Best Of Both Worlds: Structuring Sustainable Funds For International Investors In Jersey

Jersey is an established jurisdiction for sustainable finance[i] across the funds, private wealth, capital markets and banking sectors; the core pillars of its finance industry. The island’s government, regulator and finance industry continue to work together to accelerate progress, and it’s anticipated that there will be an industry-wide consultation on next steps for sustainable finance later this year. The island also recently celebrated leading local firms who are driving the pace and scale of change through Jersey Finance’s inaugural Sustainable Finance Awards.[ii]

In this article, we take a closer look at the opportunity for sustainable alternative investment funds in Jersey and address some common misconceptions about access to EU SFDR product classifications from Jersey as a non-EU IFC.

Increasing Demand For Sustainable Funds

PwC’s recent global research report, ‘Asset and wealth management revolution 2022: Exponential expectations for ESG’[iii], projects over US$33.9tn in ESG-oriented AuM by 2026, outpacing growth in the asset and wealth management market as a whole. This is clearly being driven by investor demand; for example over 80 per cent of US and European investors are planning to increase their allocations to ESG products over the next two years. The research also shows that investors believe regulatory standards provide a useful basis for due diligence on investment strategies, with 71 per cent of institutional investors in favour of strengthening ESG regulatory requirements for asset managers.

The EU Sustainable Finance Disclosure Regulation (SFDR) has had a significant impact within and beyond the European market. Designed to increase transparency around sustainability disclosures and to accelerate sustainable investment as a result, it applies to all EU financial market participants. This includes alternative investment funds promoted by non-EU managers to EU investors through the National Private Placement Regime (NPPR), which allows non-EU alternative fund managers and funds to market in Europe without using the AIFMD passport. Although not designed to operate as a product labelling framework, in practice this is what the SFDR has become - with Article 8 products having sustainable characteristics; Article 9 products having sustainable objectives; and Article 6 products being those that do not integrate sustainability considerations into their investment processes.

We’ve seen increased appetite for SFDR Article 8 funds in particular. We are seeing clients both retrofit existing Jersey funds in order to meet investor expectations for sustainability disclosures and launch new Article 8 or Article 9 funds in response to investor demand. We’re also seeing funds outside the scope of SFDR making equivalent voluntary disclosures in order to meet investor expectations.

However, there remains a misconception, including amongst those external to Jersey who are charged with jurisdiction selection, that in order for a product to be designated as Article 6, 8 or 9 under the SFDR, it must be domiciled within the EU. This is simply not the case; in fact there are a number of specific advantages to using non-EU IFCs such as Jersey to launch SFDR Article 8 or 9 products. These advantages include:

1. Interoperability

The island has long-recognised the importance of enabling access to and ensuring equivalence between international markets. It continues to adapt to serve the growing desire for ESG funds and debt instruments emerging from its core markets, including the UK, EU, North America, Middle East and Asia. Jersey’s approach has been to position itself as an enabling platform, facilitating access to products that meet a variety of international investor preferences and appetites. With this in mind, Jersey has not created its own ESG product labelling disclosure framework; electing instead to recognise and enable those that are internationally adopted (such as those within the SFDR).

With fast-changing ESG disclosure regulations in different markets, many of which overlap but with differences, it is increasingly important for funds to take a strategic approach to compliance and reporting in order to meet requirements most effectively. For example, we are expecting further updates this year on how the FCA’s Sustainable Disclosure Regulation (the UK’s forthcoming product labelling regime, and which is not directly equivalent to the SFDR) will apply to overseas products. Jersey’s neutral base supports a strategic multi-jurisdictional approach, and its agile and skilled financial services industry is well-placed to provide support. Importantly, this concept of interoperability with international frameworks applies to the full spectrum of available Jersey products, including Certified Funds, Fund Services Businesses and Investment Businesses and Jersey Private Funds.

Jersey has not, however, disregarded the need to address the risk of mislabelling from a jurisdictional reputation perspective. In 2021, the Jersey Financial Services Commission (JFSC) published anti-greenwashing legislation designed to address the risk of funds being mislabelled as having sustainable objectives, regardless of whether or not they are also under the SFDR or other overseas regimes. The legislation applies to Certified Funds, Jersey Private Funds, investment advisors and certain Fund Services Businesses; and was designed to be a proportionate response to the evolving international regulatory landscape. Under the legislation, Jersey funds promoted on the basis of making sustainable investments are required to disclose all material information on the fund's sustainable investment objectives and strategy - including if and how these align with existing taxonomies, such as the EU Taxonomy. Helpfully, and to further support interoperability, the JFSC has not issued any prescribed templates for the disclosures. In this way, funds can meet their obligations utilising existing templates (such as those required under SFDR) where appropriate.

We anticipate that any future Jersey regulation(s) on key ESG issues that are important at a jurisdictional level, for example to manage exposure to climate risk, will be similarly flexible whilst also underpinned by international good practice.

2. Efficiency

As noted above, we are seeing an uptick in the number of Article 8 funds being launched on the island, taking advantage of the NPPR. Non-EU AIFMs arguably have an advantage over EU AIFMs, as non-EU AIFMs are only in scope of the SFDR in respect of each fund they market through the NPPR. This means they’re only required to make fund-level disclosures in respect of funds that are registered for marketing in the EU; whereas EU AIFMs must comply with additional manager-level provisions. For example, an EU AIFM must publish information about the integration of sustainability risks in their investment decision-making process on their website, whereas a non-EU AIFM is not required to make such disclosures.

Another distinct advantage of using Jersey to establish an Article 8 or 9 fund arises when a manager already has existing funds based on the island. The same Jersey-based providers can service and administer both SFDR and non-SFDR products; thereby creating economies of scale that can lead to reduced costs, retention of institutional memory and time savings. This ability to use Jersey as a “one-stop shop” for both SFDR and non-SFDR products allows managers and advisors to leverage the benefits of the island’s interoperability in the most efficient way.

More broadly, Jersey’s financial services sector is highly regarded for its agility, which, when combined with its high regulatory standards and fast-growing digital economy, has led to a growing and exciting array of digital start-ups on the island - supported by one of the fastest broadband speeds in the world. As a result, Jersey is emerging as a centre of excellence for investment in ESG and impact FinTech and RegTech solutions, operating at the interface of sustainable finance and digital technology. This is supporting the island’s industry to better capture and analyse ESG and impact data and to provide a growing range of efficient and relevant regulatory disclosure and investor reporting solutions.

3. Credibility

Jersey continues to progress its ambition to be recognised by its clients, key stakeholders and other partners as the leading sustainable IFC in the markets it serves.

With this in mind, the island has committed to ensuring it has sufficient high-quality infrastructure and expertise to service the increasing demand for ESG-oriented products. There is a growing community of skilled ESG professionals on the island, including technical regulatory experts with multi-jurisdictional expertise.

Supporting this, the JFSC is a member of the Network for Greening the Financial System (NGFS), and Jersey Finance is a member of the UN’s Financial Centres for Sustainability (FC4S) Network, which comprises 39 financial centres around the world sharing experience, driving convergence and taking action on shared priorities to accelerate the expansion of sustainable finance.

A sustainable IFC is only credible if the industry operates in a sustainable manner from a sustainable location. Jersey as an island has a comprehensive policy roadmap to net zero by 2050. Its electricity is already low carbon at only 22gCO2e/kWh - roughly one tenth of the UK’s current supply. The island also has ambitious goals as they relate to its international connectivity - the local airline has announced a collaboration with a US company to employ hydrogen aircraft conversion kits, and the ferry operator that services the islands is operational partner to a consortium designing and developing battery-operated ships.

Conclusion

It is important that investors, managers and gatekeepers alike are aware of the full array of options available when looking to launch an Article 6, Article 8 or Article 9 product under the SFDR. There continue to be several advantages in considering use of IFCs such as Jersey, in particular when considering long-term interoperability, efficiency and credibility of products.

Footnotes:

[i] https://www.jerseyfinance.je/jersey-the-finance-centre/sustainable-finance/

[ii] https://www.jerseyfinance.je/sustainable-finance-awards/

[iii] https://www.pwc.com/gx/en/industries/financial-services/asset-management/publications/asset-and-wealth-management-revolution-2022.html

Ali Cambray
ESG & Net Zero Director and Jersey Finance Sustainable Finance Steering Committee member.

Tori Davis
Senior Manager, ESG & Net Zero