Why International Finance Centres Are Vital For Boosting Foreign Investment Into The UK

To achieve these ambitious targets, the Labour manifesto highlights a ‘strategic partnership with business,’ part of which will come from inward foreign direct investment (FDI). As its external connections and position in the global economy undergoes change, FDI is becoming ever more vital for the UK economy, but it is facing stiff competition to attract that investment from the likes of countries including the US, France, Ireland and Singapore. Here, Rupert Pleasant, Chief Executive of Guernsey Finance, explores how international finance centres like Guernsey boost FDI into the UK.

The Value Of FDI

On average, a £1 million FDI project into Great Britain leads to a net increase in national levels of gross value added (GVA) of around £98,000, and a net increase in employment of around 2.9 jobs. With an increase in FDI comes substantial economic benefits, yet in the 2023 to 2024 financial year, the value of large capital investment projects into the UK, which involves overseas institutional investment into large capital projects in real estate, infrastructure and energy, was valued at just over £7bn; this down from more than £17bn in the 2022 to 2023 financial year.

So how can this investment be boosted? One investment pattern bucking this trend comes from Guernsey, an independently governed international finance centre with close historical ties to the UK through its loyalty to the Crown. In a report by one of Europe’s largest economic research houses, Frontier Economics, analysts found that Guernsey-based funds currently channel £57 billion of investment from around the world and into the UK economy on an ongoing basis. This is three times the estimated cost of the Crossrail project.

This is important partly because of what that funding is used for – infrastructure projects, financing business through private equity, and property investments. But it is also important in terms of the wider context for the UK's inward investment, because funding through Guernsey has been growing at approximately 14 per cent per year since 2020.

The island is a driver of financial flows into the UK and has extensive market access, giving UK investors access to a wide range of overseas investment opportunities complemented by high-quality, cost-effective administration. This not only enhances the UK’s investment portfolio, but also plays a significant role in increasing the international competitiveness of UK financial services providers, improving risk-adjusted returns, diversifying portfolios, and allowing UK clients greater access to the significant expertise that international finance centres like Guernsey provide.

Investing In Sustainability

Ambitious global targets to net zero are impossible to reach without private capital flowing into the sector. These flows need to be effective, with good governance at the heart of the strategy and any risks of greenwashing mitigated.

Guernsey’s long-established fund industry encourages investment into sustainable UK infrastructure through regimes such as the Guernsey Green Fund regime, the world’s first regulated green investment fund designation. The criteria to meet the regime align with internationally agreed goals such as the Global Biodiversity Framework agreed in the Kunming-Montreal COP, and the European Union Taxonomy for Sustainable Activities. This not only gives investors confidence that their investments align with the objective of mitigating climate change, but also gives fund managers access to trusted sustainability credentials in a market teeming with evolving regulations.

Investments through this regime align with UK policy objectives such as the development of a resilient, low cost, low carbon power sector. Specifically, the British Energy Security Strategy has set out a target for the UK to deliver a five-fold increase in the deployment of solar by 2035.

The Guernsey-domiciled NextEnergy Solar Fund (NESF) was awarded the Guernsey Green Fund designation in February 2020. NESF invests primarily in solar power plants across the UK and in all four nations (approximately 85 per cent of its asset base).

As of April 2024, NESF owned circa 950MW of operational solar PV and energy storage assets across the UK, enough to power 301,000 households per year.

The Guernsey Green Fund’s sister regime, the Natural Capital Fund designation, was launched in 2022 by the Guernsey Financial Services Commission (GFSC), Guernsey’s financial services regulator. The world’s first regulated natural capital and biodiversity investment fund designation, the regime is intended to enhance investor access to natural capital-focused investment. Specifically, the regime focuses on opportunities that generate returns while also making a positive contribution to, or significantly reducing harm to, the natural world. Under the Natural Capital Fund Rules, a scheme’s objectives must align with either:

• The UN’s Convention on Biological Diversity’s Post-2020 Global Biodiversity Framework’s 2030 Action Targets;
• The UN’s Sustainable Development Goals 12-15; or
• The EU Taxonomy for Sustainable Activities’ Environmental Objectives (c) to (f).

This is vital not only for the UK but globally, with the UN calculating the global nature finance gap at $700bn (£539bn). This figure is the collective yearly amount required by the private sector, non-profits, NGOS, and governments, to sustainably manage biodiversity and halt the destruction of ecosystems and species by 2030.

While the global nature gap looms large, governments and regulators continue to encourage the private sector to invest in nature. Initiatives like these align seamlessly with UK policy goals, particularly in levelling up and advancing an economically efficient and environmentally friendly power sector. The rigorous application and monitoring process by the regulator adds an extra layer of reassurance that the goals of the fund are genuinely beneficial to the regeneration of nature.

Frontier Economics estimates that the social value for the UK from investment via Guernsey is worth £3-4 billion. This contributes to improved infrastructure in the energy, health, and education sectors, and more extensive social housing stocks.

The value is spread across all four nations of the UK, with funds like the NextEnergy Solar Fund bolstering investment into renewable assets and assisting in Labour’s goal to triple solar power by 2030.

Embracing Innovation

Guernsey is also in a relatively unique position to embrace AI and technology within the financial services sector, from digital assets to AI-optimised funds.

Innovators in the FinTech sector value the open conversations and clarity that Guernsey’s regulator provides, which enables investment to flow quicky and effectively into UK-based tech-enabled projects.

The GFSC’s pragmatism and openness to innovation enables the regulator to provide guidance in what would otherwise be grey areas in technology, including tokenisation.

Earlier this year, for example, tokenisation solutions provider, Ctrl Alt, launched the first tokenisation of a debt transaction for a UK bank through a Guernsey structure.

The year also saw investment services firm Sanctum FI LLP launch a closed-ended artificial intelligence-powered investment scheme in Guernsey, which applies machine learning to a wide range of fundamental, price, and other data, to select undervalued stocks and bonds across a risk adjusted portfolio.

Guernsey’s openness to pioneering investment strategies and supporting expertise within the funds sector demonstrates our jurisdiction’s suitability as a fund domicile for capital flows into the most cutting-edge UK projects.

Guernsey’s Unique Value

The findings in the Frontier Economics report also highlight that UK fund managers are generating more than £2 billion in fees from Guernsey-based funds annually, creating additional tax revenue for the UK. Additionally, £7 billion in investment returns is created for UK investors.

Because of its strong relationship to the UK, Guernsey’s channelling of investment is unique when compared to other financial centres. The report demonstrates that a significant proportion, namely £13 billion, of the £57 billion investment into the UK, would be unable to be recouped in the long term if these funds were domiciled in other jurisdictions. So, if existing linkages to Guernsey were broken, £57 billion would be lost with immediate effect, and a quarter of that would never be made back.

It therefore makes sense for the UK to tap into the expertise and dynamism of the island, bolstering UK competitiveness and the generation of UK-based fees, along with the associated investment returns that generate revenue in the UK.

International finance centres like Guernsey continue to add value to the UK and remain strategically important as stable conduits to international capital. It represents a mutually beneficial collaboration and a symbiotic relationship; the success of one is the success of the other.

Rupert Pleasant
Rupert Pleasant is Chief Executive of Guernsey Finance, the promotional agency for Guernsey’s finance industry. His role includes business development and the promotion of Guernsey’s finance industry in the island’s target markets, including Europe, US, Asia, South Africa, and the Middle East. Brought up in Guernsey, his financial services career has taken him globally, working for blue chip institutions in London, Hong Kong, South Africa, and Switzerland, before returning to Guernsey in 2014. His background is in private banking, trust and corporate services, where he has held a number of senior management roles. Rupert joined Guernsey Finance in May 2020.