Kevin Smith, Director, reflects on the introduction of a set of green principles that provide straightforward guidance to private equity practitioners operating on the island.
This article was first featured in Guernsey Press on 12/06/20.
Guernsey has long been Europe's leading centre for servicing the private equity (PE) industry but in recent years, it has also established itself at the forefront of green finance initiatives, epitomised by the introduction of the Guernsey Green Fund product in 2018 - the world's first regulated green fund product. To this end, Guernsey has now introduced a set of best practice green principles for PE practitioners, reinforcing the island's commitment to both PE and the fight against climate change.
The Covid-19 crisis and how we approach the exit from this period has brought sustainable practices into focus more so than ever before and therefore the green principles are a timely asset for PE practitioners. Investor preferences are rapidly changing to align with environmental, social and governance (ESG) narratives and the PE industry faces a significant challenge to incorporate sustainable practices at scale and speed in order to affect meaningful change.
Developed by Guernsey's sustainable finance body, Guernsey Green Finance, the voluntary green principles which are applicable to any PE fund, are a pragmatic step forward. It is hoped that they will act as a blueprint for both general partners (GPs) and limited partners (LPs) active in the PE industry, stimulating simple reporting and transparency to enable PE firms to become more sustainable and route capital to climate change mitigation causes.
Although written largely from a GP perspective, the principles are also applicable to LPs and are based on a two-pillar framework: (1) process, comprised of governance, culture and transparency; (2) portfolio, covering risk assessment, assets, taxonomy, measurement, and reporting.
Benefits of adopting the principles for fund managers
The green principles offer numerous benefits to those fund managers implementing them into their operational framework and GPs should take note of the principles in order to engender best practice. Benefits include:
- Increased investment transparency
- Enhanced governance, measurement and reporting of an investment's sustainability
- Development of an internal culture of sustainability awareness
- Strong external image
- Heightened investor confidence
- Drives more investment into sustainable investments
- Streamlines risk assessment and due diligence process
- Bolsters GP investment process and policy
The introduction of the green principles and their simplistic nature is a step towards instilling a sustainable culture within the PE industry in Guernsey. It is envisaged that the principles will assist GPs in developing their funds towards a more sustainable position and enable the PE industry to drive forward the change required to mitigate climate change.
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