“What does ESG actually mean? Who knows? My whole career is built around it, and before this I did a PhD on ESG, and I still don’t know what it actually means. That is because it means nothing,” James Corah, head of sustainability at CCLA Investment Management, tells our sister publication Portfolio Adviser.
Corah (pictured left) joined CCLA, which is the UK’s number one charity asset manager, in 2010. Over that time he has been responsible for the firm’s approach to sustainable investing which includes active stewardship, aligning investments with the values of its mostly non-for-profit clients, and developing programmes helping to combat climate change, modern slavery and poor mental health in the workplace.
And now, he believes the asset management industry has reached a point where “nobody is willing to tolerate that these three letters mean nothing anymore – they want something else”.
“For us it’s about stripping everything back to what matters, which is putting money in the pockets of our clients and actually making change happen, because that is going to help them put money in their children’s pockets in the future – as well as contribute some good within society.
“To our mind, this current era of ESG genuinely should die. SDR is going to be very helpful in this and allow us to play our part in building something that makes a difference. This presents a huge opportunity for us.”
Indeed, the Financial Conduct Authority (FCA) published its policy statement on Sustainability Disclosure Requirements (SDR) at the end of last year, in a bid to help investors identify and compare financial products relative to their morals and ethics. It also imposed an anti-greenwashing rule, which is due to come into force in May this year.
“I think there’s a real risk that the industry throws the baby out with the bathwater when it comes to SDR – because companies can’t greenwash anymore, so they decide to stop focusing on sustainability. Or, they see it as a complete waste of time,” Corah warns.
“There is a sense that the industry could begin to turn its back on [sustainable investing], which is a real shame. First and foremost because our industry has an amazing power to drive change. So, for firms to say they can no longer market their products as sustainable anymore and that sustainable investing is a waste of time, could be very damaging for the credibility of our sector.
“Our sector is all about authenticity but it faces a trust issue. We could undermine this by going full circle – from saying sustainable investing is a great thing to do, to no longer doing it. But we need to stay truly on that path. We think SDR should be seen as an opportunity to raise the bar, not a reason to throw in the towel.”
Sustainability
While SDR has put increasing pressure on asset management firms to make sure they are doing what they say on the tin, the regulation has been welcomed by CCLA with open arms. Plenty of firms will band around phrases such as ‘sustainable investing is in our DNA’ or – an oddly common analogy – ‘we’re like a stick of rock. Cut us down the middle, and you’ll see sustainability running through our core’.
But for CCLA, this isn’t hyperbole. It’s just the truth. Having first been created back in 1958 to manage the Church of England Investment Fund, the company now manages £14bn of assets. A majority of this is for charities – including charities associated with the mission of the Church of England – with non-profit offerings including the likes of the COIF Charities Investment fund and the Catholic Investment fund.
“This is a tremendous responsibility but we absolutely love that,” says Jasper Berens (pictured right), head of client relationships and distribution at CCLA.
“Companies often talk about putting clients at the heart of what they do, but we really do that here. Our ownership structure is our client base – we are owned by our funds, and our funds are our clients. So, it’s a circle that squares itself very easily.”
Therefore, ethical and sustainability considerations are paramount to how CCLA manages money for its clients. But how does the firm navigate a world that is at a turning point in the sustainability landscape, and where the ESG acronym is arguably waning in popularity?
“ESG, over the last five or six years, has become very metrics-driven,” Berens explains. “Then investors felt let down by those portfolios in 2022. So, there has been a pushback in the marketplace, and it was at the end of 2022 that the regulator stepped in and decided we needed to be clearer as an industry [and introduced SDR].
“I also think there is a lot of pressure on the ESG and sustainability industry. Where I think we, and a small group of fund management groups, can make a difference, is by accepting that capitalism has to play its part in sustainability and building a sustainable future. This is one of the reasons I decided to join CCLA.
“One Sunday evening I was figuring out which bottle and which tin should go in which recycling bin and I thought to myself that, things like this can make a difference. Society has to make a difference and it is comprised of individuals, all making independent decisions. This is important, but it is nothing compared to if your pension or ISA fund manager is piling into fossil fuels.”
As such, CCLA is on a mission to prove that investment portfolios can make “a big difference to society” as well as a big difference to investment performance. “It is possible to do both of those things”.
Philosophy
The approach CCLA adopts to investing is driven by engagement and active ownership. It will exclude any investments which do not align with the company’s philosophy, or any sectors which are notoriously difficult to engage with (oil and gas companies being a key example). However, the ultimate goal is to improve the day-to-day running of companies which have scope for improvement, and which will engage with CCLA.
“If you look at what charities need, every single penny of their capital is important, so they need to be able to perform across every different type of market cycle. They also want to make a difference,” Corah says.
“We think sustainable investing today has become a bit detached from that principle. It has very much become about investing in the top percentage of the marketplace which, when you think about where we come from, really doesn’t work for us. Because if you’re investing only in a small percentage of the market, you are leaving yourself open to portfolio bias and therefore underperforming during points in the market cycle. We can’t do that.”
He adds that investing in companies which are already sustainable “isn’t actually going to drive change”.
“All you are doing is buying things on the secondary market. What does drive change is the ability to get in, get your hands dirty, engage in active ownership work with businesses and make them better.”
Berens adds that while there is a place in the market for “traditional green, clean and thematic funds”, it isn’t CCLA’s style of investing.
“We think the majority of our clients want to make money, and they want to make change happen. Our approach is to recognise the world for what it is, warts and all, and try to make it better.”
Engagement
£14bn of assets is a great deal of money. But taking into consideration that the combined market cap of the ‘Magnificent Seven’ stocks equates to the GDP of 11 major world cities, how does CCLA manage to engage and incite change on a global basis?
“What we have found is that, often, sector and size doesn’t matter. It is about the resources that we have,” Corah reasons.
“We have a very deep specialism across a number of issues such as modern slavery – we don’t think the industry has picked up on this in the way that it should have done. We are at the point now where FTSE 100 businesses come to us because they want to learn from us, rather than us approaching them.
“So, we have not come up against any particular barriers in this sense. Some businesses are obviously more challenging than others. But oil and gas aside, I wouldn’t say there is an entire sector of the market that doesn’t engage with us. We have even managed to engage with Amazon – they have listened to our mental health policy and have created new approaches to mental health across the business now on a global basis.”
Alongside its wide range of institutional funds – and indeed its newest retail fund offering – CCLA has corporate mental health and modern slavery benchmarks, covering both the UK and global markets. The key purpose of these is to hold companies to account – whether they are investing in them or not – and to offer guidance to firms looking to improve how they operate.
“When we were designing these benchmarks, we wanted to create them in a way that allowed us to judge the progress of businesses and therefore genuinely lead to change, and to allow the rest of the investment industry to get on board with us,” Corah says.
“We realised the most simple theory of change you can have is to rate a set of businesses from one to 100. So, with our mental health programme we took emerging literature on what businesses can do to look after their employees, and – with the help of experts like Mind, the UN Principles for Responsible Investment and the Harvard School of Public Health – turn it into genuinely rigorous assessment criteria of how businesses can take this seriously, then go out and rate these businesses, as well as measure their progress over time.
“This is how we are able to have these types of conversations with businesses like Amazon, and how we have built up our expertise in this field. We are in the third year of our mental health programme now, and we have 20 to 30 companies which have improved on their score over this time frame. Who have gone from doing nothing or very little, to being leaders in this space.”
Retail offering
CCLA’s 60-year history, engagement work and long-term performance track record led to an increase in demand for a fund available to UK retail investors.
In April 2022, the firm launched its CCLA Better World Global Equity fund, which is currently £291.9m in size. Managed by Charlotte Ryland since launch, the fund aims to provide both capital growth and income to investors over rolling five-year periods, using CCLA’s active ownership approach. Its largest holdings include the likes of Microsoft, Amazon, Visa and biotech company Thermo Fisher.
Since launch, it has returned 17.9% compared to its IA Global sector average’s total return of 12.3% over the same time frame, according to data from FE Fundinfo.
“It’s differentiated, because it’s all about change and that is what clients want from us, That is so important,” Berens says. “And I think the industry needs it. People can see we have an authenticity around who we are and what we do. Our benchmarks are a good example of that.
“We are also outperforming at the same time, with low levels of risk. We have been managing this strategy since 2007 and we can demonstrate this strong performance and consistency.
“Yet, people are saying they haven’t heard of us. We are the City’s best-kept secret. Of course we are very successful in the non-profit space, but less so in the broader retail market. So, this is our opportunity to take what we do incredibly well, to a wider audience.”
This article first appeared on our sister publication, Portfolio Adviser
