The Commission has developed a Green Approach to demonstrate its commitment to develop climate finance through regulatory tools and support the finance sector throughout the transition towards a low carbon economy. The Commission recognises the importance of the COP21 Accord in Paris, which stipulates that further finance flows into green investments are consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. The Commission considers that both the global and local financial sectors are beginning to transition towards a greener world and that the Commission should co-operatively support that process.
The Risks of Climate Change
The Commission is beginning to evaluate how climate change and wider environmental issues may affect the licensees that it supervises. Licensees may face emerging physical, transition and liability risks in the face of climate change and the Commission will consider these risks as they develop. It is important that licensees understand the risks that might be facing their businesses and mitigate those risks effectively. Additionally, boards of licensed firms may wish to consider these emerging risks and understand how they might affect their firm.
In order to mitigate or slow the effects of climate change it is estimated that significant investment is required worldwide. The mobilisation of capital to green projects is clearly key to the transition to a low carbon economy. This is one of the reasons the Commission introduced the world’s first green fund (for further information on the Guernsey Green Fund, please click here).
The way in which firms may be affected by climate change will depend on their business model and function within the economy. For investment, fiduciary and pension firms, entities with exposure to so called “brown” assets, such as oil or mining stocks, may find it increasingly difficult to find service providers who will deal with those assets. Stakeholders worldwide will need to consider whether they have a capacity gap in understanding the risks of climate change and the expertise to understand new and emerging products and asset types under the shift towards low carbon assets.
Banks and insurance companies have a key role in allocating capital and managing risk respectively and both may experience the effects of climate change in different ways. Banks may experience higher levels of credit risk through exposure to mortgage portfolios that have been subject to natural disasters. Banks may choose to reduce their risk appetite in order to protect themselves from the effects of climate change. Insurance companies may be exposed to risks on both sides of the balance sheet; assets could become stranded or subject to climate-exposed areas, whilst insurance policies may generate claims with a higher frequency than expected.
There may be other risks that firms are exposed to that are not listed here, which boards may wish to consider as the world transitions to a low-carbon economy. The Commission will continue to monitor and assess the risks to which its firms are exposed in line with its policy of risk based supervision.
The Commission is engaged with other regulators to develop awareness, understanding and capabilities on how to respond to climate-related risks. The Commission contributes to the development of proportionate standards to support the finance industry in its response to climate exchange.
Network for Greening the Financial System (“NGFS”)
The Commission became a member of the NGFS in 2019. The NGFS is a network of central banks and supervisors who share best practices and contribute to the development of environment and climate risk management in the financial sector. The NGFS also supports the mobilisation of capital for green and low-carbon investments in the broader context of environmentally sustainable development. To read more about the NGFS, please click here.
Sustainable Insurance Forum (“SIF”)
The Commission became a member of the SIF in 2018. The SIF is a network of leading insurance supervisors and regulators seeking to strengthen their understanding of and responses to sustainability issues for the business of insurance. It is a global platform for knowledge sharing, research and collective action. The Commission contributes to ongoing work streams of the SIF and learns from the expertise within the network to develop its understanding of sustainability within the insurance sector. To read more about the SIF, please click here.
The Commission has been a member of IOSCO’s Sustainable Finance Network (“SFN”) since February 2019. The SFN facilitates the sharing of information, knowledge and experiences related to sustainable finance issues. It acts as a vehicle for carrying out collaborative work on common regulatory and supervisory issues and acts as the IOSCO central point for dialogue and exchange of views with other bodies in this area.
United Nations’ Financial Centres for Sustainability (“UN FC4S”)
Guernsey joined the UN FC4S in 2018. The Network includes other leading financial centres including London, Frankfurt, Paris and Zurich, who share an objective to exchange experience and take common action on shared priorities to accelerate the expansion of green and sustainable finance. Guernsey’s participation is facilitated through Guernsey Finance - for further information please click here. To read more about the UN FC4S, please click here.
The Commission continues to assess its response to climate-related risks and has published various articles and papers on different subject areas in order to improve its framework. To view these documents, please view the following links.
Greening the Commission
Doing Green and Being Green
2019 may go down as the year when being ‘green’ became more than merely socially desirable, with the UK making carbon emission commitments legally binding and the States of Guernsey giving substantial funding to We are Guernsey to pursue the Green Guernsey agenda.
At the Commission we continued to be an active participant in the UN backed Sustainable Insurance Forum and we were delighted to be accepted into the principal green forum for regulators, the Network for Greening the Financial System supported by the central banks of France and the Netherlands. We were also pleased to see the EU agree its green investment taxonomy which we look forward to incorporating into the Guernsey Green Fund regime once it is fully adopted by the EU. Closer to home, the issue of doing what we are asking others to do sprung into our consciousness. Here the Commission is probably in the Chicago nudge school in terms of encouraging firms to consider their environmental impacts rather than mandating that they must do so though we are certainly watching international developments on climate change disclosure with interest.
On behalf of our staff, we retendered the investment management component of the Commission’s staff pensions scheme and selected an investment manager able to provide staff with a green investment approach. Whilst it may be the case that issues of diversification arise if staff choose to invest in an entirely green portfolio, we thought it important to offer our staff the choice of investing their pension money in an environmentally supportive fashion. We are conscious that for many people of ordinary means the way in which they invest their pension may be the single biggest way in which they can contribute to carbon neutrality. We would hope that regulated firms will follow our lead in making environmentally friendly investing more accessible to their staff and customers over the course of the next year, to the extent COVID-19 does not impede progress.
We also evaluated our own carbon emissions in 2019 discovering somewhat unsurprisingly that our main emissions came from the electricity we consume as an organisation and the flights we take as an active regulator of international firms based on a small island. Whilst the new cable link to France may well help our electricity become lower carbon, we considered that we ought to be undertaking some active carbon offsetting activity to counter our emissions and therefore agreed to invest, following an evaluation of alternative options, in a piece of previously forested land in Angus, Scotland. We intend to plant this land with saplings over the course of the next three years with a view to becoming a carbon neutral organisation by the mid-2020s as the trees grow and start to act as an effective carbon sink, with the likelihood that this will make us one of the first carbon neutral regulators in the world. Given the commercial nature of many of the trees to be planted, the commitment of all major political parties in the recent UK election campaign to significant tree planting and the finite amount of land suitable for forestry in the UK or Guernsey, we also consider our prospective woodland can be regarded as an investment rather than simply a carbon sink.
Key elements of the Commission’s Green approach are as follows:
- The Guernsey Green Fund,
- A regulatory green discount for Life Insurer assets,
- Inclusion of a climate change requirement with the Code of Corporate Governance,
- An internal question bank for supervisors,
- Purchase of a forest site out of the Commission’s own reserves,
- A green pension offering for staff.