The role of IFCs in the changing world

Elise Donovan is the CEO of BVI Finance

The world of international commerce is currently spinning on an increasingly unpredictable axis. Mounting geopolitical tensions are remodelling globalisation and increasing barriers to trade.

Despite the growing disruption, globalisation isn’t dead; crossborder trade is deeply embedded in the DNA of countries across the globe even if its pace and trajectory have shifted.

International finance centres (IFCs), such as the British Virgin Islands (BVI), have an essential role to play in this shifting landscape; their experience and expertise will continue to ensure that crossborder investment and trade can take place with the minimum of holdups.

Their ability to create a neutral environment will also help drive collaboration, which will be especially useful for areas of emerging economic importance, such as the Caribbean and Latin America, in which growing sectors of green finance and digital assets are flourishing.

Developing scenarios

The Beyond Globalisation: The British Virgin Islands’ Contribution To Global Prosperity In An Uncertain World report, commissioned by BVI Finance and developed by the UK-based research firm, Pragmatix Advisory, offers insights into these changes. It identifies three potential scenarios for the future of international trade:

1. Weaker Internationalism: A continuation of globalisation, albeit at a slower pace, with challenges to overcome.

2. Bloc Economy: Economic and regulatory integrations form based on varying geopolitical alliances.

3. Economic Nationalism: Countries could move away from globalisation, adopting more protectionist stances.

Regardless of the predominant scenario, IFCs, especially like the BVI, will be crucial to uphold the pillars of international trade, investment, and business.

Leadership in ESG

There is an increasing global realisation that it is impossible to consider the future of investment and finance trends without considering the challenges created by climate change, a view very much shared by the BVI.

In addition, institutional investors and regulators around the world are increasingly focusing on environmental, social and governance (ESG) issues in terms of developing investment portfolios and designing corporate best practices. The good news is that BVI companies provide a flexible, internationally recognised corporate regime that supports ESG-related goals.

The incentive to tackle the damaging impact of climate change hits particularly close to home for the BVI. The small island state’s delicate ecology is especially at risk from hurricanes, changes in tidal patterns, and heavy rainfall. Its tourism industry and the jobs that rely on the visitor economy are threatened by extreme weather events, erosion, and coral and sargassum bleaching.

This experience has helped the BVI, and other IFCs in the region, understand the role of green finance and the need to respond to the climate emergency, making them well-placed as a centre for environmental investment and green funds, both across the Caribbean and the globe.

Addressing this issue will require an investment of more than $100 billion, equal to around a third of its annual economic output. In addition, with electricity largely generated using fossil fuels, energy prices in the Caribbean are among the highest in the world, highlighting the need for investment in lower-cost and lower-carbon emissions.

There’s also a requirement for blue finance, which is where sustainability-linked loans or bonds directly finance projects and programmes that have positive impacts on the ocean economy, an essential part of the Caribbean’s commercial activities.

Just prior to COP27, President Macron hosted a summit in Paris to discuss reform of the world’s multilateral finance institutions in the face of climate change and other development challenges. A key topic of discussion was a suggestion from a group of developing countries, led by Barbados, dubbed the ‘Bridgetown Initiative’, which called for the creation of new instruments and reform of existing institutions to finance climate resilience and the Sustainable Development Goals (SDGs).

The Caribbean region has the ability and motivation to become a true global leader in this area, working collaboratively across jurisdictions to make real change.

For example, the BVI has established one of the first Climate Change Trust Funds in the Caribbean, allowing it to receive funding for climate-related projects and to explore how it can maximise the impact of funding. This demonstrates how knowledge and experience in international finance and investment in the region can be harnessed to enable progress in the sector.

Unquestionably, the new global challenges and opportunities of next-generation technologies and climate change make the role of IFCs even more vital

Developing digital assets

The BVI is not only ideally situated to cater to financial markets aimed at sustainability, it is also well-placed to serve new and developing digital assets. The total addressable market for digital assets is expected to be worth between $8 trillion and $13 trillion by 2030, while the value of the global sustainable fund market could be almost fifty times greater by the end of the decade.

Keeping pace with these developments has meant that the BVI evolved and innovated in order to maintain its relevance and position in global markets. This remains an ongoing task as developments in technology and digital assets continue to evolve.

Measures are therefore being taken to welcome, regulate and support new technologies and the opportunities they bring, while legislation has been implemented to both encourage and manage the growth of digital asset holdings in the jurisdiction.

The introduction of the VASP (Virtual Asset Service Provider) legislation earlier this year showcases the jurisdiction’s commitment to evolving digital finance needs, emphasising both innovation and regulatory robustness.

Pan-global trends

Digital assets aren’t geographically anchored; part of a trend in investment that helps characterise the current period of globalisation. The BVI is an integral part of this movement because of its ability to facilitate crossborder investment – a key characteristic of its global approach. Also, by keeping up-to-speed with technological advances, the BVI aims to maximise its standing as a viable international business and finance centre.

Also, as a result of the ongoing expansion of digital connectivity and remote ways of working, geographical barriers continue to tumble. This makes the BVI’s financial services industry and the facilities it provides, accessible to clients all around the world. As investors in developing markets look to expand their portfolios across borders, the BVI is ideally placed to meet those needs.

These developments are also changing how and where people work, many kickstarted by the pandemic. This has created digital nomads; people who can work from almost anywhere in the world.

For those with no fixed base or non-geographical wealth, it makes sense to choose a location with neutral taxation in which to hold their assets. As a tax-neutral jurisdiction used for crossborder operations, the BVI is perfectly placed to meet the needs of digital nomads.

Private wealth management

The services offered by the BVI attract the business of expatriates and internationally mobile individuals with a high net worth who see the BVI as a suitable location to hold and manage assets, as it provides benefits and optionality unavailable in many other IFCs.

As a result, the BVI is one of the world’s leading destinations for private trust companies, the most comprehensive and sophisticated succession planning vehicles, with over a thousand on its register.

The jurisdiction’s long-established reputation as a safe and secure location to domicile personal wealth and assets is highly significant as we will soon see the greatest ever generational wealth transfer; US households are expected to pass $68 trillion in assets to their children over the next 30 years.

This presents a challenge for wealth managers, as just 13% of younger investors retain the same financial advisors as their parents. The BVI’s standing will help to ensure that it will remain attractive to inheriting millennials.

Looking to the future

Research from the Beyond Globalisation report found there are currently over 370,000 active BVI Business Companies, holding assets with a combined estimated value of US$1.4 trillion.

Furthermore, these companies generate an estimated $14 billion each year in taxes for governments worldwide and support around 2.3 million jobs globally.

To maintain this trajectory, the BVI must be nimble, continuously adapting to global nuances.

A key part of this will be understanding how deglobalisation and fragmentation will affect access to markets during a period of uncertainty and demonstrating how IFCs can contribute to this new landscape.

Although the future is uncertain – it is presently unclear which, if any, of the three international trade scenarios will become dominant – it is clear that the role and value of IFCs will continue beyond the current turbulence. Unquestionably, the new global challenges and opportunities of next-generation technologies and climate change make the role of IFCs even more vital.