To use climate change jargon: it’s not just about ‘solution providers’ but also ‘transition companies’. Businesses that may have a substantial emissions footprint but could transform their prospects by playing a vital role in reducing the impact of industries where behavioural inertia is hard to overcome and practical alternatives difficult to identify.
Making our impact count
One ESG challenge levelled at listed equity investors is the question of additionality. What can we add via our investment in and engagement with a company?
We believe that engagement should be a genuine two-way process by which management and shareholders work together to overcome difficult, long-term challenges.
Such an approach facilitates higher-quality conversations with senior executives and board directors, increasing our influence. With that influence, we aim to help companies make better strategic and operational decisions that result in better long-term outcomes for shareholders and all stakeholders. This is undoubtedly what sustainable investing and the incorporation of ESG should be about.
Not every company relationship will be as impactful as the other. As in investing, it is in the extremes that we are likely to add the most value.
Where we do make a difference, however, it is unlikely to occur because we bombarded the company with requests that sought to minimise our clients’ exposure to every potential ESG ‘risk’ highlighted by third-party data providers. In our experience, the outliers that make the greatest impact are seldom slaves to orthodoxy and custom.
It’s better to help our clients understand real-world impact than to fob them off with box-ticking, however much easier that might be.
Conclusion
As the investment industry scrabbles to look good in the age of ESG, the quickest fix is to focus on rating agencies’ scores and tweaking portfolios to make yourself look good.
Will such an approach make the world a better place? Will it guarantee attractive investment returns? We think not.
Data will matter over time to demonstrate progress – how else can we prove we are making headway if we have no reference points? Nonetheless, we’d rather drive while looking forwards rather than exclusively focus on the rear-view mirror.
The opportunity is not in playing the numbers. It is about meaningfully engaging with the issues, understanding why they matter and seeing the risks and possibilities they present.
If there is any chance of avoiding climate disaster or delivering sustained and meaningful improvements to financial and social inclusion across the globe, that’s what it will take.
Tom Walsh is a partner at Baillie Gifford
Important Information
As with any investment, capital is at risk. This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA).
