by Dr Andy Sloan – Deputy CEO, Strategy at We Are Guernsey
As Henry Kissinger said at the start of April, Covid-19 is a world changing event. Going forward the economic rules of the game are going to change. Exactly how, no-one yet knows but there is a common agreement that the legacy of the crisis has to be about the need for a new order in the economy and society and not simply the restoration of an old normal. One fact is axiomatic – ‘sustainable finance is going to be even more front and centre in the post Covid-19 world’.
The United Nations estimates the required investment to achieve the target of limiting climate change to 1.5C is around $2.4 trillion per year but the Climate Finance Leadership in September 2019 reported that that the required investment in green assets was falling 50% short. Post Covid-19 that shortfall is likely even greater.
Guernsey Green Finance has identified, through our research and webinars for Guernsey’s Sustainable Finance Week that while governments and the public sector will continue to play a key financing role, there is a need for the private sector to engage and help close this gap.
It will be important for the public sector to manage the recovery post Covid-19 in a sustainable manner, with Green funding through the EU recovery plan being central to this. There is also a recognition that there will be a continuing need to develop products and services to draw in private capital.
The private sector is increasingly important for attracting investment. Although more capital is finding a home in green investments, some key concerns that we have identified are that individuals and family offices appear to be looking for greater confidence in returns and in the green credentials of their investments.
There is a growing variety of methodologies and frameworks being used in support of green financing – with the EU’s Taxonomy bringing some consistency. But we have seen some concern amongst green professionals that regulatory requirements can become burdensome with a focus on in checklists and box-ticking exercises. Guernsey, Europe’s leading specialist centre for servicing private equity, has developed the Guernsey Private Equity Principles. These principles are a set of green and sustainable best practices for the PE industry, as we understand that principle-led initiatives can be useful tools to provide flexible guidance for owners of private capital. These principles provide a simple guide for the sector and help pivot industry practices towards transparency and the goal of fighting climate change.
We have seen that much of the drive for green finance comes from private sector investors being increasingly concerned with the impact of their investments and the companies they are investing in. A huge generational handover of wealth from ‘boomers’ to ‘millennials’ is already underway and trillions is due to be handed over until at least 2045. With younger generations increasingly involved in investment demand for ESG continues to grow.
Covid-19 has also highlighted to investors the positive societal impact they can have through their investing and investors are increasing keen to understand exactly what positive impact their investments are having. Working out the best method for measuring the impact is still very much a work in progress. It will be up to advisers and sustainable finance professionals to provide this information to their clients in a clear and understandable manner going forwards.
We continue to hear from investors and managers that returns is always going to be the most important factor in attracting investment and when polled 55% of sustainable finance week attendees still put “returns every time” as the most important factor. While the evidence so far on ESG related returns is positive, with research showing that sustainable investing returns tend to hold out better in a downturn, returns continue to be a key concern for private capital investors.
Sustainable Finance Week identified, however, that returns should not be considered in a silo. A more holistic appreciation of the notion of systemic risk and a much more enticing set of incentives to think about the longer-term before the short-term is necessary. When polled, only 12% of attendees saw risk issues as a key driver which could highlight the lack of urgency in considering the systemic risks of climate change. The resilience of investments will continue to move to the forefront of conversations, particularly seeing the effects of Covid-19. For sustainable investing it can be too simplistic to discuss straight returns, and instead consideration should also be around qualitative, quantitative, and risk adjusted returns.
When considering longer term systemic risk, it is key to note that private equity and UNHW family offices have always had access to more patient capital. Historically this patience and longer-term planning has been evident in this space through life science investments, but now there is a growing opportunity for private equity and family offices to directly invest in sustainability and be able to wait for long term investments to come through. Products and advisers will need to reflect this through having a long-term view and viable long-term strategy. Private equity may need to consider the availability of longer-term vehicles, rather than the traditional 10-year cycle, to match the potentially the term of the investments.
There are key steps that can be taken both during and post the pandemic to jointly respond to Covid-19 whilst still not letting the crucial task of mitigating climate change fall to the wayside, for both public and private capital. Public and private capital must be able to jointly work together to develop the pathway for financing sustainability. As a leading centre of private wealth and sustainable finance, Guernsey is well placed with green finance initiatives, such as Guernsey’s Green Fund regime, to meet climate change goals by routing global private capital to the cause of sustainability.