Tim Clipstone December 15 2022 Guernsey expands its sustainable finance product suite and aligns with EU taxonomy Ogier | Private Client & Offshore Services - Guernsey Tim Clipstone Private Client & Offshore Services IntroductionGreen FundKey points Natural Capital FundIntroductionThe fortnight-long 2022 United Nations (UN) climate change conference, more commonly referred to as COP27, in Sharm el-Sheik has recently come to a close and rightly ensured that the issue of climate change remains at the top of the news agenda. UN Secretary General Antonio Guterres said in a stark warning at the opening of the summit: "We are on a highway to climate hell with our foot on the accelerator."It is now accepted that the finance industry globally has a huge role to play in mitigating climate change through meeting the UN's sustainable development goals, including limiting global temperatures rising to 1.5 degrees Celsius and achieving net-zero carbon emissions to meet key climate goals by 2050.As a leading international finance centre and green finance hub, Guernsey can play a role disproportionate to its size in supporting the transition, with potential benefits such as growth of Guernsey's green investment sector from £4.5 billion to £56 billion by 2040, according to a report from We Are Guernsey, the promotional agency for the island's finance industry, which identified a roadmap for a transition to net-zero.Green FundThe Guernsey Financial Services Commission (GFSC), Guernsey's regulator, launched the Guernsey Green Fund, a world-first regulated green fund product, in 2018.By providing a trusted and transparent product that contributes to the internationally agreed objectives of COP21 and the EU Taxonomy Directive, the Guernsey Green Fund will increase investors' access to green investments. By investing in a Guernsey green fund, investors can be assured that that their investments, which are being monitored against internationally recognised criteria, have a positive environmental impact on the planet.Resonance British Wide Energy Income II was one of the first funds to achieve this kitemark, and since then the net asset value of Guernsey green funds has steadily risen, surpassing £5 billion at the end of the second quarter of 2022, according to the latest figures from the GFSC.Key pointsGreen Fund RulesThe Guernsey Green Fund Rules were updated in 2022, expanding the category to include two new taxonomies and tie the fund in with the EU's Sustainable Finance Disclosure Regulation (SFDR), making it more saleable to people looking to raise money in Europe. The updates provide assurance to investors and those thinking of making green investments that accredited funds are investing in projects which comply with internationally recognised criteria for green investments.Schedule 2 of the Guernsey Green Fund Rules contains a list of green criteria endorsed by the GFSC that can be adopted by a Guernsey green fund. It must comply with one of the criteria listed, which must be clearly communicated to the GFSC and within the scheme's prospectus. It is the up to fund's governing body what criteria are most relevant to its scheme.Acceptable standardsThe first set of standards added to the list was the Common Principles for Climate Mitigation Finance Tracking, Version 2. These standards offer a flexible framework for entities to adopt and provide a comprehensive understanding of what encompasses climate change mitigation. As the principles are activity-based, they do not measure the management of funds and therefore leave it to the respective parties to operate the funds as they see fit. This was supplemented in September 2022 by Version 3.At the same time, a further set of standards, the European Taxonomy for Sustainable Activities, was added. This set of standards constitutes technical screening criteria for establishing the conditions under which an economic activity qualifies as contributing substantially to climate change adaptation to determine whether the economic activity causes no significant harm to any of the other environmental objectives.The addition of this set of standards has added benefits of clearly adopting an internationally recognised definition of sustainable investment, as well as expanding the scope of the Guernsey Green Fund Fules to more clearly include climate change investment strategies relating to climate change adaptation.Natural Capital FundThe GFSC added to its suite of sustainable finance products in September 2022 with the launch of the Natural Capital Fund. This regime creates a regulatory designation for funds to help channel investment into biodiversity and natural capital projects that make a positive contribution and/or significantly reduce harm to the natural world. The intention is to provide environmentally conscious investors with assurance that their capital is deployed in efforts to promote the protection and recovery of the earth's natural environment.This latest structure is an addition to the Guernsey Green Fund, rather than part of it, in order to address:both the degradation of nature crisis and the climate crisis, which overlap as well as being distinct problems; anda funding gap in the natural capital space.The GFSC has also published new anti-greenwashing guidance.For further information on this topic please contact Tim Clipstone at Ogier by telephone (+1 284 852 7300) or email ([email protected]). The Ogier website can be accessed at www.ogier.com.