The global transition to a greener furture is estimated to require USD1 trillion of investments per year, and Guernsey is looking to adapt its offering to cater to the increasing demand for green investments. The GFF is part of an ambitous initiative from WE ARE GUERNSEY to develop the broadest and best range of products with a green focus among international financial centres, incorporating investment, securities and insurance markets and services.
Under current proposals, the GGF will be a new framework of rules that can be adopted by any type of Guernsey fund; a badge of honour demonstrating the fund’s green credentials. The Guernsey Financial Services Commission (GFSC) will expect a certification from the administrator or manager that the fund meets the relevant criteria. At least 75% of the assets in a GGF will need to be green investments falling within specified categories. The balance of the fund’s assets are restricted from being invested in a manner that would “lessen the objective of mitigating climate change”. Arguably, this leaves room for interpretation, although the GFSC does provide some guidance in the form of a non-exhaustive list of banned activities.
Clearly the idea of the GGF will be powerful selling point to an environmentally conscious investor. But what about the hard numbers? Intuitively, we might expect to pay for having one eye on the environment in the form of a lower rate of return. This has been borne out in the long term data where it has been identified that green mutual funds have underperformed relative to conventional funds.
More promisingly for the GFF, analysis of more recent performance of green funds indicated similar risk-adjusted returns to conventional funds, and outperformance in relation to so-called “black” funds with exposure to fossil energy and natural resource. This could be for a number of reasons. Green projects often benefit from subsidies, which can support or enhance performance in emerging sectors and technologies. Green investments also tend to be concentrated in certain industries thereby reducing diversification, but potentially providing excess returns over the short term.
The jury is out in relation to the performance of green investments and the final form of the GFF is to be determined. However, the concept appears sound and chimes with the wider themes of the Environmental, Social and Governance Principles that can be adopted voluntarily by a GFF. If the right balance can be struck then the GFF could end up as the gold standard for green investment.