The Polycrisis: The Role Of International Finance Centres In Navigating The Challenges

Most notably used by European Commission President Jean-Claude Juncker in 2016, a ‘polycrisis’ is characterised by a situation whereby a series of economic and non-economic shocks are disparate yet become entangled with each other in a way that degrades our ability to deal with the separate events.

It is not difficult to see why this word has risen in prominence this year.  Between global inflation, soaring energy costs in Europe, the Russian-Ukraine war, the refugee crisis, heightened tensions with China, sluggish growth, food insecurity, pandemic recovery, and the crypto crisis, all taking place against the backdrop of an intensifying climate crisis and extreme weather, economists are stating we are facing the most desperate set of challenges for the last 40 years.

As we enter 2023, the pressing questions are, where do we go from here? And what steps can we take to steer the ship through these turbulent waters towards the stability, certainty and trust that people and businesses seek?

Given the complexity of the crisis, we need to look at proven avenues of success – with International Finance Centres (IFCs) having the capabilities to facilitate cross-border trade, finance, and investment in a fragmented world.

IFCs, such as the British Virgin Islands (BVI), were born from globalisation and the success of trade and mobility that emerged in the second half of the 20^th century. While it can be recognised that the benefits of globalisation have not been universal, it must be acknowledged that globalisation has found solutions to many challenges, enabling investment, facilitating sophisticated transactions and bringing jobs and prosperity to many countries and communities across the world.

Though the polycrisis has produced a new set of global challenges, IFCs provide the blueprint to navigate these issues. As vital cogs in the global economy, IFCs create the most viable options for overcoming the climate crisis, trade disruptions, the crypto crisis, or the formation of economic and political blocs.

Sustainability And ESG

The climate crisis is undoubtedly one of the biggest challenges facing us today, with extreme weather, such as heatwaves, flooding, droughts, and hurricanes already intensifying economic hardships and social cohesion in many communities. However, international cooperation on the issue routinely overlooks the voices of the most affected communities, including many offshore IFCs such as the BVI.

One of the focal issues at the COP27 Conference in November was the assertion that countries that have contributed the least to the climate crisis in terms of carbon emissions should not be required to foot the financial bill for countries responsible for the majority of emissions and environmental issues. This was a crucial step for countries across Africa, the Pacific, and the Caribbean, in particular, to be heard and recognised on the issue.

Offshore IFCs deserve a bigger seat at the table when it comes to tackling the climate crisis. Not only are they often more vulnerable to the effects of the climate crisis and extreme weather, threatened by rising sea levels, hurricanes, and erosion, as well as wildlife degradation – they also hold the structures and expertise to become centres for green finance and environmental social governance (ESG). The vested interests of many offshore IFCs, including the BVI, in this issue and their role in global investment and finance means that IFCs are well-placed to play a crucial role in turning the tide and creating a financial ecosystem that prioritises green energy and local communities globally.  

The BVI knows the impact of climate change more than most and is invested in finding solutions.  For example, it established one of the first Climate Change Trust Funds in the Caribbean, which allows it to receive funding for climate change related projects.  The BVI can also be used as a prototype for innovative technologies and green public sector policies, which, if successful, could help prove concepts for corporations looking to support larger-scale projects around the world.

This was exemplified when the BVI-incorporated Central American Bottling Corporation made a US$1.1 billion offering in the first sustainability-linked bond by a Central American issuer. The offering also broke new ground by being the first US dollar-denominated sustainability-linked bond by a bottling company in the region and the second-largest single-tranche sustainability-linked bond by a Latin American issuer ever. Sustainability-linked bonds are issued with specific sustainability performance targets which contain key performance indicators. If a target is missed, the bond is subject to a ‘step-up’ clause, meaning the bond interest increases. In this case, the interest rate of the Senior Sustainability Notes is tied to reductions in greenhouse gas emissions in its multijurisdictional operations and in the share of waste going to landfill in the areas where its main plant facilities operate. Without access to offshore vehicles such as those offered in the BVI, this company may have struggled to present itself as an attractive sustainability partner.[i]

Facilitating Trade In Turbulence

Political conflicts and wars have threatened the stability of global markets. IFCs’ significant contribution to globalisation and cross-border investment will be as important as ever. Their neutral and robust frameworks are indispensable solutions in times of economic and political fragmentation.

For example, the BVI’s long-term success in this arena remains in the breadth of expertise and services it offers across the lifecycle of a company, from incorporation, mergers and acquisitions, listings, privatisations, restructurings, and litigation. The BVI’s world-leading network of corporate firms, law firms and financial services businesses all allow the jurisdiction to respond rapidly in the fast-moving global economic landscape and keep abreast of the legislative changes across international regulations and markets. 

The BVI’s continued popularity also relies on its internal structures – robust legislative landscape, tax neutrality, agile corporate framework, strong legal sector, and English common law, not to mention its unmatched BVI Business Company.

The scale of use of BVI Business Companies is partially visible in foreign direct investment statistics. At US$1.6 trillion, global foreign direct investment flows returned to pre-pandemic levels in 2021, while the total stock reached a record US$45 trillion. The BVI was the thirteenth-largest source of outward flows and the eighth-largest recipient globally.[ii]

IFCs like the BVI provide the know-how, reliability and consistency for businesses that are more valuable than ever in times of economic flux.

Resilience And Economic Recovery

The BVI, as an IFC, has been a model of resilience and economic recovery. The BVI’s response to the pandemic was swift, implementing an immediate lockdown and closing borders to minimise spread to the islands.  While the jurisdiction’s crucial tourism industry was deeply affected by the travel restrictions, its international business and finance centre forged ahead, adapting to the lockdown efficiently and continuing to facilitate high-profile and sophisticated deals throughout the pandemic, with BVI firms involved in tens of billions of dollars’ worth of global transactions in 2020 and 2021. For example, a BVI law firm advised on one of the largest takeovers by transaction value of a publicly listed BVI company, a US$1.1 billion acquisition, while the BVI was under 24 hour-a-day curfew.

In 2021, the BVI economy was already recuperating the economic impact for the jurisdiction, seeing the highest level of new company incorporations by financial services since 2018 – with this growth continuing in 2022.

The BVI has shown remarkable resilience in rebuilding, five years after a catastrophic category 5 hurricane flattened the infrastructure, damaging 85 per cent of buildings.

The BVI’s digital and innovative technologies have allowed it to continue to service its global clients with expertise, skill and efficiency, undeterred by disruptions from natural disasters or pandemics.  IFCs were essential in keeping the global business landscape in motion when so much of the world was at a standstill, especially in facilitating cross-border transactions and deals when travel was prohibited, serving as a lesson in adaptability and resilience necessary to navigate the polycrisis.

Neutrality In Geopolitical Tensions

Geopolitical tensions and global conflicts have played a major role in the severity of the polycrisis and continue to hamper hopes of economic recovery in 2023.

In times of uncertainty, people and businesses seek stability and certainty – characteristics evading so many jurisdictions this year.  Governments have tried to steady the ship by implementing new fiscal policies and budgets, but often, political alliances and geopolitical tensions limit the options available to them; a scenario we have witnessed with the European energy crisis.  

In unpredictable times, it can also be an impulse for countries to withdraw from a globalised view and adopt a protectionist economic approach. Geopolitical pressures also create economic blocs, as regions or politically aligned countries try to protect their own interests and mitigate the risk of further shocks.

IFCs, therefore, occupy a crucial neutral space in global trade and investment. As a neutral jurisdiction with an independent court system, the BVI is perfectly poised to facilitate joint ventures and transactions without the complications of political pressures. For example, China remains a critical player in the global economic environment. The BVI’s long-standing relationship with China and the Asia-Pacific region enables market access and facilitates critical deals between economic blocs.

The ability to operate without political constraints and tensions allows the BVI to maintain its globalised, neutral, open approach – a benefit many businesses will seek to embrace.

Through The Crypto Crisis

The entry of cryptocurrency and digital assets into the mainstream in recent years has opened the door to a whole new financial system. Traditional financial institutions and regulators struggle to keep up with the speed of innovation, attempting to both harness the opportunities they provide and protect consumers and markets from their volatility.

IFCs have been at the forefront of digital assets and are leading the way in creating robust regulatory ecosystems which can harness opportunities while minimising risk. Singapore, Malta, and the British Virgin Islands have successfully attracted entrepreneurs and investors to their jurisdictions. The BVI was one of the first jurisdictions to invest in the digital asset sector. As early as 2015, when most jurisdictions were rejecting digital asset funds, the BVI Investment Fund Association was working with the BVI’s regulator to create new frameworks to facilitate them and, as a result, succeeded in creating an ecosystem ripe for fast-growing businesses to thrive, attracting business from entrepreneurs and pioneers in the sector across the world.

However, as we enter 2023, there is a strong apprehension around digital assets and cryptocurrencies. The collapse of industry-leading companies such as Three Arrows Capital and, most recently, FTX has deepened concerns that the astronomical rise of crypto without a comprehensive regulatory landscape has allowed irresponsible practices and high-risk behaviour to proliferate, leaving investors and consumers unprotected from huge losses.

In 2020, the BVI issued Guidance on the Regulation of Virtual Assets to insure against any violation of financial services laws related to the use of or trading in virtual assets from the jurisdiction.  The BVI further strengthened its regulation of the digital assets class with the introduction of the Virtual Asset Service Providers (VASP) legislation, which became effective on 1^st December 2022. The Guidance notes and the VASP legislation have made the BVI even more attractive as a hub in the digital assets space.

We have also witnessed that the jurisdiction’s legislative framework and world-leading legal sector is well-equipped to deal with any challenges that lie ahead, demonstrated by advisory firm Teneo BVI, after being appointed by the court, taking control of high-profile Three Arrows Capital assets, and it is certain that the BVI will play a critical role in the sector as it matures and develops. 

As centres for evolution and innovation, IFCs are ideally placed to meet the increasing demands for the growth and sustainability of crypto and digital assets while mitigating the inherent risks in the sector.

Conclusions

Whether 2023 will see yet more global shocks contribute to the polycrisis, remains to be seen. However, there are reasons to be optimistic. IFCs have demonstrated that there is still a strong desire and necessity for a globalised economy, even in times of economic and political fragmentation, and that IFC vehicles are available to facilitate crucial investment in ESG and international development.

After a year of navigating the global geo-political challenges, economic disruptions, and regulatory shifts, the BVI has remained steadfast in its commitment to facilitating cross-border investment and trade, particularly in emerging markets and sectors. Like the BVI, other IFCs also have a continued responsibility to demonstrate the benefits of a globalised economy, promote growth and investment, and drive economic recovery and stability.

The risks in the polycrisis are ubiquitous, but there are also opportunities.  International Finance Centres have the specialist expertise to help global markets mitigate the risks while capitalising on the opportunities.

 

Footnotes:

[i] Beyond Globalisation – Pragmatix Advisory.

[ii] UNCTAD World Investment Report 2022