investors, businesses have begun to answer calls for more transparency and better global citizenship. The main message in an OECD report on investment governance is that ESG issues have become critical to the health and prospects of any company – so their consideration sits squarely within every institution’s fiduciary duties.
At Concentric, a sustainable investment consultancy based in Jersey, co-founder and Director James Painter has seen the relationship between sustainable investments and good governance evolve rapidly over the past 12 months:
‘It seems that in a relatively short space of time environmental considerations have moved up most company board agendas, from being an operational consideration to now being entwined into every aspect of how a company operates and interacts with its customers. Consequently, whereas previously being green and showing good governance were mutually exclusive, now being green has become a prerequisite for good governance.’
Tracking the ‘Blue Planet effect’
Gemma Woodward, Executive Director and Director of Responsible Investment at Quilter Cheviot, believes this change is down to a number of different factors:
‘The David Attenborough series Blue Planet II made people sit up and think about rubbish in a completely different way – plastic straws became the new cigarettes. You then have the influence of Greta Thunberg and Extinction Rebellion.
‘In the financial services sector, regulation is playing an important role in making investors think about ESG factors when making decisions. It’s also worth noting that the idea that only millennials or generation Z are interested in this is a fallacy. Our average client is 64 years old – boomers and generation X are on board as well.’
Michelle McMahon is Legal Counsel at Innovest Advisory, a consultancy providing advice and project management services to support the creation and scaling of development projects. She reports an increasing universality in the desire for not only responsible investing, but also more generalised paradigms such as ‘profit with purpose’ and ‘doing well while doing good’.
She believes that, while COVID-19 is a short-term crisis, it will have far-reaching consequences for how business is conducted: ‘This shock to the global system will stimulate changes worldwide, regardless of sector or geography. These changes will certainly increase demand for green investments and clean energy, and stakeholders will continue to insist on demonstrable, sustainable practices and good governance throughout all sectors.’
Doing good and making a good return are not mutually exclusive
There is a common misconception that choosing a sustainable investment strategy comes at a cost. Woodward is quick to dispel this myth: ‘It’s important not to make the assumption that investing in a sustainable way means that you sacrifice returns over the long term. It is not that straightforward. For many clients, they want to ensure they make returns, but that these are from investments they feel comfortable with.’
Moving away from the perceived trade-off between impact and return is a key aim in some of the fund concepts that Innovest is helping to bring to market, as McMahon explains: ‘As an “impact first” development consultancy, doing good is at the forefront of every strategic decision we make with clients. However, we don’t see this as a necessary trade-off with making a return.
‘On the contrary, an impact-related mission or business decisions that are environmentally or socially responsible are often financially beneficial in the long run. Most ethical listed companies and ESG funds tend to have above average returns, while a number of studies have suggested that impact investment portfolios also achieve market-rate returns.’
The strong performance of green investments certainly looks set to increase as technologies improve and subsidies to oil companies decrease. Painter is already seeing a rise in returns, with intergenerational wealth transfers fuelling growth in the market: ‘Returns on investments with green credentials have been comparatively strong in recent months due to the sheer weight of money such investments are attracting.’
Jersey’s advisors are developing their offerings to meet demand
As high-net-worth and institutional investors demand greater clarity around ESG performance and credentials, the experience and expertise of investment service providers in international finance centres have been critical in meeting a perceived gap in service delivery.
Woodward explains what sets Jersey apart: ‘Jersey has an outsized depth of expertise in financial services, and the regulatory underpinning to create investment vehicles quickly and effectively.
‘These vehicles, whether they be private equity funds or closed-end investment companies listed on major exchanges such as the London Stock Exchange, can provide the capital platform for next-generation businesses. Jersey is able to attract global capital given its robust legal framework, combined with a reputation for being a safe place to invest.’
She believes that the adoption of ESG factors into investment planning has accelerated significantly in recent times – and that Jersey has grasped this emerging trend:
‘The ESG investments we’re seeing are varied. Some of these funds have helped tackle issues such as urban regeneration, water-related infrastructure projects and, in one case, the acquisition of UK properties for lease by high-performing social sector organisations. The common theme is that these funds have the usual financial return targets, but also aim to consider their impact.’
What are the challenges faced by Jersey in its quest to become more sustainable?
While it is vital to focus on the opportunities sustainable finance brings, Painter is conscious that Jersey faces stiff competition: ‘Jersey has a leading position due to its effective regulatory regime. However, more work needs to be done by industry to demonstrate green credentials and allow the island to stand out.’
‘The challenge is scale,’ says Woodward. ‘The costs for setting up and running a business can be calculated, but with a population of only around 100,000, the local market in terms of revenue is limited. Therefore, to make a business larger, other external customers need to be included in a company’s target market, which will involve additional logistics costs, management and therefore potentially an increased carbon footprint.’
Food for thought. But with Jersey’s forward-thinking approach, the island will continue to lead on innovative solutions that support sustainable finance and have a positive impact on our planet.
Click here to read how Jersey stays one step ahead of financial criminals.