To claim that ESG has become an important aspect of the alternative funds landscape would be something of an understatement – investor scrutiny, stakeholder activism and an ever-greater focus on purpose and climate change have all brought ESG into the mainstream – and with that, has shifted the dial in fund structuring.
That has fundamental consequences for cross-border domicile selection too – to the point that domicile choice has become a key factor in determining whether managers are meeting the credentials investors expect.
It’s significant that, in a survey we commissioned in 2021, 100 percent of investors as well as 61 percent of managers and their advisers noted that ESG criteria will play an increasing role in fund domiciliation.
It’s a trend that cannot be ignored by fund domiciles because it is being driven by the most powerful camp in the private equity universe: investors.
However, it’s also a trend that brings with it considerable challenges. Language, terminologies, reporting benchmarks and regulatory standards remain diverse, unclear and varied.
There is, for instance, a question mark as to the exact definition of ESG: simply put it is making a difference to the good as a by-product of investment. It is a mindset, and that mindset can be nuanced.
We have recently started to see the introduction of ESG regulation in the form of the European SFDR, as well as other standards around the world. But in supporting ESG, the role of the IFC is more than regulation. It is to respect the investor mindset and cater to it in a holistic way, and not simply treat it as a product or service line.
As far as private equity’s role in the ESG revolution, there’s no doubt that it has a key role to play in driving the transition to a more sustainable future.
That might be, for example, through investment strategies that seek out companies where there is a clear focus on delivering a social, environmental outcome or facilitating a system change.
In addition, for those companies that do not have this focus, private equity can help them understand how their business fits into a more sustainable future economy.
But it remains the case that private equity has the best chance of achieving these aims if it has the right support and platform to do so – and domicile choice is critical in that.
The rising importance attached to domicile choice is one reason why almost two years ago, Jersey Finance launched its sustainable finance strategy, ‘Jersey For Good.’ When it was launched, we said we wanted Jersey to be recognized as the leading sustainable finance center in the markets it serves by 2030.
It was an ambitious vision, which is why we also launched our two-year Pathway to Success roadmap. That Pathway focuses on a number of core “tasks” around collaboration; awareness and training; product innovation and quality; creating an enabling environment; and having a clear communication strategy.
Over the past almost two years, we have hit some important milestones in that Pathway – in particular, we established a robust framework for collaboration between policy makers, industry and the regulator in Jersey. This has already culminated in the adoption of Jersey’s first regulatory regime for sustainable investment, a pragmatic and appropriate disclosure regime that works particularly well in the alternatives space we cater for.
We have also focused on creating strong links with the private equity community to help drive our strategy, including with early adopters and innovators who are helping to shape our vision of what the future holds for Jersey as a sustainable finance center.
We have also conducted a stock-take of key sustainable finance indicators in Jersey to help benchmark our credentials. The data we received from managers and administrators in the alternative funds community has been absolutely essential to furthering Jersey’s strategy for sustainable finance.
A number of key challenges remain for managers and investors, in particular in terms of keeping pace with the evolving regulatory environment; finding people with the background, skills and experience to lead on their ESG and impact strategies; and the gathering of data.
Jersey has sought to address the key skills issue head on, by launching various educational initiatives as part of our strategy, amounting to more than 600 hours of CPD-accredited training on ESG topics to 130+ industry professionals.
In addition, while there has been considerable effort and focus from regulators and other authorities on the convergence of standards and reporting frameworks, there is still a lot of ‘noise’ out there. For those managers at the beginning of their ESG journey, it can be confusing. Against this backdrop, Jersey continues to innovate to meet ESG demands, taking a robust but practical approach, including around ESG reporting.
The Jersey Financial Services Commission (JFSC), for instance, introduced new innovative disclosure requirements last year relating to sustainable investments, aimed at addressing the risk of greenwashing. Crucially, the JFSC has not issued a prescribed template for disclosures, enabling managers to meet their obligations using existing templates and reduce duplication.
Other examples of this pragmatic approach include our opt-in/opt-out approach to AIFMD, and the codification of best practice in our substance laws.
Looking forward, there is a clear opportunity for a jurisdiction to come to the fore in the ESG space. Based on its holistic and joined-up approach, as well as its wider message of stability and certainty, Jersey has good credentials to seize that opportunity.
There are strong arguments, for instance, for Jersey to build on its expertise when it comes to the “G” (governance) for alternatives to establish itself as a center of excellence for services such as impact measurement, data analytics, reporting and assurance.
We have already seen some good examples of this in Jersey, with a number of fund administrators stepping up their offering through new reporting and compliance solutions in response to requirements such as SFDR. Jersey’s strong fintech stream is also providing good synergies to deliver solutions supporting a progressive data-driven ESG space.
With domiciliation set to be a key element in ESG structuring decisions in the coming years, Jersey will be well placed, focused on helping the private equity sector to clearly demonstrate how it is part of the solution when it comes to the global transition towards a net-zero, sustainable future.