When looking at managing short term challenges against longer term opportunities, it is best to begin with the elephant in the room. Returns on sustainable investments have experienced unwelcomed volatility. We went from a high after COVID-19 with the so called ‘ESG boom’ in 2021 to a low, following the illegal invasion of Ukraine in 2022/2023, as energy security disruptions erupted vis-à-vis an already overpriced renewable energy market.¹ Whilst at the time all markets were hit, clearly sustainable investments have underperformed their peers given the lack of exposure to fossil fuels and, at times, excessive concentration risk.
However, the current short term market fluctuations are at odds with sustainable finance growth predictions over longer term. For example, Global Market Insights forecast the global sustainable finance market to grow at an annual rate of 22.4% up to 2032, to a total value of $30.9 trillion.
In fact, there is evidence showing some green shoots currently developing. For example, in June² this year, Morningstar published an article stating that Europe-domiciled sustainable fixed income ’light green’ funds (otherwise known in the EU as Article 8 funds) saw net inflows in the first four months of 2024, overtaking non-ESG oriented bond funds in terms of inflows levels. This may evidence some market consensus forming around integrating more ESG factors for successful long-term investments.
What is more, a joint research publication from Microsoft and PwC entitled How AI can enable a Sustainable Future evidences artificial intelligence (AI) becoming a key enabler of business and wider sustainable economic transformation, enabling both growth and carbon emissions reductions. As if this was all by chance, it just happens NVIDIA, seen as the leader of the AI revolution, became the world’s most valuable company after surpassing Microsoft (briefly though, as investors rushed to take on the profits).
It does not seem hard to imagine then how investments directed towards sustainable innovation could become a defining source of investor interest (and healthy returns).
It therefore becomes apparent that the question nobody can answer with exactitude is not really the aforementioned ‘if’ but the ‘how’ and ‘when’. Let me explain.
Climate change in the form of increasingly recurrent extreme weather events (e.g. droughts, storms, fires and floods) is already impacting us all, one way or another. Think how Storm Ciarán − which unlocked the strongest tornado on record in the Channel Islands − left some Islanders without a roof, literally and potentially caused sharp increases in home insurance premiums for all those affected.
Indeed, funding for new technology and infrastructure will be increasingly required whether for climate mitigation (i.e. stopping global warming at 1.5 Celsius increase compared to pre-industrial levels), climate adaptation (i.e. developing infrastructure to manage the impact of climate change) or climate reparation (it is estimated that losses due to wildfires in the State of California between 2017 and 2021 totalled over $117,4 billion annually).³
Climate change however does not only present risks but also opportunities. We are seeing increasingly good British wine being produced, whilst the UK’s solar energy generation remains very limited (though expanding). Spain however has a recognised solar energy generation potential − 14% of its generated energy is already solar and roughly doubles that of the UK − but struggles to avoid producing wine below 14% of alcohol, due to the higher temperature and less rain when grapes mature, creating an excessive concentration of sugars.
The biggest challenge with climate change is not only that it is hard to predict how it will affect humans in practice but when exactly those impacts will manifest.
At the end of the day, climate change impacts territories − land and people − and therefore geopolitics in an entirely unpredictable manner (remember that famous quote from Herodotus, father of geopolitics, saying “Egypt is the gift of the river Nile”?).
Against this backdrop, the financial services sector has been leading the charge, perhaps with even more commitment than sovereign nations which are suffering shorter term very pressing issues such as a cost-of-living crisis, online abuse and disinformation, together with worrying geopolitical tensions leading to citizens dissatisfaction, poor mental health and increasing military expenditure.
Nonetheless, some jurisdictions like the EU or the UK have been quite proactive in developing a sustainable finance policy and regulatory framework with the adoption of sustainability reporting standards, climate disclosures, anti-green washing measures, labelling regimes, green bonds standards, science-based taxonomies to name but a few.
Having said that, a big driver for these larger jurisdictions is to ensure there is a consumer protection level playing field to safeguard millions of ordinary citizens from accessing retail type sustainability related products in conditions of weak market integrity or transparency. These jurisdictions also rely on economic growth or energy security from their green energy, tech, or manufacturing sectors.
Jersey, however, finds itself not so much a financial services point of consumption jurisdiction − though of course we have consumers we need to protect − but more as a point of manufacturing jurisdiction. This nuance compels us, as an international financial centre (IFC), to consider our position from a slightly different angle, placing a bigger emphasis on the opportunities that developing a sustainable finance eco-system may offer, as we seek to have a bigger role in the deployment of sustainable capital around the world.
In this space, we believe Jersey is already quite advanced in its thinking against other comparable IFCs. Therefore, we have an opportunity to get the balance right, developing an eco-system that may help with future proofing financial services.
IFCs therefore also have a role to play.
Our Own Journey
Jersey Finance’s ‘Jersey for Good – A Sustainable Future’ kicked off coordinated industry efforts for the development of sustainable finance in Jersey, with great progress made in recent years.
However, there came a point where we, as Government of Jersey, had to consider our own role in sustainable finance in more detail. To define the Government’s role and level of ambition in sustainable finance, we published a ‘Sustainable Finance Consultation’ in March 2024 to design a sustainable finance framework.
Following intense engagement with industry, we are pleased to have received more than 125 consultation responses, two thirds coming from the financial services sector and with more than 50 responses coming from employees of financial services’ firms, evidencing how the new generations have a keen interest in this topic. Responses also highlighted that 90% of respondents believed the Government of Jersey has a role to play in developing a sustainable finance framework. This was a helpful confirmation that it was right to pause and consider our role more strategically.
As per ambition levels, preferred approaches included Advanced, a Combination of Approaches and then Moderate. Regardless of any individual preferences, respondents highlighted the need to balance ambition levels with our realities as a small island − including any potential impact into costs of doing business and the need to foster skills and education to better manage risks or better serve clients.
Now that we have reflected on our role, it is time to plan for the future, considering how an ambitious but realistic sustainable finance framework could be deployed over the coming years.
The Next Steps
When it comes to sustainable finance, we are all in this together. It is a fast paced, ever evolving and at times complex topic, that poses both challenges and opportunities for us all. Therefore, it will be important to go along this journey in collaboration, learning together as we go, developing rules and best practices not for the sake of it but to achieve market transparency and market integrity but also to develop greater market access and market share, as the longer term forecast for this industry is optimistic.
Unsurprisingly, when considering a sustainable finance policy framework three pillars clearly emerge.
- Sustainability disclosures and data: No doubt the way in which company value is assessed is changing with investors now also demanding to see sustainability disclosures alongside financial statements. Now such disclosures requirements (such as ISSB) are very sophisticated and in competitor jurisdictions remain only applicable to large corporates. However, there is no doubt any business, regardless of its size, will face increasing needs to collect, process and share with different stakeholders, sustainability related data. Such data collection capabilities are underpinned by business digitalisation.
- Risk management: Climate change does not only impact land or humans but also businesses and in financial services ensuring we have strong operational resilience to keep serving our customers is fundamental. As we go along this journey, not only will businesses think about the need to collect more sustainability related data but boards will increasingly start to consider what that data means for their business risks assessment and strategies, both in terms of risk and opportunities.
- Incentives and engagement: Everyone would agree rules are not sufficient to develop new markets. Emphasis is needed in skills and education so our businesses become more resilient and our clients can continue to access high quality services. As a small jurisdiction, we also need to ensure we are internationally well connected and alive to other jurisdictions and global actors’ plans, to better identity potential impacts (or opportunities) for us.
There is a long and exciting road ahead and we look forward to working with the industry as we continue on this journey towards making Jersey a progressive IFC at the forefront of sustainability.
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