The next big opportunity for Sustainable Finance in Jersey

Most people working in the financial sector by now will have likely heard of the term Environmental, Social, Governance (ESG).

For some, it has become a buzzword for a trend that is losing momentum. For others, it symbolises the next big opportunity for the Jersey finance industry to capitalise on, in order to maintain relevance in a changing world.

Recent developments show that the death of ESG has been greatly exaggerated. There are good reasons why Jersey needs to continue to focus on ESG, and these centre on opportunity and responsibility.

Earlier this year, the Government of Jersey released a consultation paper which, at its core, asked the question, “Where does Jersey want to position itself in the global sustainable finance market?”.

The response was, overall, very much in favour of Jersey leading from the front. Nearly 70% of respondents agreed the island needs clear sustainable finance policies and regulation to remain successful as an International Finance Centre (IFC).

Many respondents were individual finance professionals. This provided valuable insight into their mindset, and the extent to which the business community believes Jersey can have a meaningful impact in becoming a sustainable IFC jurisdiction.

The feedback received is also aligned with the broader trend in industry toward taking bolder actions on sustainability. This demonstrates an appetite to go further, quicker.

The way Jersey positions itself as a centre for sustainable finance could present a huge opportunity for the island’s financial sector. The total size of global ESG assets is expected to grow from USD $30 trillion in 2022, to USD $40 trillion by 2030. That’s nearly a third of total global Assets under Management (AuM).

Europe is expected to be the leader in this space, estimated to hold approximately 45% of total ESG assets . If Jersey fails to adapt or lags far enough behind, we may miss our opportunity to take a piece of the pie.

We have a responsibility to take action. The global concern regarding climate change has captured the attention of governments, the media, the public, and – quite notably – the younger generation.

The UK’s climate obligations under the Paris Climate Agreement were formally extended to Jersey in 2022, in response to the island’s Carbon Neutral Roadmap. This means Jersey’s emissions are now linked to the wider climate targets of the UK.

But the question remains, “how does this impact Jersey’s financial sector?”.

While the financial sector doesn’t first appear to be a ‘high emitter’, with over £1 trillion in assets administered through Jersey, the capital it deploys can play a key role in supporting the decarbonisation of the global climate targets. What’s more, the Paris Climate Agreement sets an expectation that countries will align financial flows with global net-zero efforts.

That’s why it is essential within the island’s large financial sector for private equity firms, asset managers, banks, and businesses alike to pay particular attention to where money is being invested / loaned. And the environmental impact those investments may have, as those financed emissions contribute a substantial amount to Jersey’s wider climate impact.

Much of the narrative around ESG investing is that one must sacrifice financial returns for environmental or social benefit. In reality, that isn’t necessarily true.

Recent studies have shown that when ESG funds are compared against more traditional investments, companies can achieve substantially lower financed emissions with little to no impact on returns and financial risk compared to industry benchmarks.

Other studies, such as one conducted by the IEEFS, reveal the performance of ESG funds has either matched or surpassed traditional funds. ESG funds returned an average of 12.6% in 2023 compared to 8.6% for traditional funds.

If financial returns experience little to no impact and have been proven to at least maintain their value, it could be argued financial actors have a responsibility –  even a fiduciary duty – to incorporate ESG considerations when making investment decisions.

Greater transparency in this area, through a sustainable finance disclosure regime, would reduce the risk of greenwashing. This would allow investors and asset managers to make better investment decisions.

It is clear pressure is coming from all angles – government; regulation; businesses; and employees. Jurisdictions are now having to (at a minimum) consider forming a roadmap towards sustainable finance.

In Jersey’s case, the business community is calling for us to take charge and grasp the opportunities it may bring to the financial sector. Similar jurisdictions have been acting in this space for some time now. Luxembourg, Singapore, and the Republic of Ireland have all published some form of sustainable finance strategy, as they see the value to be had in this industry.

Let’s not fall behind as a jurisdiction, but act on Jersey’s responsibility as a leading financial centre and benefit from the financial prospects it may bring.

KPMG has a leading ESG team across the Crown Dependencies that can support you in becoming a nature-positive business. Find out more by contacting a member of our team or visiting kpmg.com/cds.