Regulatory Approaches To Sustainable Finance: A View From Guernsey’s Regulator

R: Tell me about Guernsey and the Commission’s approach to sustainability?

W: Guernsey is one of the Channel Islands off the coast of France, which has been self-governing with its own Parliament, courts and laws for 800 years, and has a substantial financial services sector. Over the last seven years we've been doing a number of things in the sustainability space. In 2018, we launched the Guernsey Green Fund framework to provide investors with a secure statutory framework so they know that actually what they're investing will be climate change positive.

In 2022, we followed that with the Natural Capital Fund framework, based on the Kunming Montreal Global Biodiversity Framework, which was agreed at COP15 last year. Going back to 2020, I think we were the first regulator to introduce an insurance capital regime for life insurance firms to give them incentives to invest in sustainable finance.

But it's not just about capital regimes, it’s also about how you're governed. In 2021 we updated our Code of Corporate Governance, which applies to the several thousand firms we regulate. They now need to have at least one board meeting a year where they discuss the Paris Agreement targets, what effect they're going to have on their business, and how they're going to adapt to climate change. Having done that, they have to consider what disclosures to make to investors.

Those who live in Guernsey are known colloquially as donkeys. A theme of our sustainability regulation has been carrots, because we like to be happy rather than sore donkeys. We intend to continue in that vein because we want to facilitate rather than inhibit the required large-scale investments.

R: What do you see as the biggest challenges with sustainable investing and in your case as a regulator, regulation?

W: I think greenwashing is a challenge.

We've got the issue of people being discouraged from investing, because they're investing and thinking they are doing good, and then their money isn't going to green projects, but it's not as simple as the scandals we have seen.

We're embarking on the biggest civil engineering project I think the world has ever seen in terms of the amount of green infrastructure, which needs to be built globally to get us to net-zero by 2050.

Building that infrastructure requires an awful lot of minerals extraction, and it requires an awful lot of manufacturing. Now, minerals extraction and manufacturing tend to produce greenhouse gases and tend to do some environmental damage, but we desperately need finance going into them or there's absolutely no way we're going to get to net zero by 2050. This transitional finance is really, really important. If some people regard that as greenwashing and other people regard that as green, we have some difficulties.

So I think we need to think in terms of productive investment, rather than setting parameters so narrowly that people can't actually invest in things which need to be invested in if we need to get to net-zero.

Then there's another thing which is really important, which is economic viability.

And I think the sad truth is that unless the global carbon price rises quite radically, most of this greening of industry may not be economically viable. I listened to a lot of industrialists at the British Labour Party conference fringe this year talking about their carbon capture plans, and I was struck about how expensive the plans were relative to any extra added value on the goods produced. There is a great danger that the wrong regulatory regime can simply outsource production to another country with a less strong commitment to net zero, decreasing national prosperity, whilst not contributing to any global reduction in greenhouse gas emissions.

Then you've got the issue about SMEs. Small medium enterprises do much of the innovation in the world and if you clobber them with an awful lot of green bureaucracy, they’re going to either move to another country, or just stop doing what they're doing, and then you're going to have economic problems like unemployment.

And that's deeply problematic. So you need to work out how can you design appropriate green regulations to encourage SMEs to become greener without making it so administratively burdensome that they can't cope.

R: So you've told us quite a bit about the challenges but what are the solutions on the horizon? Are there changes to be made that will make the transition easier?

W: Yes, I think there are. The International Sustainability Standard Board (ISSB) standards published in June this year have done an amazing job of pulling together a complete alphabet soup of standards into one global minimum baseline.

More importantly, from my perspective, IOSCO (which is the global standard setter for the investment sector) agreed to adopt the ISSB standards in July, which means there should be a global trajectory towards implementing them. Now, it's still complex because within ISSB you've got Scope One and Scope Two emissions, which are the emissions which you as a company directly control, and then there's the Scope Three emissions, which are produced by the people who purchase your goods and the people you sell your goods to, or the people you finance and that's particularly critical in terms of the financial service sector.

I was talking to Emmanuel Faber, the chair of the ISSB on Monday and he said the largest firms that have been experimenting over the last few years with voluntary TCFD standards, upon which the ISSB standards themselves are based, have become quite good at working with their suppliers to get away from roughly-modelled data to ensure real emissions are recorded for many of their suppliers. And I think it may well be the case that you might ask firms to focus on producing their Scope One and Scope Two emissions (which they should be able to calculate) for a year or so. And then you actually create real hard data, which other companies can draw upon to calculate their own Scope Three emissions much more accurately. So, I can see that some countries might adopt a phased implementation. We have done some work looking at whether AI can help small and medium enterprises produce their emissions data. And the answer is it's advancing quite fast but it's not there yet. Hopefully it will get better with all the data providers improving their databases to accommodate the new demand.

R: What do you think about transition plans? Are they a necessary step for transition? And what do you see as their limitations?

W: A huge amount of work has been done. I was talking to counterparts at the Network for Greening the Financial System earlier in the week who were saying they can be very helpful. After all, we can’t all sit here twiddling our thumbs until 2049 and then say we need to implement net zero next year. There’s got to be a pathway towards net zero. We need a good quality pathway, and I think well-handled transition plans can be a helpful tool for people to determine their firm's profitable and growth led pathway towards net zero.

Conversely, I think you could get to a situation where some regulators set out an intellectually demanding set of standards around transition plans, which actually incentivises firms not to do the transition investments, but to disinvest. This is especially the case in financial services, where the wrong sort of transition plan regulation could inhibit the financing of the green transitional investments, which are so necessary for our transition to net zero.

And I think we need to be very careful that transition plans don't actually stop people investing in Africa, for example. I was talking to the manager of an impeccably green globally motivated investment fund recently, one with a very strong Christian ethos in terms of how they go about their business. She was saying that if her transition plan was set too tightly, she couldn't invest in any emerging market countries. So transition plans have got to be done very sensibly and very sensitively but they have got to be real in terms of driving the right sorts of environmentally positive investment.

A final point: We have both seen the slogans around COP urging us to become “actionists” this week. I think of net zero as being like a really difficult mountain peak – K2 for example. The “actionists” are fit people who will put on crampons and ropes and then try to climb up the most difficult face of the mountain. You need people like them, but most people won’t get up the mountain that way. As technocrats, I see our task, as being to build a smooth, well-engineered road up that mountain, so that the rest of humanity can drive up it in EV or hydrogen cars, around hairpin bends and through some tunnels, to safely get to the summit without great discomfort. If we forget about the need to do that, as we have seen in some European election results in the last 18 months, they simply won’t come with us on the climb.

Rosie Allsopp
Rosie is a writer, broadcaster and editor with more than 20 years' industry experience. She is currently the Communications Director at Guernsey Finance. Her background is primarily in print journalism, writing and editing for newspapers and magazines, specialising in business, politics and technology. She won Woman of the Year for Government, Regulatory and Not-for-profit Organisations at the 2023 Citywealth Powerwomen Awards.

William Mason
William Mason has been the Director General of the Guernsey Financial Services Commission since 2013. He is also a member of the Executive Committee of the International Association of Insurance Supervisors where he has previously chaired both the Audit and Risk Committee and the Standards Assessment Working Group. He has a strong interest in Supervisory Technology and Green Finance. Under his leadership the Guernsey Financial Services Commission has developed: The Guernsey Green Fund – possibly the world’s first regulated green fund structure; brought into force environmentally sensitive green capital rules for life insurance individuals – possibly another world first in insurance regulation; and made moves, including planting 53,000 trees this year in an ecologically advantageous fashion, towards becoming a net zero regulator. Prior to becoming a financial regulator, William worked at the UK Cabinet Office where he helped write “Regulation - Less is More, a report to the Prime Minister.” His other publications include: “Freedom for Public Services; The Costs of Regulation and PRISM Explained – Implementing Risk Based Supervision.” Earlier in his career William gained private sector experience working for an international energy firm on three continents and a US strategy house, Monitor Group.