Anti-Greenwashing, COVID-19 and Brexit: The Current State of the Fund Sector in Guernsey

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Richard Bray joined Aspida in 2007 and has been working in Fund Administration since 1985, including 13 years with a major Swiss financial institution. Richard has worked on a wide variety of funds, from relatively simple long-only bond and equity funds, through to complex structured products and including private equity, property, commodity, derivative, and hedge funds of various strategies.

Principally from an operational background, Richard has also worked closely with clients with the structuring of their products and following on through to the successful set-up and running of the fund. Richard has in-depth knowledge of all aspects of fund operations across a wide variety of fund types and strategies.

In light of Europe’s new Anti-Greenwashing rules coming into effect, can you tell us a little bit about the impact greenwashing has on the fund management industry?

Greenwashing, which is falsely reporting, or dressing up something to be ‘green’ when it is not really so, is a pernicious threat to anyone looking to place their money in investments that will help to benefit the environment.

Imagine that you invested in a fund that claimed to have green credentials, but then you later found out that the fund invested in items such as oil pipelines (oil being less polluting than coal and transporting it by pipelines is far better and less risky to the environment than tankers), open-cast uranium mining (nuclear power stations don’t emit greenhouse gasses), and rail infrastructure that was primarily used for transporting logs felled from rain forests (because rail is less polluting than road). I think you would quite rightly be rather sceptical of the green credentials of that fund.

The threat of scenarios such as the rather extreme example above could give investors doubts about putting their money into such products. This would then slow down the growth of the green investment fund sector unless some guarantees can be made of the veracity of the environmental claims made in fund literature.

The need to avoid greenwashing and provide a decent return to investors then throws challenges to the fund manager. How can they demonstrate that their investments are truly environmentally friendly? What can they do to engender the trust of the investor community and prove that the trust is well-founded?

The answer to these questions tends to be found within sets of defined rules on investing and reporting.

Although these rules place more work on investment managers and fund administrators, we would expect to see more funds being set up to comply, more money flowing into the sector, more money being invested in environmentally beneficent projects and thus a positive impact on the environment.

What will be the impact of these new rules in your opinion?

Europe’s anti-greenwashing rules are one in a developing line of regulations and guidelines that set out rules for green investing. For instance, we already have The United Nations Principles for Responsible Investing, the Guernsey Green Fund Rules, and the International Capital Market Association’s Green Bond Principles.  So now Europe brings us their Sustainable Finance Disclosure Regulation (“SFDR”) which sits with their Low Carbon Benchmarks Regulation and their Taxonomy Regulation as part of the EU’s commitment to enabling the financing of sustainable growth.

As you may guess from the name, the SFDR focuses on imposing mandatory reporting requirements on Alternative Investment Fund Manager and on UCIT Managers where their products are sold into the European Economic Area. It also demands that investment managers consider the principal adverse impacts of their investment activity. The more claims you make about the product targeting environmentally friendly investments, the more you have to do to back up these claims.

Meanwhile, the Taxonomy Regulation sets out which economic activities can be deemed to be ‘sustainable’, with one of the many defining criteria being that ‘an economic activity should not qualify as environmentally sustainable if it causes more harm to the environment than the benefits it brings.’

So what Europe has done is to provide definitions of environmentally beneficial investments and define reporting standards to follow if you make green investment claims. This should help to give assurance to potential investors that their money will be used as claimed; for example, the oil vs coal example I gave above would, one hopes, fail the Taxonomy test

Although these rules place more work on investment managers and fund administrators, we would expect to see more funds being set up to comply, more money flowing into the sector, more money being invested in environmentally beneficent projects and thus a positive impact on the environment.

Which is undoubtedly a good thing.

What has been the impact of the COVID-19 pandemic on the fund sector in Guernsey?     

The fund sector in Guernsey has proved itself to be resilient during the pandemic. We were forced to adapt to this new environment, this ‘new normal’ but adapt we did. Firms successfully embraced working from home. Virtual meetings became the norm whether between team members, Boards, or potential client meetings.

We were of course able to come out of lockdown and return to the old normal (without travel abroad) sooner than most, but we learned from the experience.

So where are we now, as the world is slowly but surely moving to ‘living with COVID’? Discussions with various people within the fund sector reveal a pretty universal theme of ‘very busy dealing with the new business’. This reflects, I think, on the resilience of the fund sector.

Being able to continue operating throughout the pandemic; and being one of the few jurisdictions that were operating business as usual, allowed us to demonstrate to the finance world the benefits of working with us. Their business was, and is, in good hands.

We do still have some challenges; for example, being able to demonstrate proper substance when people cannot readily come to the island on day trips for board meetings springs to mind. But the fund sector is up to these challenges, and I find that the sector is one that throws up solutions to problems rather than becoming mired in them.

How is Brexit affecting the sector on the island?

Until the UK finalises its financial services agreements with the EU, we will not know the full extent of the effect that Brexit has had on the Guernsey Fund Sector. There were some immediate effects: Guernsey was to be granted third-country passporting rights for marketing funds into Europe, but with Brexit, that process was put on hold.

The Fund Sector has seen the movement of business both ways as a result of Brexit, but our resilience and ability to adapt and move quickly should put us in good stead as matters develop.

What do you think the future holds for funds in Guernsey?

My crystal ball is rather murky on this matter. But our fund sector has demonstrated its strength and resilience. It is able to lead the way in innovations such as the Guernsey Green Fund, it is able to react quickly as financial markets evolve, and it is able to work with Governments and Regulators across the world. While we have strong regulators, and skilled and experienced personnel to support the fund sector, I believe we are well placed to meet whatever challenges are thrown at us.

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