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20/11/24
The Bahamas Embraces The Future With ESG
The Bahamas has blazed a trail for other jurisdictions to follow in the field of sustainable finance, with a set of practices and standards that strives to fulfil environmentally-sound objectives while also generating profits. In the business world, 'sustainability' often refers to policies that try to prevent the depletion of natural resources. Investors often take sustainable finance to be synonymous with Environmental, Social and Governance-related (ESG) investing.
The island nation began to evolve robust ESG rules and principles earlier than most jurisdictions. These are designed to benefit impact-driven businesses that want to do societal and environmental good, as well as earn revenue.
Such rules and principles are also likely to protect the environment in The Bahamas, make local communities more resilient, and foster economic growth that raises the standard of living for broad swathes of the islands' population.
The E, The S, And The G
But what exactly is 'ESG' and why is it so important?
Environmental, social and governance-related standards or criteria measure the sustainability and societal impact of an investment in a company or business.
- Environmental criteria consider how a company performs as a steward of nature, focusing on such issues as climate change, the conservation of natural resources, and pollution.
- Social criteria examine its relationships with employees, suppliers, customers and communities. Labour practices and diversity (the inclusion of people with more than one creed, colour, sexual orientation etc) are factors here.
- Governance concerns a company’s leadership, executive pay, audits, internal controls and shareholders' rights.
By pursuing ESG-related policies, businesses and investors can spot and offset risks, boost revenues, and make the world more equitable and sustainable. ESG is crucial because it aligns business success with ethical responsibility, creating wealth and tackling global problems at the same time.
Problems To Be Solved
In recent years, however, many people have grown sceptical about ESG. They have pointed to examples of greenwashing – the act of claiming that a product or business is more environmentally safe than it actually is. They have declared that ESG rules are not well standardised, and that rigorous governance and accountability are absent. They have also argued that it is often hard to quantify and verify the real-world impact of ESG strategies, and that businesses often claim to be ESG-friendly while simply carrying on business as usual.
The Bahamian Solution
The Bahamas has met these concerns head on. It has built a regulatory system that is grounded in transparency, integrity, and high standards of environmental and social performance.
The Carbon Credit Trading Act 2022 and the Climate Change and Carbon Market Initiatives Act 2022 contain clear and robust provisions for the validation and verification of carbon credits. They establish a rigorous process of registering and authenticating carbon credits that ensures they represent genuine and permanent reductions or removals of emissions.
The legislation also sets out strict criteria for the accreditation of independent third-party validators who, when the time comes, will be responsible for assessing the quality and credibility of Bahamian carbon projects and assets. This guards against the risk of greenwashing, and inspires trust and confidence in buyers and investors.
These acts legitimise a new asset class (carbon credits) and impose a set of assessment rules on it in pursuit of the United Nations Paris Agreement’s goal of reducing emissions. This proves to trusts and other corporate structures domiciled in The Bahamas that the recognition and valuation of carbon credits is well regulated.
Supporting Legislation
A further medley of Bahamian Acts underpins this.
The Investment Funds Act 2019 provides a regulatory framework for the creation of versatile investment fund vehicles. Investors can use these regulated funds for carbon-credit projects and all manner of ESG investing strategies. Such funds, which range from private-placement SMART (Specific Mandate Alternative Regulatory Test) funds to professional funds, allow them to see – and oversee – the whole process very clearly.
The Segregated Accounts Companies Act 2004 makes it possible to make sub-funds available, in an economic and efficient way, with segregated NAVs (net asset value calculations) underpinning their ESG-related strategies.
Digital Assets In The Service Of ESG
As green finance interacts with technology, FinTech projects related to the tokenisation of carbon credits, or utility tokens based around ESG communities, can take advantage of the regulatory clarity that the Digital Assets and Registered Exchanges (DARE) Act 2024 (an update of a previous and much more ground-breaking act) provides.
Moreover, traditional corporate structures in The Bahamas, such as companies or unit trusts, may provide tokens with legal personalities by tokenising the shares or units, which have enforceable contractual rights.
A Smorgasbord Of Services
The Bahamas is a robust international financial centre that offers a complete wealth management solution. Its adroit workforce of accountants, lawyers, bankers, asset managers, FinTech specialists, environmentalists, and professional trustees, is especially proficient in succession planning and business continuity. This tapestry of talent provides ESG initiatives with all the support functions they could possibly need.
New types of trust asset are always appearing, and carbon credits may soon be among them. Bahamian trust practitioners are always nimble and responsive to these trends, as the law requires them to be.
Moreover, trustees who want to preserve and increase the wealth that their trusts hold should consider the efficacy of ESG funds and investment options – not only for moral satisfaction, but also for the sake of monetary prudence, judging each fund or option by merit.
In 2023, sustainable funds performed far better than traditional funds in various asset classes and regions, as revealed by the Morgan Stanley Institute for Sustainable Investing’s sustainability report. Data from Morningstar, which the institute analysed, indicated that sustainable funds achieved a median return of 12.6 per cent, surpassing the 8.6 per cent return of traditional funds.
Bahamian Sea Grass And The Carbon Markets
The responsible management of natural resources and ecosystems, research into their preservation, and the advent of active voluntary and involuntary carbon markets, are all combining to offer investors financial gain.
For instance, it has been discovered that The Bahamas is endowed with the largest natural habitat of sea grass in the world, accounting for 40.7 per cent of all known sea grass. The sea grass works organically as a blue-carbon sink, sequestering 2–3 billion kilograms of carbon into its root systems annually. Studies are being conducted to quantify the amount of carbon credits that this discovery is going to generate.
The government of The Bahamas counts every carbon credit generated in The Bahamas as its own sovereign property. However, it is welcoming private/public partnerships that might generate said carbon credits. It wants this to happen through projects that are 'additional,' ie that cannot take place without the expected revenue from selling carbon credits. It is willing to negotiate income-sharing arrangements.
The Giving Pledge
Many current and prospective grantors of trusts want to leave a positive mark on the world while also ensuring that their loved ones are cared for. This is the impetus behind the ‘Giving Pledge’ that Bill and Melinda Gates and Warren Buffet founded in 2010. It is a collective effort by high-net-worth philanthropists to dedicate the majority of their wealth to charitable endeavours, either during their lifetimes or through their wills. To date, more than 240 individuals from 30 countries have taken this pledge.
Sustainable Finance On The Rise Among HNWs
Meanwhile, interest in sustainability among global investors is on the rise, with a Morgan Stanley report revealing that 77 per cent of investors are keen on companies that prioritise ESG factors. Furthermore, a poll by FTAdviser indicates that more than half of investors are planning to increase their ESG investments in 2024. The accounting firm PwC has also done research that shows that ESG has become a critical factor for leading investors worldwide.
The Bahamas provides an ideal destination for such investments, having legislated in favour of sustainable finance at an early stage in the ESG story. Its rules on the subject are anchored in quantifiable, verifiable metrics that measure the environmental and social impact of plans and projects – an ideal basis of support for a burgeoning ESG marketplace.
Delphino Gilbert Cassar
Delphino is the Chairman of the Board of Directors of The Bahamas Development Bank (BDB) and Head of Business Development and Fintech at Equity Bank Bahamas Limited.
Michael Clare
Michael is a Director for The Bahamas Financial Services Board (BFSB) and
Head of Digital Assets and Fintech Operations at Liongate Bahamas.
