Green and sustainable finance has been expanding rapidly as investment decisions are increasingly taking into account environmental, social and governance (ESG) factors. ESG-linked financing and bond issuance, for instance, are often undertaken by banks, financial institutions and corporates which have certain capital or targets earmarked for green or sustainable projects, subject to principles or criteria set by regulators and industry bodies which are constantly developing.
September 2023 marks the conclusion of the fourth and final G20 Sustainable Finance Working Group (SFWG) meeting, held under India’s G20 presidency, with the finalisation of the Sustainable Finance Report, 2023 (Report). The main purpose of the SFWG is to scale up blended finance towards sustainable investments and accelerate the implementation of the Paris Agreement and the 2030 Agenda for Sustainable Development. The Report consolidates recommendations for voluntary considerations by the public and private sectors and covers deliverables related to three priority areas, namely (1) mobilising timely and adequate resources (especially private capital) to finance the development and deployment of green and low carbon technologies; (2) enabling finance for the Sustainable Development Goals (including scaling up social impact investment instruments and achieving globally interoperable nature-related data and reporting frameworks); and (3) building capacity of the ecosystem for financing toward sustainable development (including overcoming data-related barriers to climate investment).
Against this backdrop, the use of corporate vehicles in the Cayman Islands and Bermuda (such as exempted companies and exempted limited partnerships) and the British Virgin Islands (such as business companies and limited partnerships) for sustainable finance (including structuring investment funds and other financial transactions such as the issuance of green bonds) is gaining momentum worldwide. This is driven by the offshore jurisdictions’ proactivity in developing legislation and regulations that support sustainable finance. For instance, the Cayman Islands Monetary Authority has issued guidance on the registration and supervision of funds with ESG strategies with the aim of having these funds comply with appropriate standards and disclosure requirements.
The prominent themes of the Report are (a) enabling the use of blended finance instruments such as green bonds to mobilise private capital towards sustainable and climate-friendly initiatives; and (b) the corresponding need for more robust regulatory and disclosure frameworks. Driven by increasing awareness of ESG issues and the need for sustainable financing, green bond offerings and green facilities of offshore-incorporated companies have gained popularity as mechanisms to finance sustainable initiatives in areas spanning across renewable energy, energy efficiency and climate change adaptation.
An emerging trend in the offshore space is the growth of ESG fund financing with the strategy of investing in a diversified portfolio of companies with strong ESG performance. The influx of investments with the ESG label gives rise to growing demand for thorough due diligence on potential ESG investments, sustainability reporting (with clear metrics on areas including carbon emissions, diversity and inclusion, labour practices and governance structures) and impact measurement.
The growth of ESG strategies has, however, led to concerns over the risks of ‘greenwashing’ where the sustainability characteristics or achievement of the relevant product or service is misrepresented, intentionally or unintentionally. Whilst greenwashing has taken various forms and interpretations, investors and other stakeholders are demanding more stringent scrutiny, as noted by principles and standards set by regulators and international bodies.
To address the issue of greenwashing, the projects funded by green financing are expected to meet specific environmental criteria and may be subject to third-party verification. In the offshore space, challenges arising from limited and fragmented measurement and reporting frameworks that fail to consider different stages of technology readiness remain.
While the Cayman Islands government confirmed at the Spectrum 2023 conference in September 2023 that it will develop a sustainable finance strategy, it is taking a backseat approach in financial sustainability regulation and disclosure. Currently, the EU Parliament is leading the way in approving in October 2023 a new uniform standard for the use of the “European Green Bond” label, the first of its kind in the world. Measures include sustainability disclosure on use of proceeds and transition planning, a regulatory framework for independent third-party review of standard adherence, and a requirement that issuers allocate 85% of proceeds on climate-friendly initiatives that align with the EU taxonomy framework.
Once a more robust ESG regulatory framework and clear reporting perimeters are fully developed and implemented, it is expected that the offshore jurisdictions will draw on the EU market practice and norms in ensuring funds raised are used for legitimate sustainable projects and that transparency and accountability are maintained throughout the transition planning.
For further information, please contact:
Fiona Chan, Partner, Appleby
fchan@applebyglobal.com
