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Keeping ESG simple

Andy_SloanDr Andy Sloan, Deputy Chief Executive, Strategy, at Guernsey Finance and the Chair of Guernsey Green Finance, outlines the island’s approach towards ESG and making sustainability understandable.

It has been difficult to move recently for the plethora of reports arguing that returns and ESG are not exclusive. Yet frankly, the case is not proven. More work is required to ensure it is the orthodox opinion – though I do think we are not too far away.

In a way the ‘ESG conversation’ post-Covid has almost become too loud. For sure, it is clear that LPs are expressing a clear desire to ensure conformance with ESG principles, but conversations by providers about trends in reporting are rarely grounded by the actuality of current provision and data issues.

Much of the dialogue seems to leave practicalities out of it. The University of Cambridge Institute for Sustainability Leadership’s report ‘In Search of Impact: Measuring the Full Value of Capital’ is, in my opinion, one of the most frank and honest expositions of the gap between what is readily measurable and what is purported.

Perhaps exasperated by the pace of development of global standards and consensus, the World Economic Forum recently published a set of ESG metrics in association with the Big Four professional services firms. Four pillars, covering 21 core and 34 expanded metrics – that is a relatively slimmed down effort, but it would still be no mean feat to provide these cost-effectively from a private portfolio.

Simple metrics and reporting are necessary. We are seeing the emergence of ESG reporting as a portfolio function for administrators here in Guernsey, given the island’s leadership in the development of sustainable finance product and services.

We must guard against costly complexity. For finance there is a simple measure – carbon content of the portfolio, and its path to zero. Yet still the propensity is to over-engineer. The EU Taxonomy is a great illustration of the case in point. Back in January, we welcomed the move as helping to shift common standards, as this is clearly required to help route capital to climate finance.

The concern with the EU taxonomy was its application in practice, and the likely granularity of the approach to implementation, which may well end up with a Mifid II degree of complication.   

The EU’s Technical Experts’ Group report on taxonomy last year was long, but nothing like the length of any regulatory technical standards likely to eventually emerge from ESMA. It is no surprise that the UK has signalled that it plans to row back from this, to look to create more streamlined standards.

Investors’ need for trusted, transparent product was the rationale behind our creation of the Guernsey Green Fund, the world’s first regulatory regime. A simple, straightforward notification and disclosure regime, aligned with international standards, designed to provide investors confidence from a regulatory wrapper.

In a similar vein, our Green Principles for Private Equity, described at the time by market commentators as simple ESG principles, provided a straightforward guide to investing, aligned with the climate change agenda.

The private equity industry and private markets need the comfort and confidence of a robust investment product, aligned with global standards, without the cost and complication of prescriptive rules.

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