The Responsible Approach to ESG Investing

The investment industry is awash with talk of ESG, and other terms such as stewardship, impact, sustainable and responsible investing. Here, we’ll use ESG as shorthand for this broad topic. It’s widely accepted as covering how a company operates and impacts society and the environment. And for many well-intentioned investors this ends up as a ‘do no harm’ metric-based approach to investment decision making. The problem, however, says Dunbar, is that by doing this you may unwittingly exclude the very companies that are helping change the world for the better.

Dunbar illustrates his point by way of mining companies and wind farms, which at face value appear to be at opposite ends of the spectrum. Many sustainability-conscious investors would not consider investing in miners because of their impact on the landscape, but simultaneously “fail to acknowledge that 30,000 tonnes of iron ore are required to build a 100-million-watt windfarm.”

Part of the carbon transition is trying to find better, less polluting, less resource-intensive ways of doing things. Dunbar explains, “if a miner that digs up iron ore is crucial to producing the raw materials for wind turbines, then it doesn’t make sense to simplistically say ‘well, we’re not going to invest in mining companies, because they deplete the world’s non-renewable resources,’ when they’re a crucial component of how we get to this more sustainable economy.”

Stuart Dunbar, partner.

Metrics-based, measurement-heavy approaches to responsible investing do not capture this process of change adequately. As the ESG scores for the electric car and clean energy company, Tesla demonstrate. It is often the longstanding companies that have been under regulatory scrutiny for some time that have the policies – climate, diversity and inclusion, use of water etc. – that count toward a company’s overall ESG score, according to Dunbar. Being somewhat more entrepreneurial, less traditionally organised and led by a quirky leader and entrepreneur, the younger nature of Tesla means it scores less highly on traditional organisational ESG measures than the likes of General Motors. But he says, “that fails to take into account that Tesla has almost undoubtedly done more to change the direction of the automobile industry to being overwhelmingly electric in the now visible future.”

Dunbar also worries that those investing in impact strategies, with very simplistic approaches, are led to believing they’ve solved the problem. In his view, that might even be worse than their doing nothing, “because if you think you’ve solved a problem, you’ll stop paying attention to it.”

It is clear we are not going to be able to do without steel and concrete in our carbon transition in the next 20 or 30 years. Yet, there is very little investment going into these industries to find much less environmentally damaging approaches to the production of steel and concrete. “Wouldn't it make more sense to invest in these industries, rather than simply excluding companies which deprives them of the capital they need to create a cleaner environment?” he suggests.

It’s not just understanding the implications of supply chains that’s important. We are going through a period of rapid change and disruption across a wide range of industries, which means it’s difficult to quantify sustainability meaningfully. That’s why it is vital we approach the subject thoughtfully, rather than reduce it to number crunching. Dunbar adds, “these forward-looking contributions to sustainability discussions are way more important than what a company’s carbon footprint is this year.”

Dunbar advocates focusing our attention, and capital, on the companies that are enabling our sustainability transition, the ones looking for new and better ways of doing things. This is even more important given he believes “the growing focus on ESG factors, and E in particular, is where many of the disruptive opportunities lie. Some of the best growth opportunities for the next 20 to 30 years will be in those companies that can go through this carbon transition in a positive way.”

Dunbar concludes that, “what matters here is environmental sustainability, and just transition and social equity.” This is what most people think of when they’re talking about ESG. Therefore, Dunbar favours reframing ESG as ‘exploring sustainable growth’, which he sees as the hallmark of Baillie Gifford’s approach to ESG investing.

Words by Gillian Christie

If you’d like to learn more about Baillie Gifford’s thoughts on ESG, tune into our podcast, Short Briefings on Long Term Thinking. You can find the podcast at bailliegifford.com/podcasts or subscribe at Apple Podcasts, Spotify, or on TuneIn.