Sustainable at Heart
Why businesses need to adaptSeb Petit, Global Income Growth
The value of any investment can fall as well as rise and investors may not get back the amount invested.
The global economy is an ecosystem where thousands of companies appear and disappear each year, with the typical half-life of a listed company being around 10 years. Long-term investors would be well advised to look at this ecosystem through a Darwinian lens.
‘Survival of the fittest’ is often misunderstood to mean ‘survival of the strongest’. Darwin’s theory highlights adaptation to change in the environment as key to survival and development. The dark form of peppered moth is the classic example. During the Industrial Revolution, pollution killed lichen on tree bark, which became darkened by soot, favouring the emergence and rapid development of a darker-winged form of moth in the UK.
Beyond the random short-term fluctuations, the economic environment is an ecosystem subject to slow, but very powerful changes. Global warming, and reactions to it by institutions and consumers, is an example of such slow, high-impact change.
Too focused on the short term, most market participants can – and often do – ignore slow changes to this environment. Until a point at which they finally, and very rapidly, incorporate these changes into their view of the world. To paraphrase Hemingway, investors adjust the share price of companies which no longer fit a changed environment in two ways: “gradually, then suddenly.”
In the long run, companies which can adapt to these changes – the ‘fittest’ – will survive and thrive. Those companies who don’t, or simply can’t, will fail. Regardless of how strong their balance sheet or their dominance of an industry are.
Sustainability is just another word for adaptability. Understanding a company’s ability and willingness to adapt is crucial for long-term, growth and income seeking investors.
But assessing the ‘fitness’ of companies is not straightforward. It requires thoughtful analysis which goes well beyond box ticking ESG ratings and glossy reports. Hence the development of our proprietary and forward-looking Impact, Ambition and Trust framework. This helps us assess a company’s ability to grow both its share price and its shareholder payouts.
Take Nestlé as an example, which has a high Impact on a wide range of stakeholders: its agricultural supply chain, its customers’ nutrition, and society at large through its carbon footprint.
Nestlé’s Ambition to mitigate this impact across the group is evident in its sustainability goals, which have been published and regularly updated for at least a decade. For instance, its commitment to halve its absolute greenhouse gas emissions between 2018 and 2030 is much more ambitious than its peers.
The third plank of our analysis is around Trust: are we confident in the company’s management ability and willingness to deliver on ambitious goals? For Nestlé, measurable and meaningful progress achieved on targets set in the past gives us confidence that they can be trusted for the future.
In summary, Nestlé has a high impact, and the trust we have in the company delivering on ambitious goals gives us confidence that they will be able to adapt.
If we accept that companies which adapt will thrive, what about the providers of the adaptation tools used in the process? We invest in French company Schneider Electric for precisely that reason: their power management solutions help companies become “fitter” by reducing energy consumption. We foresee a large and growing market opportunity, a management seizing that opportunity and a dependable income for years to come. We also predict a large positive impact, and an ambitious management team which we trust to execute on their strategy to adapt their own business.
As long-term shareholders anticipating a changing environment, we are convinced that selecting companies which can adapt is the best way to preserve future income and capital for our clients. We look for a resilient dividend, which we expect to grow over the long term. Not necessarily the ‘strongest’ today, but one which is ‘fit’ for today and the decades to come.
The good news is that, in contrast to what happens in nature, companies do not have to wait for random mutations to adapt: some can make the necessary changes themselves. These are the companies we invest in for the long term.
look to the future.
Not the past.
The views expressed are those of the Income strategy teams and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
Any stock examples and images used are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
The following page contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.
Past performance is not a guide to future returns.
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest,
and with their tax advisers for advice relevant to their own particular circumstances.
Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK clients. Both are authorised and regulated by the Financial Conduct Authority.
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Similarly, it has established Baillie Gifford Investment Management (Europe) Limited (Amsterdam Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in The Netherlands. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions ('FinIA'). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.
La presente oferta se acoge a la Norma de Carácter General N° 336 de la Comisión para el Mercado Financiero (CMF) de Chile. La presente oferta versa sobre valores no inscritos en el Registro de Valores o en el Registro deValores Extranjeros que lleva la Comisión para el Mercado Financiero, por lo que los valores sobre los cuales ésta versa, no están sujetos a su fiscalización. Que por tratarse de valores no inscritos, no existe la obligación por parte del emisor de entregar en Chile información pública respect de estos valores. Estos valores no podrán ser objeto de oferta pública mientras no sean inscritos en el Registro de Valores correspondiente.
The securities have not been, and will not be, registered with the Colombian National Registry of Securities and Issuers (Registro Nacional de Valores y Emisores) or traded on the Colombian Stock Exchange (Bolsa de Valores de Colombia). Unless so registered, the securities may not be publicly offered in Colombia or traded on the Colombian Stock Exchange. This presentation is for the sole and exclusive use of the addressee and it shall not be interpreted as being addressed to any third party in Colombia or for the use of any third party in Colombia, including any shareholders, managers or employees of the addressee. The investor acknowledges that certain Colombian laws and regulations (including but not limited to foreign exchange and tax regulations) may apply in connection with the investment in the securities and represents that is the sole liable party for full compliance therewith.
The shares have not been registered before the Superintendencia del Mercado de Valores (SVM) and are being placed by means of a private offer. SVM has not reviewed the information provided to the investor. This document is not for public distribution.
The interests in the following securities have not and will not be registered in the National Registry of Securities maintained by the National Banking and Securities Commission, and therefore may not be offered or sold publicly in Mexico. The interests in the following securities may be offered or sold to qualified and institutional investors in Mexico, pursuant to the private placement exemption set forth under Article 8 of the Securities Market Law as part of a private offer.
Information on the relevant LATAM funds is available on request. Please contact [email protected]
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used are for illustrative purposes only.
YOU MAY ALSO LIKEInsights.Visit Baillie Gifford's Insights page.Why China's cloud is differentWhy cloud computing is developing differently in the world’s most populous nation.Will industrial biotech be the next manufacturing revolution?Industrial biotech companies can already produce synthetic spider silk and plant-based burgers that taste like meat. Future possibilities include timber produced from yeast. In the latest episode of our podcast, Kirsty Gibson tells Malcolm Borthwick why she's fascinated by the opportunities of industrial biotech and its enormous investment potential.The Myth of the Marlboro Man.Fear of missing out on dividend payments has sustained investment in oil and tobacco companies for many years. Now, however, the returns are dwindling. And, as Scott Nisbet explains, the door is opening for investors who see investing with a conscience as being less about avoiding bad companies and more about backing good.