This article is archived and some details may be out of date.
Article

Purpose not governance.

September 2021

Key points

Baillie Gifford’s James Anderson warns of the risks of ill-defined sustainability metrics.

Illustration by the Craig Frazier

 

Please remember that the value of an investment can fall and you may not get back the amount invested.

   

It’s wonderful that fund managers have noticed that serious capital allocation extends beyond consideration of short-term financial returns. But opportunity is fast turning into tragedy. Morality cannot be outsourced. It has to be painstakingly won through deeply held but idiosyncratic investment philosophies and expressed through determined but rewarding efforts to select and influence individual companies. True long-term impact for the good of economies, societies and the Earth cannot be anchored in the diktats and banal mismeasurements of the ESG dogmatists, who have come to enjoy such unjustified influence.

Let’s try to explore this by an example. As readers will be aware, we’ve been a large and long-term shareholder, often the largest external shareholder, of Tesla. To paraphrase Elon Musk, he chose to build Tesla because it was the best way to combat the most serious issue facing the world. If he had just wanted to make money then making cars was not the easy way forward.

By now it is obvious to even the most myopic observer that Tesla has turned the automobile industry in an increasingly sustainable direction. It’s not just that Tesla itself replaces internal combustion engines but much more that it has forced change in a recalcitrant industry. Without Tesla the current transition would have been fatally later and slower – perhaps beyond a climate tipping point. Yet the standard metrics tell me that Tesla itself pollutes, has ill-defined future metrics and that it takes up a fair portion of carbon exposure.

Now I think this is dangerous rubbish. If measure we must, then the relevant number isn’t the carbon Tesla expends, not even the gap between what it emits versus what a traditional manufacturer would, not just the driving emissions removed and pollution deaths avoided but all those plus the resultant benefits of its transformation of the rest of the industry. It’s all the electric vehicles made by others from VW to GM because Tesla changed the world. That’s the scale of the contribution.

If that’s Tesla’s role, what is ours? I think we can claim that without Baillie Gifford’s support and engagement Tesla’s success might have been even more difficult and less than assured. I don’t mean to sound vainglorious but we may have mattered. After all, at one prolonged and crucial point there were no other major institutional backers and few sources of finance amid the short-sellers’ onslaught. I’m sorry but I think this made more of a societal contribution than all the invisible ESG measures and pontificators have ever done.

But let’s go further. Tesla itself disobeys many governance metrics. From the board composition to incentive schemes to tensions with the SEC to Twitter radicalism, this is not a company to gladden ESG and voting advisor hearts.

Sometimes we have painfully clashed with Mr Musk in advocating deeper board oversight or greater restraint. At other times we’ve risked the wrath of right-thinking people by backing the company – on Musk’s huge but demanding incentives for instance. Whatever the issue though, to have influence you have to fight and earn a voice over years of ownership.

Now let’s take our example one final stage forward. I do not believe that Tesla would have changed the world for the better if it had been a normal company paying heed to the standard governance codes. For a company and a CEO so dependent on radical thought, so blindingly impatient of conventions and constraints, it’s hard to conceive that ‘normal’ behaviour would have been feasible or beneficial. Would a standard board have risked all on a revolution that came within weeks of disaster? Would Musk have survived the many moments of controversy? I doubt each of these. Now Tesla may be an extreme example but aren’t all companies that transcend the mediocre (and even the good) fundamentally unreasonable?

Tesla has turned the automobile industry in an increasingly sustainable direction

Or to, without any apology, repeat a quote from Noubar Afeyan, the chairman of Moderna: “We have to be willing to embrace unreasonable propositions and unreasonable people in order to make extraordinary findings because the notion that utterly reasonable people doing utterly reasonable things will produce massive breakthroughs doesn’t compute to me.”

We’ve often talked about the importance of identifying the few companies that can drive investment performance but it seems to me that this is even more imperative in matters of governance, or rather societal impact. The number of companies that truly possess the ability to change the world for what we trust is the better is vanishingly small, and a small subset of those that can drive investment performance. That we can have underwritten Tesla and kept Illumina independent from the clutches of the financial engineers at Roche masquerading as healthcare innovators is a source of real pride to us. But that we were slow to back Moderna, despite its endless courtesies to us, is a source of equally deep personal regret. But in aggregate to have helped confront the climate crisis and the pandemic is hopefully evidence enough of impact for good.

Out of cowardice I’ve left perhaps the most contrarian thought to last. It’s that ESG frameworks are not just gestures, not just ill-thought through metrics and distractions, but that in aggregate they are profoundly damaging to the prospect of changing the corporate sector – even the world – for the better. If we believe, demand and enforce a standard template for all companies, in all industries and in all countries then we will have an arid, unimaginative, fearful and rule book-driven world.

As Sir John Kay wrote some years ago, “Tolstoy claimed in Anna Karenina that ‘All happy families resemble each other, but each unhappy family is unhappy in its own way’. However, the opposite is true in commercial life. Unhappy businesses resemble one another: each successful company is successful in its own way. Business achievement depends on doing things that others cannot do.”

Or as John declared at a memorable lunch: you cannot enforce or legislate diversity, because true diversity stems from the unique combination of ingredients that only one company can achieve.

To take a simple, perhaps simplistic, example of universal current metrics, I’d much rather have one company leadership composed of six white male Old Etonians who matured (if that is the word) into Bullingdon Club membership and effortless supremacy and another, separate company, entirely composed of minorities than two companies that both evenly balanced these categories. For sure, I would much rather invest in the ‘diverse’ company. For certainly, it would be much more independent of mind.

As an aside, it’s amazing that more than 100 years after the suffragettes and Marie Curie’s double Nobel Prize wins, some companies still define female staff as ‘diverse’, despite women making up 51 per cent of the UK population. To repeat and conclude: what we desperately need is the courage to find our own less travelled paths to investment and societal progress, not the supine adherence to questionable and superficial metrics determined by others.

Risk Factors

The views expressed in this article are those of James Anderson 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.

This communication was produced and approved in September 2021 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for Profit and Loss

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

Stock Examples

Any stock examples and images used in this article 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.

This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

The images used in this article are for illustrative purposes only.


Important Information

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.

Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
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.

Europe
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.

China
Baillie Gifford Investment Management (Shanghai) Limited
柏基投资管理(上海)有限公司(‘BGIMS’) is wholly owned by Baillie Gifford Overseas Limited and may provide investment research to the Baillie Gifford Group pursuant to applicable laws. BGIMS is incorporated in Shanghai in the People’s Republic of China (‘PRC’) as a wholly foreign-owned limited liability company with a unified social credit code of 91310000MA1FL6KQ30. BGIMS is a registered Private Fund Manager with the Asset Management Association of China (‘AMAC’) and manages private security investment fund in the PRC, with a registration code of P1071226.

Baillie Gifford Overseas Investment Fund Management (Shanghai) Limited
柏基海外投资基金管理(上海)有限公司(‘BGQS’) is a wholly owned subsidiary of BGIMS incorporated in Shanghai as a limited liability company with its unified social credit code of 91310000MA1FL7JFXQ. BGQS is a registered Private Fund Manager with AMAC with a registration code of P1071708. BGQS has been approved by Shanghai Municipal Financial Regulatory Bureau for the Qualified Domestic Limited Partners (QDLP) Pilot Program, under which it may raise funds from PRC investors for making overseas investments.

Hong Kong
Baillie Gifford Asia (Hong Kong) Limited
柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 license from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited
柏基亞洲(香港)有限公司 can be contacted at Suites 2713-2715, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone +852 3756 5700.

South Korea
Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.

Japan
Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.

Australia
Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth) and holds Foreign Australian Financial Services Licence No 528911. This material is provided to you on the basis that you are a “wholesale client” within the meaning of section 761G of the Corporations Act 2001 (Cth) (“Corporations Act”). Please advise Baillie Gifford Overseas Limited immediately if you are not a wholesale client. In no circumstances may this material be made available to a “retail client” within the meaning of section 761G of the Corporations Act.

This material contains general information only. It does not take into account any person’s objectives, financial situation or needs.

South Africa
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.

North America
Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.

The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission ('OSC'). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.

Oman
Baillie Gifford Overseas Limited (“BGO”) neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently, BGO is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. No authorization, licence or approval has been received from the Capital Market Authority of Oman or any other regulatory authority in Oman, to provide such advice or service within Oman. BGO does not solicit business in Oman and does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. The recipient of this material represents that it is a financial institution or a sophisticated investor (as described in Article 139 of the Executive Regulations of the Capital Market Law) and that its officers/employees have such experience in business and financial matters that they are capable of evaluating the merits and risks of investments.

Qatar
The materials contained herein are not intended to constitute an offer or provision of investment management, investment and advisory services or other financial services under the laws of Qatar. The services have not been and will not be authorised by the Qatar Financial Markets Authority, the Qatar Financial Centre Regulatory Authority or the Qatar Central Bank in accordance with their regulations or any other regulations in Qatar.

Israel
Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This material is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.

 

11449 10003464

About the authors