James Corah (pictured), head of sustainability at CCLA
I spent much of 2023 arguing that sustainable investing needed to change. My recurring argument was that sustainable finance products were not delivering what investors wanted, which according to the Financial Conduct Authority's Financial Lives Survey was to do "some good as well as [providing] a financial return".
I argued that existing products were too fixated on metrics, ratings and what the portfolio looks like rather than focusing on how they were driving positive change.
It may be confirmation bias, but it seems momentum - helped by the FCA's finalisation of the SDR rules and continuing investor appetite - is growing.
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From AdviserAction to Worthstone and Paradigm Norton's campaign to push engagement, many wealth managers are coming together to build an industry that is more meaningful.
So, in 2024, I want to move on from 'what we need to do' and focus on how - together - 'we can deliver it'.
Here, in no particular order, are five ‘New Year's Resolutions' for our sector to deliver for those investors wanting their portfolios to do some good.
Embrace dynamic materiality
Much of the sustainable investment mantra in wealth management has been about investing sustainably to boost returns. To paraphrase, it has focused on financial materiality. As investors, it is vitally important that we focus on the bottom line.
After all, what differentiates us from NGOs is the desire to build an environment in which businesses can flourish and portfolio returns can prosper.
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However, an exclusive focus on financial materiality can lead us to get trapped into seeing sustainable investment as solely about delivering alpha over conventional investment time horizons.
Instead, I would like our sector to fully embrace dynamic materiality.
This recognises that some negative sustainability externalities might not be financially material today but they do harm the overall environment and - due to changing regulation and legislation - can, over the long-term, come back to damage that company's returns.
If we were to do this, it would create a sector that is better at allocating capital today, but also incentivises us to ‘de-risk' tomorrow by making change happen.
Embracing governance
With the introduction of SDR and the ‘Anti-Greenwash rule' this year - at least in the UK- will be the year that Sustainable Finance regulation ‘gets real'.
At the heart of delivering against the ever-tightening rules is going to be making sure that sustainable investment systems and processes are adequate and functioning.
Traditionally, our sector had been sceptical about rules and regulations. Indeed, one of my early career mentors would often rant about compliance stopping him from doing the right thing.
But we need to consign that attitude to the past.
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The new range of regulation gives us the opportunity to build new systems that take sustainability seriously.
It allows us to build internal processes that treat what we do as the core part of our industry that it is.
In short, we need to practice what we preach and embrace good governance in 2024.
This is not a distraction from doing what matters, it builds a better platform from which we can deliver proper sustainable finance.
Training and development
At the core of good governance is competent people and it is no surprise that the FCA made training and development a key part of their ‘Finance for Positive Change' Discussion Paper.
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In 2024, we need to make sure that everyone involved in the ‘sustainable finance chain', from the board to the client, has the necessary knowledge to understand, deliver and interrogate the product.
But, in addition to ‘core training', we need to build a sector that wants to learn.
Change
I could not put together a list of resolutions without including Positive Change.
The purpose of Sustainability Investing is to help build a more sustainable world. How we do this is going to differ, but I would encourage every firm to establish their own ‘theory of change'.
Celebrate
Finally, in 2024 we need to celebrate what we achieve more. The downside of the new regulations - when partnered with the ESG backlash - could be the temptation to ‘greenhush'.
This is to keep quiet about what it is we have achieved.
As a sector, we need to do the opposite. We need to be loud and proud about what our industry does.
For sustainable finance to flourish we need to inspire people about the potential for their money to both provide a financial return and make a difference.
We need to give them the vision of what finance can, and does, achieve. There is a lot to be proud of.
Here is to a prosperous 2024!
James Corah is head of sustainability and Amy Browne is stewardship lead at CCLA
