A conversation about sustainability
Long-term investors know there is more to sustainability than just sustainable investing, there’s also value creation.
The value of an investment, and any income from it can fall as well as rise and investors may not get back the amount invested. Past performance is not a guide to future returns.
Let’s start a new conversation on sustainability. A conversation to make explicit, what we trust is already implicit in our process. To bring a broader, and we believe, valuable narrative on sustainability to the table, helping to improve us as investors and pushing companies themselves to get better.
We believe that sustainability is inextricably linked to being a long-term investor. To think about a company on a five-year plus horizon, we must consider the sustainability of its business in the broadest possible sense: why will any company continue to grow? Why will customers continue to like them – from both a product and reputation perspective? How will management allocate capital or handle challenges? This is sustainability beyond a company’s impact on the environment or the remuneration of its executives. That is not to say these issues are unimportant. They are just part of a far larger picture.
What does long term mean to us?
Long term is investing on a five-year plus time horizon. A time period where the empowerment of employees benefits productivity, where the considered consumption of natural resources ensures continued access, where a sustainable supply chain protects inventory; where balancing customer experience with profit taking ensures long-term sales growth.
Long term is a time period where the needs of the entire ecosystem line up. Long term is ambition. It is thinking about what a company could do, might be, not what it is today. Long term for us is not imagining base cases, but blue-sky cases.
Long term is support. It is about being there for companies and founders, encouraging and supporting them to achieve their ambitions. Enabling them, with steady and often sizable ownership stakes, or direct capital deployments, to think big.
Finally, long term is sustainable. We define sustainable as the ability to balance value creation with value capture. You cannot capture more value than you create for any length of time; companies that do this will not survive. Those that thrive in the long run will deliver more value than they capture.
Deploying capital sustainably
As long-term investors we have an exceptional opportunity to deploy our client’s capital in a way to help maximise the value creation our holdings deliver. And we have thought long and hard about how to articulate the societal value creation our clients enable by owning our portfolio. Tesla is a salient example. Have Baillie Gifford’s clients contributed more to the future of society from owning Tesla from 2013 to the present versus now and for the next eight years? We concluded that without our client’s long-term and stable capital in the early years Tesla may not have achieved what it has today.
Consequently, we consider the ’capital impact’ of our clients’ investment in a given company. We use the term to open up the conversation as to the different ways our clients’ capital can enable companies to achieve their ambitions and deliver a positive contribution to society.
We believe our clients’ capital impact can be considered under three broad headings: Beneficiary Impact, Support Capital Impact, and Direct Capital Impact. Beneficial impact comes from owning companies we believe to be making a positive societal contribution over the long run. Companies which only fit within this category are making a positive contribution to society, and they will do so whether or not our clients own the shares; our clients’ capital is not playing an instrumental role. Support Capital Impact is about how long term and sizable ownership stakes can enable companies to be ambitious and take calculated risks, to achieve their long-term potential and really deliver on their potential for society, knowing they have solid, long-term shareholders on the register. The final category is Direct Capital Impact. This is where our clients’ capital directly enables a company to fulfil its potential – whether that be supporting an IPO, participating in a capital raise or by investing in these businesses in private markets.
One type of capital impact is not better than another; although we believe that some are more influential. The headings are more to open up a discussion and to enable investors to better understand how directly they are empowering a business to achieve its potential.
We create a societal contribution hypothesis for every company we own. Our approach is highly subjective, and we look at what each company might deliver to society if it grows as we think it could; an approach we believe to be highly aligned with our investment style. There is no perfect company. All companies will make mistakes on the road to fulfilling their potential and some will not succeed. We are cognisant of positive and negative implications of success, and we consider those we believe to be most important for the long-run sustainability of each company. We use these to feed into further work or engagement with a company, helping us to become better stewards of our clients’ capital whilst pushing the companies we own on behalf of our clients to improve.
We do not score our portfolio’s net societal contribution. We prefer to think of companies as participants in complex and interconnected networks. Their influence will depend on many factors and we certainly won’t predict all of them. Instead we seek to understand how their positive societal contributions could enhance their durability, and how the negative implications of their growth might diminish that. That is not to say that we believe that all societal impact is equal, in fact we feel it is fairly easy to identify those companies which we believe have the potential to change society. Not necessarily just through what they do or sell, but indirectly through the industries that they change with them. We call these companies the Gamechangers. Two examples of these are described below, based on our societal contribution hypothesis framework.
Sustainability in its broadest possible sense is very important to us as long-term growth investors. And after careful consideration we have decided to talk more openly about how we integrate it into our process This is a challenging and complex topic and we are far from having all the answers. But we will keep asking questions of ourselves and of the companies we invest in. We look forward to new conversations, evolution and becoming better investors.
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