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IMPORTANT INFORMATION
All data as at 31 December 2024, unless specified otherwise. This document is issued for information purposes only. It does not constitute the provision of financial, investment or other professional advice. We strongly recommend you seek independent professional advice prior to investing. The value of investments and the income derived from them may fall as well as rise. Investors may not get back the amount originally invested and may lose money. Any forward-looking statements are based on CCLA’s current opinions, expectations and projections. CCLA undertakes no obligations to update or revise these. Actual results could differ materially from those anticipated. All names, logos and brands shown in this document are the property of their respective owners and do not imply endorsement. These have been used for the purposes of this document only. CCLA Investment Management Limited (a company registered in England and Wales with company number 2183088), whose registered address is One Angel Lane, London EC4R 3AB, is authorised and regulated by the Financial Conduct Authority.
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Sustainability and our investment process
The primary aim of our sustainability work is to preserve the long‑term value of our clients’ investments by driving positive change.
Tide Out, HM Prison Oakwood | Courtesy of Koestler Arts
Assessing financial materiality
Assessing financial materiality
We believe that a combination of legislation, regulation and changing societal preferences can impact negatively on the cash flow of the most unsustainable business models. When considering a potential equity purchase, we seek to identify and avoid investing in companies that have uncompensated, unwanted, unwarranted or unmitigated environmental, social and governance (ESG) risks as evidenced by:
- poor management or weak corporate governance
- an unacceptable social or environmental impact
- not demonstrating a willingness to improve through investor engagement.
Prior to purchase, we assess companies’ ESG risks in conjunction with their financial position. We include this assessment in our analysis for every potential equity investment and it is a standard component of the overall investment case. It applies to all listed equities, irrespective of their geography or sector, and includes the following four considerations:
1
Corporate governance. We have developed a bespoke quantitative corporate governance rating tool that assesses the board structure, ownership, accounting practices and management capabilities of listed companies. Supported by a qualitative review process, this tool allows us to identify any strengths and weaknesses of companies’ governance structures and how these adapt over the life of the holding.
2
Climate change. All assets are managed in line with CCLA’s Climate Change and Investment Policy. This requires CCLA to annually review the impact of climate change – and progress made towards a net-zero economy – on every sector and to stress-test carbon-intensive businesses’ decarbonisation plans against the requirements of the Paris Agreement on climate change.
3
Wider sustainability factors. Potential investee companies are reviewed on their approach to the most financially material sustainability risks relevant to their industry. We use Sustainalytics’ ESG Risk Ratings, which is based on widely recognised materiality frameworks, including those of the Sustainability Accounting Standards Board and the Global Reporting Initiative. Any companies considered high risk require Investment Committee approval.
4
Corporate behaviour and standards. Assets are reviewed against any sustainability-related controversies in which a company has been involved. We pay particular attention to controversies that suggest a company either has breached, or may in the future breach, international standards set out in the UN Global Compact and UN Guiding Principles on Business and Human Rights.
Where we identify material concerns, we conduct further research, potentially including a fact-finding meeting with management. Subject to the success (or otherwise) of this research, companies can be approved for purchase.
Once an investment is made, companies are routinely monitored to ensure that standards do not slip.
Assessing real-world materiality
Assessing real-world materiality
While our investment process focuses on financially material sustainability issues, our engagement work seeks to encourage companies to minimise their negative environmental and social impacts. This approach acknowledges that while many sustainability issues do not impact companies’ short-term financial performance, they can have a significant negative impact on our environment and communities.
Accordingly, we also assess companies’ impacts on the real world and build both company-specific and systemic programmes aimed at changing company behaviour for the better. These efforts are based on three themes:
- better environment – considering both climate change and wider environmental concerns
- better work – encouraging high labour standards and protection of human rights
- better health – improving the health of workers, customers and communities.
Minimum standards for investment
Our minimum standards for investment, across all funds and segregated portfolios, exclude companies with a predetermined revenue threshold coming from:
- climate change
- tobacco
- cannabis
- indiscriminate weaponry (we have a zero-tolerance policy if the company is involved in the production of landmines, cluster munitions, or chemical or biological weapons)
- sovereign debt issued by countries identified as being among the world’s most oppressive.1
These minimum standards are designed to help us capture – and avoid – businesses that we believe have a significant negative social and/or environmental impact that cannot be addressed through engagement.
At the end of calendar year 2024, the minimum standards set out above resulted in 3.9% of the investment universe being excluded from our pool of potential equity investments (based on the MSCI World Index).
Working for you
Working for you
This combination of financial and real-world sustainability analysis allows us to identify, and avoid, the most unsustainable businesses and to develop ambitious engagement action plans to push others forward.
We closely monitor the progress of those companies with an engagement action plan. We reconsider investment in companies if they refuse to engage or do not respond adequately to engagement on the most serious issues.
These are defined as involvement in controversies that suggest a company has either has breached, or may in the future breach, international standards set out in the UN Global Compact and UN Guiding Principles on Business and Human Rights.
The approach described above is designed to help us control risk, to deliver more consistent investment returns and to build on our purpose of helping our clients to maximise their impact on society by harnessing the power of investment markets.
Sustainability considerations for other asset classes
Money markets
In 2024, we developed a bespoke assessment framework for counterparties used in our money market funds. As a minimum, we consider a counterparty’s:
- corporate governance practices
- approach to financing climate change
- association with any controversies.
Property
For our property funds, we seek to integrate sustainability into our asset selection, management and refurbishment processes. Prior to purchase, all potential properties, tenants and vendors are subject to an initial due diligence check focusing on ensuring tenant activities are consistent with the values-based restrictions attached to the fund, and we adhere to market practice in preventing financial crime. Should the proposal pass this initial stage the team will then undertake enhanced due diligence on environmental risk and energy efficiency associated with the building.
There were no new properties purchased during 2024. However, we did undertake several significant upgrades to improve the sustainability of properties owned in our portfolio. In 2024, we completed the refurbishment of a vacant office floor in 80 Cannon Street (owned in the COIF Charity Property Fund). This multi-let property, originally developed in 1974, had operated with a building-wide gas-powered heating and cooling system.
We conducted an energy assessment to identify potential improvements. The floor initially had an ‘E’ EPC rating. Although leasing a floor with this rating is currently permissible under MEES regulations, anticipated increases in minimum standards would render the space unlettable without enhancements.
Our refurbishment works entailed replacing the outdated heating and cooling system with an all-electric alternative, installing energy-efficient LED lighting throughout, introducing secondary glazing to minimise heat loss, and incorporating water-saving fittings.
Upon completion, the floor received an EPC ‘B’ rating, reflecting the energy-efficient modifications implemented. The space was successfully leased in August, illustrating that even in a challenging office market, tenants are drawn to energy-efficient premises.
We are reliant on our tenants and third party managing agents to collect and share appropriate data on the performance of our buildings, and this has been a substantial barrier to our ability to set targets and monitor progress in our property investments. In 2024, EVORA Global Limited was appointed to assist in the development and implementation of our approach to sustainability in property, including the expansion of asset-level action plans and portfolio risk management.
Alternatives
During the year we engaged with six listed alternatives held in our portfolios, focusing of the need for board members to undertake a strategic review to either address an underperforming share price or to return value to shareholders.
At two of these companies, we agitated for change at board level. At US Solar Fund, we recommended the appointment of an independent director with expertise in the disposal of US solar assets and delivering strong outcomes for shareholders. Following a recruitment process, a suitable director was appointed.
Our approach at PRS REIT went one step further and involved the filing of a requisition to convene an EGM, and calling on shareholders to remove two of the five independent non-executive directors. More details of the proposal and the board’s subsequent actions can be found on this page.
www.CartoonStock.com
Collaboration is the key to unlocking progress at scale. We are hugely grateful to every investor that supports our initiatives.
Collaborating for change
At the end of 2024, our sustainability initiatives are supported by:
0
investors†
across
0
countries
in
0
continents
representing assets under management of
£
0
trillion
†114 investors includes institutional asset managers, asset owners, stewardship service providers and investor membership organisations.
1CCLA does not invest in sovereign debt issued by countries identified as the most oppressive. The identification of such countries is based on an analysis of the following four data sources: Freedom House, Corruption Perception Index, US Commission on International Religious Freedom, UN embargoes (only state-led)/EU embargoes. For details, please visit: www.ccla.co.uk/about-us/policies-and-reports/policies/approach-sovereign-debt