Q: As we begin 2025, where do we currently find ourselves in terms of a sustainable market?
JC: It is an important question, both in terms of grounding where our market is and where it should be heading. It feels to me that the whole sustainable investment market has lost a little bit of its purpose.
At CCLA we have been running our sustainable approach to investing for over 50 years, and based on our conversations with clients it’s clear they have two main objectives: they want to make money; and they want their investment to make a difference, doing something they can be proud of.
What we have found with sustainable investment over the past few years is that it has become increasingly metrics related. By that, I mean investors are too focused on data rather than people. Of course, metrics are important as they are one of the ways investors can get comfort that their investment is doing as they would expect. However, the problem comes when the metric becomes the objective rather than the support.
If you manage portfolios to a metric above everything else, you run the risk of building sustainability for the sake of sustainability, rather than delivering what the end-investor wanted, which is to make sure their money is working for them, the planet and the communities that support them.
Instead, we need to re-grasp as an industry and start focusing on genuinely driving change. This needs to be less about building an investment style for the sake of a style, and instead be more about building sensible portfolios and ensuring they are delivering the change our investors want to see. In short, the industry genuinely must reconnect with its core purpose.
Q: What does this mean for end-investors and how can the industry be improved?
JC: There is some very interesting research coming out of the FCA as part of the SDR process, which said that 81% of investors want their money to make a difference, as well as genuinely making money.
I think most of us who are involved in the investment market will recognise that this statistic seems remarkably high, however if you flip it around and say investors can make a decent return and do good then why wouldn’t you? I think most people would really connect with that.
See also: Q&A with CCLA’s Corah: Focusing on sustainable leaders is not unleashing the power of our industry
Why do we think this is important? It gets us back to a sustainable investment market that isn’t just about style, instead it’s about driving change. This allows us to do interesting things as an industry to make those changes investors want to see happen, and this means making much better use of engagements to alter company behaviour for the better.
Q: What is the CCLA approach and how is it different from your peers?
JC: It goes right back to where we started, with the idea of engagement. By becoming too focused on metrics, it has become all about what is in your portfolio and, particularly when it comes to listed equity, it doesn’t really matter.
That might seem an odd thing to say, but by holding a company as an investor you are not providing them capital, instead you are just providing liquidity to prove you are a shareholder. As a result, in many ways what the portfolio looks like is almost immaterial when it comes to the idea of driving change.
Instead, we want people to see the portfolio as the part that drives returns, but also the platform from which we can go out and make great things happen with engagement. This is the starting point of what we call our five-point plan, valuing engagement and ensuring it focuses on real-world change rather than just enhance due diligence.
How do we do this? That is the second point of the plan, and it focuses on people. Engagement, impact and influencing is a very different skill to the one conventionally done by portfolio managers and analysts, and you can count on one hand those that can do both.
For us, we needed to accept we had to hire engagement specialists who can really maximise that ability to drive change through, and this neatly ties into the third point of the plan which is the constant need for expertise. I have been in meetings where it feels the company you are engaging with knows more about the issue than the investors who are there to try and get them to do more. If this is the case, why would a company talk to you and what are they going to learn from that dialogue?
So, you need to make sure you have that real expertise if you expect a company to learn from you and move forward. As a result, our team at CCLA has deep sector knowledge, from mental health all the way through to human rights and modern slavery.
See also: CCLA’s Dame Sara Thornton: Forced labour is ‘a feature of the system’ in the UK
The fourth part of the plan is the need to learn from other industries. Frankly, within the investment sector, we sometimes have a bit of a swagger and arrogance about ourselves. It’s almost: “We’re investors, we control capital, and we know how to do things differently.”
However, change is an ecosystem, no-one ever achieves something by themselves. So, we need to look more broadly, can we learn from NGOs? Can we learn from foundations? Particularly their expertise when it comes to monitoring, evaluation and learning, we can learn a lot from these other parts of the change industry to see how we can make what it is we do slightly better.
Finally, and it plays to the point of arrogance again, none of us can make change happen alone. No matter how good we are at engagement, no matter how big our firms are, our potential to get companies to do the right thing increases exponentially the more people who are asking the same question, the more people who are working in collaboration and coordinated. We need to harness the power of what is an incredible industry in investment, to come together and make things happen.
If we can do these five things, we can get over what some people consider to be an ESG slump and rebuild this industry to focus on delivering financial returns and unleashing the power we have to bring about great change.
Q: What are the dangers to investors if we don’t go down the route you have just mapped out?
JC: I think we are already beginning to see an ESG backlash. Investors saying ESG or sustainable investing are no longer as attractive and beginning to see it as yesterday’s issue is the consequence of a sector that has lost its focus on its stated purpose and has stopped delivering on what people wanted.
My feeling is that if we don’t re-engage and we don’t reconnect with the original purpose of “make money and make a difference”, then frankly this will become an investment style that comes and goes as the market comes
and goes.
It would be a huge waste to lose the power of our industry when it comes to making things better and I do think that if we do not reconnect with our investors this could be existential for sustainable investing.
However, it’s often darkest before the dawn, so this is the time that we are seeing so much new thinking happen, and we can really see the rebirth of a more meaningful sustainable investment market.
Q: Can engaging with companies really make them change?
JC: The core of our strategy is to invest in businesses that are not sustainable now but use our engagement USP to genuinely drive them forward. When you engage with some of the biggest companies, even the smallest change can get multiplied to a big outcome.
So why are some people cynical about engagement? I think it’s because some parts of our industry used it as an excuse to invest in some businesses they shouldn’t have, either because they can never change, or because they are not doing engagement correctly. For many, engagement is just a form of due diligence, rather than using it as a North Star for change. However, when used for the purpose of change, led by the right people, engagement most certainly can drive the outcome investors want to see.
This article first appeared in the January issue of Portfolio Adviser magazine
