With the new Sustainable Finance Disclosure Regulations (SFDR), which came into effective implementation on 10 March 2021, an increasing focus has been placed on transparency and regulatory oversight when considering ESG, impact and sustainable investing. Increasing transparency on sustainability with new financial products and institutions will improve comparability, ESG-standardisation, and should go a long way in tackling greenwashing.
The ethical imperatives provided by climate change, biodiversity loss, water management and improvements to corporate governance and board structure are now surely underpinned by ESG product performance. During the market turmoil of last year, sustainable funds gained 72% in the second quarter. Indeed, Morningstar reports that 6 out of 10 sustainable funds delivered higher returns than equivalent non-ESG funds over the last ten years. SFDR ensures that alongside gains, these ESG funds genuinely make good on their impact assurances. Compliance will include enacting sustainability risk policy, due diligence policy, remuneration policy and sustainability communications. Funds both within the European Economic Area (EEA) and those non-EEA funds looking to market themselves within the EEA will be required to comply with these rules on transparency.
This critical juncture in the timeline of finance’s relationship with climate change and improved governance provides an opportunity for fund managers to articulate their commitment to ESG integration. Collaboration with partners and fund jurisdictions that display a corresponding ethos is essential, and choosing where to domicile in order to ensure regulatory compliance bespoke to the needs of individual managers is key to performance.
The Nordics, as a bloc, have traditionally embraced rigorous ESG standards and innovation within their financial products. The World Bank and Skaninaviska Enskilda Banken (SEB) developed the first conceptualisation of the ‘green bond’ back in 2008 and have adopted a public-private partnership that allows a growing private debt sector access to sustainable investing issuances, whilst opening up green infrastructure to private markets.
The Subnational Pooled Financing Mechanisms (SPFMs) scheme aggregates the financial needs of its signatories into a pooled financing agency which then issues debt and distributes the borrowing or bond offering to its sub-national members. Examples of Nordic pooled financing agencies include Kommuninvest (Sweden), KommuneKredit (Denmark) and KLP Kommunekreditt AS (Norway).
Initiatives involving low-carbon energy investments, renewables and energy efficient real estate have been flourishing through innovations such as the issuances of green bonds to fund local-level sustainability projects. The Nordic countries also typically have tougher environmental and building regulations, specifically when it comes to EPC A energy-efficiency thresholds that are taken as Nordic Green Investment amidst SFDR, and a constantly evolving regulatory landscape the new benchmark by the SFDR rules. Nordic firms, therefore, appear to already be incredibly well positioned to meet the requirements of SFDR regulations.
Certain pre-existing pressure points in Nordic ESG regulation, however, require experienced local advisors to navigate and discrepancies between rules. The AIFMD laws, for example, created some issues upon adoption largely due to ambiguity within the directives and disparity in application across the constituent Nordic jurisdictions, partly due to the umbrella coverage of AIFMD existing alongside partial EU membership. Some managers have mentioned that excess conservatism can hamper performance due to not wanting to accidentally breach rules. The choice of domicile is therefore a crucial decision for firms, as amongst many factors to consider are industry expertise and depth of talent pools within the jurisdiction.
It comes as no surprise therefore that Jersey, with 44% of its entire population working in the finance industry, has been attracting considerable interest from Nordic firms. Significant partnerships already exist between Jersey and the Nordics; $23bn in assets from Sweden is domiciled on the island, making up the fourth largest pool of AuM, and Nordic Capital private equity, ranked 2nd out of the top 10 private equity funds globally by Dow Jones, are already members of Jersey Finance. Their first Jersey fund was launched 20 years ago and all of its active funds are fully or partially domiciled in Jersey, revealing an already robust infrastructure in place for firms seeking to domicile Jersey. Initiatives such as the Jersey Private Fund structure – which can be established by a firm within two days – help to make this a seamless process.
A domicile such as Jersey also makes a natural partner for Nordic ESG funds; The island’s Carbon Neutral Strategy sets out a strategic, scientific commitment to achieve carbon neutrality by 2030; this target cements a categorical ambition to embed sustainable investing into Jersey’s culture and the recently established Jersey Finance Fund for a Wilder World, focusing on reversing biodiversity loss, runs concurrently to the strategy – enabling funds sector providers to contribute to wildlife conservation. These undertakings are part of the ‘Jersey for Good: a Sustainable Future‘ report that outlines the jurisdiction’s vision to support and inform the transition to an environmentally and socially sustainable global economy.
The Jersey Financial Services Commission’s recent Consultation on Sustainable Investments report has outlined key codes of practice incorporating transparency and disclosure that will enhance existing beneficial legislative landscapes for financial services. A willingness to build on early adoption of transparency, fair taxation and international tax initiatives with robust ESG frameworks renders Jersey an attractive proposition with a comprehensive regulatory toolbox for Nordic firms looking to add value and increase efficiencies in their corporate strategies.
Jersey has developed a well-respected and forward-thinking funds sector that offers regimes from retail options through to the more sophisticated and institutional end of the market.