CCLA’s James Corah: An ESG Christmas Carol

It is very easy to recast this story as an allegory for ESG (or sustainable finance).

The ghost of ESG Past is one of optimism, such as when mission- and faith-driven investors, many from the Christian faith, sought to align their money with their values and use their investments to drive change.

ESG was moulded in the context of pushing for change against challenges such as apartheid and the Vietnam war. 

This is, in many ways, the ESG that our clients desire today.

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Indeed, as we look back over the year, we would be foolish to ignore findings by the Financial Conduct Authority’s Financial Lives Survey showing that 81% of investors want an investment return while also wanting their money to do some good.

This is what ESG Past delivered.

Sadly, ESG Present has, for many, lost this purpose. Described by Alex Edmans as “both extremely important and nothing special”, it has become dominated by metrics – such as implied temperature ratings and SDG calculators – and constrained by the need to focus solely on financial materiality.

It has become more of a tick box exercise than a vehicle for furthering good in the world.

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Finally, ESG Yet to Come – based upon our current path – is a vision of regret.

It is one where the sustainable investment industry has lost the confidence of consumers, it has failed to drive the change that it promised; the change that our clients desire.

So, how can we set it back on track?

Like Scrooge, it feels like ESG, or sustainable investment, must act now to save itself and help has come from the regulator.

The FCA’s Sustainability Disclosure Requirements (SDR) Policy Statement has the potential to save us from our fate.

By recasting sustainability around ‘positive sustainability outcomes’ it will make us focus on what actually drives change. For us, this is engagement and the ‘sustainability improvers’ label.

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As everyone is now aware, SDR sets out four prospective labels for sustainable finance products: Sustainability Impact, Sustainability Focus, Sustainability Improvers and Sustainability Mixed Goals.

In Listed Equity, Sustainability Improvers are the way that we can have the biggest impact. When done properly, it can unleash the power of the investment industry to be transformative of company practices. It can take companies whose activities are not sustainable on a journey and  drive them to improve.

This will take unconventional projects – like our recent Modern Slavery benchmark – which uses the platform of the investment industry to push for change in new and innovative ways.

It is this kind of engagement where investors – and the investment manager working on their behalf – can make a real impact.

So, what does this all mean for ESG? It means that, to avoid a fate like Scrooge’s Ghost of Christmas Yet to Come, we have to recognise we have lost our way.

We have to stop pretending that it is just the portfolio and the metrics that matter and recognise that engagement on thorny topics is one of the ways to drive the most positive change.

By accepting the error of our ways, we can set investment on a better path towards true sustainability and what those 81% of investors surveyed by the FCA actually want – to provide returns and do some good.  

James Corah is head of sustainability at CCLA