2024 marks the fourth year of our MM Meets series, and we’re gearing up for even more exciting interviews in the year ahead. In the meantime, enjoy some of the highlights from the last 12 months!

MM Meets… Tyndall Investment Management CEO Alex Odd: ‘I had no ambition at all to run a business’

In the first MM Meets of 2024, Tyndall Investment Management CEO and founder Alex Odd describes how the company was created almost by accident and how it has a 360-degree relationship with financial advisers.

Reflecting on the 2008 financial crisis, Odd said that it taught him “it’s not about when things are great and going up; it’s about when things are tougher”.

MM Meets… Quilter CEO Steven Levin: ‘I’ve always loved solving problems’

Quilter CEO Steven Levin, who took up his position in November 2022, stressed the need for evolution rather than revolution in the company, for “building out our distribution, supporting advisers, enhancing our proposition and driving efficiency in our business”.

“At times, I’ve been pushed or thrown into the deep end,” said Levin of his career so far. “Sometimes I’ve had bosses retire and give me their job, which can be daunting. But I’ve also thrived on that. And I’ve always had good support and mentorship.”

MM Meets… Jasper Berens: ‘I thought: this is the moment’

CCLA head of client relationships and distribution Jasper Berens explained how it was Sir David Attenborough’s 2020 documentary, ‘A Life on Our Planet’, that fortified his decision to move into the world of sustainability investing.

“It made the point very strongly that capitalism could play a part in the shift to a more sustainable future,” Berens pointed out. “And I thought, ‘Right, this is the moment. How can I use my 30 years of client-facing experience to make a difference in the world?’”

MM Meets… Andrea Montague: ‘Every business needs to focus on the areas it’s good at’

When Money Marketing spoke to Andrea Montague, she was Brooks Macdonald’s chief financial officer (CFO). She is now CEO of the firm – a sterling achievement when only 9% of FTSE 350 companies have a female CEO.

She outlined Brooks Macdonald ambitious plan to become a top-five wealth manager in the UK through both organic and inorganic growth while recounting her younger days growing up in Northern Ireland during the latter half of the Troubles.

MM Meets… Ed Dymott: ‘Never be satisfied with the status quo’

Benchmark Capital chief executive Ed Dymott told Money Marketing about his enthusiasm for Formula 1 fan and how he divides his time between Benchmark’s Horsham office and its London base at Schroders.

Dymott explained that Benchmark is “broader than a consolidator” as whenever Benchmark buys another IFA, it has already worked with it for a defined period.

MM Meets… Louise Jeffreys: ‘I love getting under the bonnet of a business’

Avid runner Louise Jeffreys explained how a chance encounter playing softball in her home town of Bristol led to her creating Gunner & Co, the financial services M&A experts.

Since the company’s creation, managing director Jeffreys has fallen in love with the advice profession and genuinely believes its service helps to define and execute succession plans “really does help people”.

MM Meets… Parmenion CEO Martin Jennings: ‘We’re just trying to build a great product’

Parmenion chief executive Martin Jennings told Money Marketing how then Axa Life CEO Paul Evans first introduced him to platforms.

Growing up in a household of seven brothers came with unique challenges, said Evans, but also gave him a competitive side. This has certainly come in handy as, in the eight years since he joined Parmenion, the firm’s assets have risen to just over £12bn across the group.

MM Meets… Castlefield founder and chair John Eckersley: ‘We have a strong set of values as a business’

The chair and founder of sustainable investment firm Castlefield John Eckersley explained how the business has gone from two employees in 2002 to more than 50 today.

In Eckersley’s view, finding the right people is “essential” because Castlefield’s employees are not just the “beating heart” of the company – they also own a part of it. Every employee, he said, has the option to become a co-owner of the business upon successful completion of their six-month probation.

MM Meets… Unbiased founder and chief executive Karen Barrett: ‘You have to dig deep and keep going’

Unbiased founder and chief executive Karen Barrett tells Money Marketing how the birth of her second child with a heart condition inspired her to start the company.

“It was only then I realised that I hadn’t made any financial plans for such an eventuality,” remembers Barrett.

Unbiased now connects people to financial advisers and manages over £80bn in assets. In the 15 years since its launch, it’s estimated that Unbiased has helped 10 million people access the right IFA.

MM Meets… Aberdein Considine Wealth’s Jen Paice: ‘I thrive on challenges that require bold action’

Aberdein Considine Wealth CEO Jen Paice initially wanted to be a physiotherapist, but she pointed out that this ambition brought with it a lot of transferable skills she uses at the Scottish IFA firm.

The business is part of the Scottish law firm Aberdein Considine. “It started as a solicitor estate agency and it has evolved into financial services and other legal services,” explained Paice.

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This is especially true as the anti-greenwashing regulations and the SDR’s naming and marketing rules for investment products are now in place, he added.

Marshall said advisers need to consider three issues when assessing whether or not to implement the FCA’s SDR rules – how does SDR:

• fit within their advice process;
• align to previous client discussions; and
• relate to any previous verbal or written communications, including their websites and client brochures.

Marshall said: “SDR has the potential to impact all advisers. It considerably strengthens existing regulations affecting what advisers and investment managers are allowed to claim on sustainable investments.

“Unpacking how these regulations affect each adviser firm and their advice on sustainable investments will take time, but given the regulations are now in place, it should be treated as a key priority.”

“With more responsible investment-related regulation likely in the future, firms should lean on the industry frameworks that already exist. For example, the FCA’s anti-greenwashing guidance states any sustainability references need to be: Correct, Clear and Complete, and any Comparisons must be fair and meaningful.

“Firms should also recognise that sustainable investment is a well-trodden path, which means there are numerous examples of good and bad that can be used as a resource. Firms may, for example, look to those in the institutional investment arena who have been investing sustainably for many years. Taking advantage of their learnings can only be a good thing.”

Marshall made these comments as EdenTree Investment Management announced that the EdenTree Global Impact Bond Fund will adopt the SDR “Sustainability Impact” label from 3rd February 2025.

The portfolio will be the third fund in EdenTree’s range to adopt a label, joining the EdenTree Green Future and EdenTree Green Infrastructure funds in the Sustainability Impact category.

The main aim behind the SDR is to “improve the trust and transparency of sustainable investment products and minimise greenwashing”.

Greenwashing is define as the act of “making people believe that your company is doing more to protect the environment than it really is”.

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At the same time, Quilter has reduced European equity allocation within the Managed and Responsible portfolios as it believes Europe is vulnerable in the wake of Trump’s tariffs.

Additionally, it also reduced the UK equity allocation within the same portfolios, mainly due to chancellor Rachel Reeves’ first Budget on the 30 October.

Quilter said the Budget “is expected to create growth challenges and may deter overseas investors from seeking valuation opportunities in UK equity markets”.

Typically, the WealthSelect portfolio managers have maintained their generally cautious stance. However, they anticipate that president-elect Trump’s campaign pledges of corporate tax cuts and deregulation will benefit US-based businesses and provide a near-term boost to the US economy.

The team have added exposure to outside of the Magnificent 7 as they expect sectors such as financials and industrials to be the primary beneficiaries of Trump’s White House win.

The increased allocation has been primarily directed towards Quilter Investors US Equity Income within the Managed portfolios, Quaero Capital Cullen US ESG Value within Responsible, and AllianceBernstein Sustainable Global Equity within Sustainable.

Within the Responsible portfolios, a new holding in PZENA Emerging Market Value was added, providing value exposure within the EM manager mix.

Quilter Investors portfolio manager Helen Bradshaw said: “Donald Trump’s victory has shifted the outlook for markets as we move into the new year. As we draw closer to the start of his second term in office, we have used this latest rebalance to ensure the portfolios are adjusted to weather this change of landscape.

“The impact of Trump’s tariffs will be felt globally. In the US, we will likely see a shorter-term economic sugar rush as his promises of corporate tax cuts and deregulation provide a boost to corporate America, and we have increased our exposure outside of the Magnificent 7 to reflect this.

“Comparatively, Europe is likely to suffer the effects, and when combined with the economic challenges the region is already facing, it looks rather vulnerable. The UK might not feel the tariff pinch quite so keenly, but it faces its own headwinds following an underwhelming Budget and a lack of investor interest. Now felt like the right time to reduce our equity allocation in each of these regions.

“2025 looks set to be another interesting year. We will be keeping a particularly close eye on what policies the Trump administration is able to push through and how this reverberates across markets.”

Still, there is a fear that Trump’s administration is expected to prove inflationary and therefore this increases the risk that the Federal Reserve may need to delay rate cuts.

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Last November, the regulator published its SDR consultation policy statement, which set out four labels introduced for sustainable funds.

It said that investors were “not confident” that sustainability-related claims made about investments were genuine.

Corah said the regulations were “intentionally painful” to ensure the asset-management industry builds a “higher bar for funds”.

“We’re all in this together,” he told Money Marketing. “Of course, there’s competition and a need for consumer understanding, which is important for driving competition and avoiding greenwashing.

“But the regulator’s goal is to nudge the sustainable finance industry to play a much more meaningful role in the transition to a better world.”

He described SDR as a “very useful” piece of regulation.

“This will ultimately strengthen the UK industry in the future, because we’ll have higher quality funds at the end of this process,” he added.

“We haven’t reached that stage yet, but all I can say is that the regulator has been unprecedentedly helpful in encouraging progress in this area.

“This reflects their understanding that it’s in their interest to move forward – both to address risks in the industry and to strengthen the UK industry as a whole.”

In April, the FCA announced it will extend its SDR rules to include portfolio managers.

It said the new rules are designed to protect consumers by ensuring sustainable products and services they are sold are accurately described.

This will include model portfolios, customised portfolios and/or bespoke portfolio management services.

Corah insisted that the regulator, fund managers, portfolio creators and advisers must all “work together” to ensure the SDR rules work properly in the future.

“It’s in everyone’s interest to make this regime work,” he said.

MM Meets… Jasper Berens: ‘I thought: this is the moment’

CCLA head of client relationships and distribution, Jasper Berens, said he believes there is still “considerable” consumer demand for sustainability.

“Anyone who says that demand is dropping off either isn’t talking to the right people or to the right generation,” he told Money Marketing.

“I completely understand that things [to do with ESG] are coming under scrutiny, but our feeling is that the regulator is doing the right thing.

“If the data shows that three-quarters to four-fifths of consumers are interested in sustainability and sustainable investments, then this issue is not going away.”

Berens suggested one reason sustainable investing may not have taken off as significantly in the broader intermediated market is that advisers have been overwhelmed by the “alphabet soup” of different sustainability capabilities in what was essentially a “wild west of product development”.

“What the regulator is doing is ensuring that the market comes to terms with this and creates a much more structured and efficient approach to sustainability for the intermediary market,” he added.

“We are very supportive of that, no matter how difficult it may be.”

Berens pointed out that there had been “a lot of noise” in early summer about how few funds had been approved across the different label structures.

“The reason is that they are setting a very high bar and they’re right to do so, because they want the system to work.

“Ultimately, they want consumers, through their advisers, to be really confident in the system.”

He suggested the regime in the future will have far fewer labelled funds, but consumers will ultimately have much greater confidence in the fund-management system.

“Right now, we’re just going through the challenge of fund managers figuring out exactly what they need to do to become labelled and ensuring that what they’re doing is right and fair, and provides the right outcomes for their consumers.”

He said he expects there to be a “crescendo” early next year, as more fund managers come to the table with more products.

The regulator has said it will offer firms temporary flexibility on its ‘naming and marketing’ sustainability rules, which came into force on 2 December this year.

The temporary flexibility came into effect on 9 September and will run until 5pm on 2 April 2025.

The FCA has warned that, where firms can comply with the rules without requiring this flexibility, they should do so.

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The global ESG market is predicted to surpass $40trn by 2030.

Investors and markets are increasingly using ESG ratings to inform investment decisions and capital allocation.

The number of firms offering ratings on ESG factors has grown rapidly in recent years, and the differences in the methodologies behind these ratings can be problematic.

In March last year, the previous government published a consultation on the matter. This closed on 30 June 2023.

It sought views on the introduction of regulation for ESG ratings providers, description of ESG ratings and their provision, activities to exclude from regulation, sectoral and territorial scope of regulation, and making regulation proportionate.

It reaffirmed its commitment in March and August this year.

In its response to the consultation, published today (15 November), the government said its plans to bring ESG ratings providers into regulation are “driven by its support for this growing sector”.

It added that bringing ESG ratings providers into regulation will boost investor confidence, reduce greenwashing and address the lack of transparency highlighted in responses to the consultation.

This, it said, will help to drive investment, support innovation and ensure that companies in critical sectors are not penalised by opaque ratings.

It plans for a number of exclusions to apply, including not-for-profit entities and internal ESG ratings assessments.

In its document, the government laid out its process for designing, developing and introducing the new rules, which is expected to take approximately four years.

It aims to lay the requisite secondary legislation before Parliament in early 2025.

Following this, the Financial Conduct Authority will develop and consult on policy proposals, building in feedback to finalise the ESG ratings regime.

Affected firms will then go through the authorisations process, with the regime ultimately going live at the end of the authorisation gateway.

The government said this timeline is “subject to various factors”, including the number of firms in the scope of the regime.

Quilter Cheviot head of responsible investment Gemma Woodward said: “With deadlines for the Sustainable Disclosure Requirements also upon us, this has come at the right time given the sometimes over-reliance asset managers place on these metrics and ratings to meet their own regulatory reporting.”

She said the government has introduced a “sensible list” of those excluded from proposed regulation.

“We need to make sure that capital allocators are not overburdened and can make decisions on responsible and sustainable investments in a timely manner – that is the only way to help money flow into companies and projects that need it most.”

However, she warned: “This is not going to be a quick process, with the government indicating it will take four years to design and bring in.

“Clearly there will be teething issues with it all too, as with any regulation, and as such we may not see any improvement in the current regime for some time.”

The government’s response is drawn from 94 written consultation responses from 30 ratings providers, 14 ratings users, 10 rated entities, nine consultancies and advisory bodies and 31 others, including 22 trade bodies.

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The M&G (Lux) responsAbility Sustainable Solutions Bond Fund has been designed following active engagement with institutional and wholesale investors seeking sustainable active fixed-income strategies.

The fund, which is classified as Article 9 under the EU’s Sustainable Finance Disclosure Regulation, will leverage M&G’s deep credit expertise and responsAbility’s long-standing track record on impact and sustainable investing.

It will be co-managed by Mario Eisenegger and Ben Lord, who are long-standing members of M&G’s €161bn global fixed-income investment division.

ResponsAbility , a subsidiary of M&G acquired in 2022, will act as investment adviser, providing quality assurance and additional insights across sustainability themes and supporting the research teams.

ResponsAbility will also be a voting member of M&G’s independent Impact, SDG & Solutions Committee.

The team will follow a fundamental credit strategy, constructing a highly diversified portfolio of actively selected global investment grade bonds driving positive change in six distinctive areas: better health, better work & education, social inclusion, circular economy, environmental solutions and climate action.

Investments will be mapped to the UN Sustainable Development Goals (SDGs) according to their contributions and bonds in the portfolio. The bonds will either be:

• Project financing bonds – ESG bonds funding a specific project targeting either environmental (green bonds) or social outcomes (social bonds), or a combination of both (sustainability bonds).
• Solution Provider Businesses – Bonds issued by companies that actively address problems linked to environmental or social challenges through the core products and services they offer.

Ten years after the first corporate green bond was issued in 2013, the ESG bond market today presents investors with a growing universe of green, social and sustainability bonds.

In the first three quarters of 2024, global ESG corporate bond issuance reached $306bn, accounting for 23% of the current total corporate supply in the European Investment Grade space.  

Neal Brooks, global head of product and distribution at M&G, said: “This strategy is testament to M&G’s ability to combine its capabilities to create unique investment solutions that play to our strengths in active fixed income and responsAbility’s market-leading impact credentials.

“The M&G (Lux) responsAbility Sustainable Solutions Bond Fund has been tailored to meet demand from pension funds, insurance companies and wholesale investors in Europe looking to align active public fixed-income portfolios to positive change.”

Fund manager Mario Eisenegger added: “One of the most effective ways for bond investors to contribute to the Sustainable Development Goals is by directly funding environmental and social projects, and providing financing to businesses that make a meaningful, positive contribution to the planet or society through their underlying business models.

“This fund does exactly that, giving the team a clear mandate to be laser-focused on these urgent priorities when putting our clients’ money to work.”

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AIC’s ESG Attitudes Tracker revealed the number of private investors who said they consider ESG when it comes to investing has dropped for the third year in a row.

According to the Tracker, less than half (48%) now think about ESG, compared to 66% in 2021.

Over two fifths (43%) of investors said they consider themselves “fans” of ESG investing, down from 60% in 2021, 51% in 2022 and 50% in 2023.

Only 17% of respondents felt ESG investing is likely to improve performance, down from 22% last year.

There has also been a shift in which ESG issues investors consider to be most important.

While environmental issues have dominated previous years, they now tie with governance issues, with 37% of respondents considering both to be equally important.

Social issues continue to trail, with 28% of respondents considering them as being important when investing.

Additionally, previous ESG Attitudes Trackers have revealed low levels of trust in ESG claims from funds, as well as concerns regarding greenwashing.

The introduction of the Financial Conduct Authority Sustainability Disclosure Requirements (SDR) rules to prevent greenwashing has not reduced this figure “but there are signs that at least they are not getting worse”.

Overall, 53% of those under the age of 45 consider ESG when investing, compared to 43% of those aged 65 or over.

Older respondents were also less likely than younger investors to associate ESG with positive words and phrases.

Less than half (48%) of those aged 65 or above associated ESG with being “responsible”, compared to 76% of those aged under 45.

AIC research director Nick Britton said: “Our ESG Attitudes Tracker shows that investors’ love affair with ESG investing continues to cool.

“That doesn’t mean they reject it altogether though. To extend the metaphor, they are thinking about the bits of ESG they like and those they don’t, and deciding if they want to make this a longer-term relationship.

“One interesting aspect of this year’s research is that almost all the governance issues have increased in importance for investors.

“Investors are increasingly savvy and recognise that governance is the bedrock of ESG investing: put another way, you need the G before you can have the E and the S.

“Though passions for ESG may have cooled, our research also suggests that love has not turned to hate.

“Few investors are actively hostile to ESG: for those who aren’t so engaged, it would be more accurate to describe them as sceptical, uninterested, or prioritising investment performance over ESG issues.”

To obtain these figures, AIC conducted an online survey of 400 private investors and 202 financial advisers between 8 July and 31 July.

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The sustainability ratings sector is largely unregulated despite having a big influence over trillions of pounds worth of investment.

Projections show that $33.9trn (£27.5trn) of global assets will consider ESG factors within three years.

Ratings can shape the performance of investments and the credibility of the sustainable investment market.

On a visit to Toronto this week, Reeves reportedly said: “We are forging a new partnership with industry to get finance to the best, most innovative and most sustainable companies so that we can unleash Britain’s potential.”

Her plan progresses work started by former Conservative chancellor Jeremy Hunt.

Commenting on the news, Hymans Robertson head of responsible investment Simon Jones said: “External ESG ratings are a simple and effective tool for communicating assessments on companies and investment portfolios, but there are issues in how they have been perceived.

“While ESG ratings typically reflect the internal management of ESG risks, they are often conflated with providing an assessment of the external impact that a company may have.

“Coupled with the fact that there are often discrepancies in ratings produced by different agencies, this can create a lack of trust.

“Although there are products that make direct use of ESG ratings as a basis for captial allocation, we believe its is the underlying data which is used as an input to the ratings process that is more valuable.

“Product providers are increasingly creating their own bespoke methodologies which draw on multiple insights and data sources to develop investment products, rather than simply relying on the output from a single agency.

“Regulation of ESG ratings providers will be helpful if it promotes transparency and consistency or approaches.

“However, we would not want to see this regulation extended to those using ESG data solely for the purposes of creating investment products.”

In Focus: Should advisers use ESG ratings?

In March 2023, the Treasury, under the former government, released a consultation on regulating ESG ratings.

In March this year, the Treasury reaffirmed its commitment to give the Financial Conduct Authority powers to regulate ESG rating providers, to “improve transparency” in their processes.

The finance ministry said these providers will be regulated where assessments of ESG factors are used for investment decisions and influence capital allocation.

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It is commonly assumed the extra costs ESG funds typically incur, associated with specialist ESG data, research and expertise, are passed on to the end investor.

Our recent study hopes to provide a timely answer to this debate by examining the cost evolution of a vast sample of almost 110,000 retail share classes in Europe over the past 10 years, comparing the fee prices of ESG funds against their non-ESG equivalents.

Initially, ESG funds had higher fees but, throughout the decade, these dropped substantially

From the European portion of the study, we found that, initially, ESG funds had higher fees but, throughout the decade, these dropped substantially, and funds with ESG-oriented mandates have showcased more evident cost reduction in contrast to their non-ESG peers.

As of March 2024, asset-weighted costs of ESG and conventional funds averaged 0.8% and 0.9%, respectively, compared to 1.6% and 1.3% seen in March 2013. While the cost reduction has been driven mostly by active ESG strategies, costs among passive ESG funds undergo little change and stay on par with conventional passive funds over the past five years in general.

This means that, although, originally, ESG funds did assume higher prices, they are now not only cheaper in terms of fees, but managers have also actively worked to reduce the price over time in contrast to their non-ESG counterparts. Robust results are found when we switch from net-assets-weighted average to simple average.

Managers have actively worked to reduce the price over time in contrast to their non-ESG counterparts

Though the cost advantage of ESG funds compared with conventional funds may remain somewhat counterintuitive for many, it can be explained by the fact many ESG funds have recently been launched amid stiff competition among ESG fund managers, who have a strong incentive to limit ongoing charges to attract investors.

In this regard, we compared the fees levied by the more recently incepted funds, both ESG and conventional, in the six selected categories. Our findings suggest costs of the recent ESG launches remain consistently lower than their conventional peers in both the active and passive space.

With the ESG investing landscape having changed quite drastically over the past decade, not only regarding investor sentiment but also due to regularly evolving regulation, many ESG funds have had to rebrand to keep in line with regulatory demands.

Over 60% of rebranded funds slash or maintain their costs over a 12-month period after rebranding, suggesting that adopting an ESG has not led to higher costs

To provide total clarity, we examined the fee levels of rebranded ESG funds before and after the conversion. In fact, most (over 60%) rebranded funds slash or maintain their costs over a 12-month period after rebranding, suggesting that adopting an ESG or other sustainability-related appellation has not led to higher costs for ESG funds.

Similar results are found after excluding share classes with retrocession fees which accounted for a small percentage of our entire sample.

Finally, some may argue qualification and track records of the portfolio managers, as well as branding effects of fund houses, would lead to cost merit of a number of sizable ESG funds, which could tilt the results.

In response, we examine an exhaustive list of matched ESG and conventional funds under identical portfolio managers, geographical and sectoral exposure and similar investment mandates.

These results show the majority of the matched ESG funds feature lower fees than their conventional counterparts after controlling for these important fund-level factors.

So, the myth that ESG funds are expensive has been busted.

Boya Wang is ESG analyst at Morningstar Sustainalytics

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This is despite the vast majority (90%) of firms recognising that environmental, social and governance (ESG) is a “crucial focus area”.

Due to the UK’s Sustainability Disclosure Requirements (SDR) firms will be required to evidence their reporting data from 31 July 2025.

Additionally, the EU’s Sustainable Finance Disclosure Regulation (SFDR) “demands immediate attention”.

Bovill Newgate funds practice lead Abi Reilly said: “With SDR, it’s understandable if firms are just beginning now.

“However, with reporting deadlines only a year away on 31 July, they must not underestimate the time and resources needed to prepare the necessary reports.

“Our message is simple, although the reporting requirements may be complex: don’t delay.

“If you’re aiming for a label or will be drawn into the regime by marketing funds to retail clients using so-called ‘green’ language, you will need to be in a position to make the relevant disclosures.

“Even if your focus is only on professional investors and you decide not to use a label, you will still need to substantiate any claims made in investor marketing documents in order to comply with anti-greenwashing regulations.

“It seems to me you need data. Everyone needs data. Even firms currently reporting under SFDR might not be doing so in the most effective way.

“Deciding on what data you need, gathering it efficiently and supporting your portfolio companies to improve their data over time is the key to successful reporting and compliance with the both the letter and the spirit of the UK and EU regimes.”

Treety co-founder and chief executive Hatim Baheranwala added: “Many firms still have their reporting frameworks in a theoretical place – or worse, haven’t taken a clear stance on what they would like to report.

“We know from experience that the moment the rubber hits the road and it gets in front of boards and investors, there’ll be questions around data completeness and data accuracy assumptions.

“The quicker firms can get to a point of formalising their reporting processes and working with real reporting data, the better.

“The launch of the UK SDR is one more from a long list of signals that the movement towards increased ESG and sustainability related reporting is irreversible.”

Bovill Newgate is an Ocorian company and specialist financial services regulatory consultancy with a multi-jurisdictional offering across the UK, the Channel Islands, Singapore, Hong Kong, Mauritius and the Americas.

Treety is Ocorian’s ESG reporting partner.

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I used to think divestment was obvious. If you don’t like or agree with something, why would you invest in it?

Divestment is essentially the opposite of investment. But, in the context of this article, we are talking about its role in shaping sustainability outcomes.

Since I joined Money Marketing, I’ve begun to think differently and realise that divestment may not always be the way to go. After all, ignoring a problem is sometimes not the answer.

As an asset owner, the ability to influence corporate behaviour is arguably an effective way to implement change

There is no doubt over the need to decarbonise the economy. Things have been heating up since the mid-20th century.

According to NASA, this is “clearly the result of human activities since the mid-1800s” and it is proceeding at a rate not seen over many recent millennia.

But lately the UK government seems to have lost its nerve and, in September last year, it scaled back its net-zero targets. The announcement boasted about the fact that the UK had set the “most ambitious” target to reduce carbon emissions by 68% by 2030 compared to 1990 levels; and that it was the “only major economy” to have set a target of 77% for 2035.

It is true that the UK has set some ambitious targets, including pledging to reduce its greenhouse-gas emissions to net zero by 2050. But concerns have been mounting that the UK may miss its future targets thanks to its recent scale-back.

Mission 2025

The Financial Times recently reported on a coalition of businesses, mayors, governors and investors, backed by former UN diplomat Christiana Figueres and calling themselves Mission 2025, which has formed in support of “robust climate action”.

If pension schemes are mandated to remove fossil-fuel assets, we do worry that these may be bought up by hedge funds and other investors who may not be as interested

Figueres told the newspaper that the group wanted to rebut the view that moving more quickly on tackling the climate crisis was “too difficult, too unpopular or too expensive”.

It has been widely reported that various companies have rolled back on net zero and other environmental measures. Critics argue that businesses are responding to “mixed messages” from governments.

So, perhaps it is up to investors now. And this is where divestment can be a sound strategy.

By divesting from industries or companies involved in practices deemed unethical — such as fossil fuels, tobacco and arms manufacturing — investors can align their portfolios with their moral values.

This is not only beneficial for the investors themselves but it also sends a powerful message to companies about societal norms and expectations.

Sustainable investing shouldn’t be a style of investing; it should be a movement. It should be about how you use your assets to drive change

By moving away from fossil fuels, for example, investors hope to address climate change by stigmatising investments in carbon-intensive industries.

If done right, divestment can influence corporate behaviour. This is especially true if the investors are large institutions such as universities and pension funds. In this case, divestment can lead to a decline in stock prices and increase the cost of capital for the targeted institutions .

This may, in turn, force companies to look again at their business practice and, potentially, adopt a more sustainable and ethical approach.

Threatening to divest can be just as effective as actually divesting. It can encourage firms to engage more transparently with stakeholders and consider the long-term social and environmental impacts of their operations.

Although divestment can raise awareness of ethical and environmental issues, and apply pressure on firms, it alone cannot be relied upon to drive systemic change

If divestment is used, capital taken away from ‘dirty’ companies should be re-invested in sustainable alternatives, to help support the development of a more sustainable and equitable economy.

Unintended consequences

One party that is backing divestment is the Green Party. In its pre-election manifesto, it laid out plans that included forcing non-bank financial institutions — such as UK pension funds, investment funds, mutual funds, brokers and insurance companies that sell policies in the UK — to remove fossil-fuel assets from their investment portfolios, securities transactions and balance sheets by 2030.

But not everyone agrees with such a forcible policy.

Broadstone investment consultant Matthew Downey says that, while prohibitions on investments may appear an efficient way of reaching the goal of net zero, a policy such as that proposed could have “unintended consequences”.

Divestment should work hand in hand with engagement. Try engagement first but, if that does not work, divestment may be the only thing you can do

He continues: “There is demand from the pensions industry to decarbonise and engage with companies to improve working practices. If pension schemes are mandated to remove fossil-fuel assets, we do worry that these may be bought up by hedge funds and other investors who may not be as interested in how the underlying companies operate.

“As an asset owner, the ability to engage and influence corporate behaviour is arguably an effective way to implement change.

“We would also need to see how the plans for the Financial Conduct Authority to stop shares relating to fossil-fuel exploitation are implemented. As the [Green Party’s] manifesto stands, the wording does not prohibit debt financing, so there are potential loopholes that could be exploited.

“That said, supermarkets make money by selling fuel, banks may finance oil and gas firms, and there is even an airline in the FTSE 100. So, depending on how the targets are set, they could have a significant impact on the UK stockmarket.”

Divestment is not always the answer. As Downey lays out above, it can have a limited direct impact on the financial health of targeted companies. It can, in fact, have the opposite effect.

Divestment can have unintended consequences for company stakeholders, including employees, communities and suppliers

Investors who have sold their shares no longer have a say in how a company is run. And, if the shares are bought by investors who do not share the same ethical or environmental concerns, there is no longer any hope that the company in question will be lobbied for poor practice.

The transfer of shares will be unlikely to reduce the company’s access to capital. At the same time, it will be less likely to change its business practices without the threat of money being pulled.

There is also a danger that divestment financially hurts the ‘divestee’. This is especially likely for large institutional investors with complex portfolios.

As is often pointed out by a select few Money Marketing readers, divesting from profitable industries such as fossil fuels can result in short-term financial losses for investors.

Divestment can also act as a trigger for companies to engage in greenwashing — saying they are environmentally friendly when they are not.

There is demand from the pensions industry to decarbonise and engage with companies to improve working practices

This is something the FCA is aiming to tackle with its new sustainability labels and anti-greenwashing rule, as part of its Sustainability Disclosure Requirements.

The anti-greenwashing rule was put in place to clarify to firms that sustainability-related claims about their products and services must be “fair, clear and not misleading”.

Stakeholders

Divestment can also have unintended consequences for company stakeholders, including employees, communities and suppliers.

Taking money away from a company may lead to reduced investment in the local community, job losses and economic instability — impacts that are often particularly pronounced in regions heavily reliant on industries such as coal mining or oil.

So, although divestment can raise awareness of ethical and environmental issues, and apply pressure on firms, it alone cannot be relied upon to drive systemic change.

In many cases, it is better to try to engage with companies to encourage them to change their ways.

Supermarkets make money by selling fuel, banks may finance oil and gas firms, and there is even an airline in the FTSE 100

CCLA head of sustainability James Corah believes that divestment should work hand in hand with engagement. Try engagement first, he says, but, if that does not work, divestment may be the only thing you can do.

The whole point of sustainable investment is to “drive outcomes”, says Corah.

“Sustainable investing shouldn’t be a style of investing; it should be a movement. It should be about how you use your assets to drive change.”

This article featured in the July/August 2024 edition of Money Marketing. 

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