The world is full of challenges, but solutions are to be found in what some would consider the unlikeliest places. Impact investing, at its heart, can draw on the renowned and existing talents of the financial sector, whilst also enhancing social and environmental returns. Investing for social good is increasingly measured and delivered using sophisticated techniques that are similar to what we see in the profit-driven world of purely financial investing. International Financial Centres (IFCs), for instance, have traditionally been used by high-net-worth individuals (HNWIs), corporations and other institutions as a safe base through which to structure their holdings. However, as the rich get richer, and the clamour for social conscience grows louder, the focus on IFCs is turning from the stewardship of wealth for future generations, to the use of offshore structures for philanthropic purposes.
A key driver of the groundswell of support for philanthropy is the re-alignment of corporate and HNWI goals to include a wider set of stakeholders, beyond just shareholders. Environmental, Social and Governance (ESG) and Corporate Social Responsibility (CSR) goals are increasingly being woven into the corporate reporting agenda. While new, first-generation wealth is often coupled with careful stewardship and a keen focus on financial growth; maturity and successor generations pay attention to other criteria, including a mission to ’put something back’ into their home communities. This is particularly true when the family’s wealth has been derived from extractive industries. Indeed, Viscount Simmonds noted in 1955[i] that ‘there is no limit to the number and diversity of ways in which a man will seek to benefit his fellow men’. This attitude leads to all manner of projects focusing on the relief of poverty, the advancement of education, the advancement of religion, and anything else reasonably considered to be charitable.
Philanthropy, at its core, is founded on a desire to promote the welfare of other human beings.
Offshore Structures & Legal Environment
Common across IFCs are the structuring opportunities provided by trusts, companies, foundations, partnerships, limited partnerships and other vehicles – together with the founding legislation and case law – to run, manage and apply charitable funds to associated good causes.
Many of these structure and entity types are already used by corporations and wealthy individuals in their own financial set-ups, the familiarity making them a natural choice for continued use for philanthropic purposes. Moreover, at a time when even developed nations are facing tumult, rancour and disruption, IFCs offer relative political, constitutional and legal stability on which to build philanthropic platforms.
Alongside global measures on information exchange, such as the Common Reporting Standard (CRS), Guernsey has, for a decade, obliged sizeable charities and non-profit organisations to register domestically, although no further reporting is required publicly. Protections for a benefactor are then to be found in the reach of the regulated sector into the operation of such organisations; besides, it is also likely that the benefactor will already be dealing with some or all of those intermediaries for pre-existing reasons.
One of the principal benefits of using an offshore structure for philanthropic purposes is the modern landscape of counterparties on offer. Most IFCs are clustered around broader economic powerhouses, and so are co-located in efficient time zones with strong technological and telecommunication sectors with no additional layers of taxation to be suffered by the charitable structures. There is also a web of Tax Information Exchange Agreements (TIEAs) and Automatic Exchange of Information (AEOI)[ii] across governments and fiscal authorities allowing for structures to report connections, flows and values appropriately.
The domestic environment of IFCs is highly regulated and most professional advisers are covered by regulation, professional indemnity and/or minimum capital requirements. Being located close to Europe means that visits and physical meetings are easy to arrange from the Crown dependencies; likewise arranging conference calls from Caribbean Overseas Territories for the eastern seaboards of the Americas.
Measuring Philanthropic Impact
As part of an existing ecosystem, it takes little to adapt purely financial assessment criteria used for evaluating, measuring and assessing current projects by institutions, corporations and HNWIs, to include suitable charitable key performance indicators (KPIs).
IFCs can therefore assist in maximising philanthropic ‘dividends’ by drawing on existing talents, existing clients and developing global awareness of what they are poised to do; at their core, IFCs can re-deploy expertise whilst shining a socially aware light on lesser-regarded areas.
Additionally, IFCs offer world-leading standards to counter money-laundering and terrorist financing. Although certain jurisdictions are often in the news for reasons of political envy and misunderstanding, the vast majority of IFCs have been evaluated as strong and well-developed locations for the entrustment of capital, compliant with global regulation, and appropriate audit standards. IFCs, particularly the Crown dependencies, have built dedicated ecosystems of accountants, lawyers, tax advisers, fiduciaries, investment managers and bankers to look after existing funds; so, it is with ease that they can adapt to working within the burgeoning philanthropy consultancy arena.
Impact Investing: A Case Study
One example of impact investment in practice, with which my colleagues and I have been involved, is an agribusiness development project targeting a number of countries in Central Africa (see Fig. 1 below for simplified structure chart). The project takes in over 10,000 hectares of farming land, which, aside from its agricultural potential, also benefits from the capacity to generate renewable energy from sunlight, creating multiple income streams for stakeholders. There is also the possibility for local residents to benefit from ownership.
In time, there will be scope for:
The overall aims of this project are to offer a sustainable income yield, local economic growth, and enhancements for local quality of life, whilst also reducing food imports and increasing domestic nutritional self-sufficiency. Each project is designed to be self-sustaining and replicable, subject to local awareness, involvement and compliance measures (such as planning laws). Already, we can see a vast improvement in the social, economic and environmental conditions of the nearby residents of these Central African projects which could, in turn, spur innovation and legislative clarification as the economies develop.
Evolution of Philanthropic Services
Reports such as Fiduciary Duty in the 21st Century[iii], coupled with a growing awareness of investing for a wider social purpose (including such initiatives as the Green Bond Principles[iv] and the more recent Green Loan Principles[v]), are increasing awareness of how ESG/CSR factors are often more important drivers to investors and capital-holders than financial returns. Philanthropy consultants can build on existing knowledge to design, assess and monitor KPIs on individual charitable projects, enabling due diligence skills to be extended to newer targets and continuing assistance. Calls for policy clarification and national frameworks will likely increase, but this is already underway across a number of jurisdictions, including IFCs.
Due diligence, as part of the fiduciary offering, is key. Its standards and implementation are constantly moving in the offshore world. Therefore IFC-based fiduciaries are well placed to assist with the necessary administration and maintenance of structures, leading to early assessments of:
[i] IRC v. Baddeley (1955) AC 572
[ii] automatic exchange of information, pursuant to FATCA, CRS and bilateral initiatives of like impact
[iv] voluntary guidelines set out by the International Capital Markets Association, an industry body, but with widespread use, acceptance and endorsement, last updated in 2017 (https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/GreenBondsBrochure-JUNE2017.pdf)
[v] voluntary guidelines published by the Loan Market Association and the Asia Pacific Loan Market Association, last updated in 2018 (https://webcache.googleusercontent.com/search?q=cache:SCNP5coOKFsJ:https://www.icmagroup.org/assets/%20documents/Regulatory/Green-Bonds/LMA_Green_Loan_Principles_Booklet-220318.pdf+&cd=2&hl=en&ct=clnk&gl=us)
Kit Hobbs is Head of Legal at Bellerive Trust Limited in Guernsey, specialising in private wealth structuring and with experience in private equity and regulatory matters. He has previously worked in England and Guernsey in legal private practice. Kit is a Solicitor of the Senior Courts of England & Wales and holds an MBA from the University of Cambridge’s Judge Business School. He has a keen interest in sustainability and philanthropy as a member of the Sustainable Finance Guernsey Council and one of the Guernsey representatives on the UN FC4S TNFD panel.