I am writing this article from New Providence, the capital island of The Bahamas, an archipelago stretching thousands of miles in the Atlantic Ocean. New Providence is mere miles from Grand Bahama and Abaco, which were ravaged by Hurricane Dorian in 2019. As lifetime occupants of an extraordinarily active hurricane corridor with nowhere to flee inland from the miles of sea surrounding us, it is no wonder that we, the people of The Bahamas, are concerned about climate change.
Environmental Social and Governance (ESG) factors are increasingly buzzy terms in investment circles, with real implications for the globe and particularly low-lying countries like The Bahamas. ESG and the regulations that have arisen surrounding it, recognise that such factors are additive measures for evaluating an investment or a company. and from a company’s perspective, an important part of managing risk.
In addition, many ESG disclosures for listed and large companies and investment managers are now mandatory in jurisdictions such as the EU with its Taxonomy Regulation and Non-Financial Reporting Directives and the UK with its Task Force on Climate-related Financial Disclosures. Others are in development and likely to be based, at least in part, upon the International Sustainability Standards Board (ISSB) standards adopted in July 2023 by the International Organization of Securities Commissions (IOSCO), of which The Bahamas is a long standing ‘A’ member.
The coalescing of global disclosure regimes could not have come at a more critical time for The Bahamas. Earlier this year, I wrote that The Bahamas had big aspirations to lead the dialogue on climate finance regionally and globally. This had been demonstrated most notably by advancing its legislative framework, introducing the Carbon Market Initiatives Act (supporting The Bahamas’ Sovereign Carbon Credit Program) and the Carbon Trading Act 2022 (providing a registration framework for carbon exchanges, carbon trading businesses, and carbon registries).
The Bahamas’ aspirations would undoubtedly have been challenged by the widely publicised news that many carbon offsets are useless for the mitigation of global warming, and the general dip in carbon market pricing which roiled the voluntary carbon markets. If many of these sustainable investments are the opposite of sustainable, how do we, as a global community, even approach net zero emissions? The answer is in clear rules and regulations and The Bahamas is no doubt keen to ensure that its carbon project is validated and verified appropriately. Bahamas regulation now also provides a framework for the regulation of carbon exchanges, carbon registries, and carbon trading businesses. What’s missing now is a local framework/guidance on disclosure for publicly listed companies, investment funds, and fund managers.
Investors are increasingly clamoring for metrics to help them evaluate the sustainability practices of companies in which they invest. In addition, it is sensible that a fund’s documents should include disclosures on what, if any, ESG criteria are considered by an investment manager. This should be even more expansive where the fund brands itself as a sustainable fund. These disclosures are generally helpful to managers, in their capacity as fiduciaries. While an investment manager has a fiduciary duty to act in the best interests of the investment fund and its investors, a poorly conceptualised ESG policy and practice may run counter this obligation. For instance, a manager may fail to properly due diligence the investments falling victim to ‘green washing’ or other types of fraud.
It is now largely indisputable that ESG factors have a material impact on a fund’s investments and investment managers are perfectly entitled to have a policy on sustainable investments, but these factors should be disclosed to the fund and to investors, and investment policy mandates should be explicit in this respect. Applying an internationally consistent approach would enable investment managers, listed companies, and investment funds to be evaluated by investors on consistent metrics but, most importantly, would be yet another positive step towards net zero.
Partner, Graham Thompson, Bahamas