A contribution to the Edinburgh Book Festival fossil fuel debate
- Baillie Gifford aims to put our clients’ capital to use in game-changing companies, including those tackling climate change
- Some of the leading renewable energy providers, including Ørsted, are also involved in fossil fuels
- Total divestment from fossil fuels would prevent us from being able to support companies transitioning away from the sector
Which company has made the most positive impact on climate change in a generation?
A strong case can be made for Tesla.
Its mission: to accelerate the world’s transition to sustainable energy and thus to slow climate change. Not mission impossible but – for a carmaker – certainly mission improbable.
It’s now the world’s biggest seller of electric vehicles (EVs) and has achieved this by driving down production costs. What’s more, it has dragged the industry with it, forcing the likes of GM and VW to swap internal combustion engine cars for EVs.
When we first invested in Tesla more than a decade ago, the company had made a mere 10,000 cars (0.01 per cent of the global market) in the previous year. It was tiny. Most observers were inclined to sneer, trotting out reasons why EVs would never work.
We became the second-largest shareholders in Tesla after Elon Musk, whose antics we sometimes disapproved of but whose drive and vision were Herculean. So, being Tesla shareholders was far from plain sailing, as it teetered on the verge of bankruptcy more than once and often seemed irrationally despised by the market. Short sellers circled like vultures, effectively betting on the firm to fail. Others sharpened their pens to write its obituary. At least once, Tesla may even have needed Baillie Gifford as the sole large, supportive shareholder to survive.
Tesla is a huge success story nowadays, but we keep looking for the next generation of companies that will facilitate the energy transition, and we are not afraid to back them early even when they are clearly still ‘long shots’. More on the next generation of companies later.
I talk about Tesla to illustrate our common ground with climate campaigners. Yes, we can do better, but more often than not, we are part of the solution – providing long-term capital to help support companies at the vanguard of the energy transition.
Now that some of the heat and headlines have died down, we thought this would be an opportunity to explain our approach, especially to authors considering appearing at some of the wonderful festivals we support, even if differences of opinion remain.
Why do we sponsor literary festivals?
Baillie Gifford has been proud to sponsor the Edinburgh International Book Festival for almost two decades.
As a private partnership that is more than a century old, we see sponsorship of the arts and other charitable work as part of our broader societal role as an investment management firm. After all, our own interests and passions extend well beyond the stock market. That’s why one of our maxims is “curious about the world” – not just the financial world.
It is also why we recruit graduates from all sorts of disciplines (I studied English Literature) and why we love to facilitate platforms for open and honest intellectual debate across different cultures and disciplines. The Edinburgh International Book Festival is a resplendent example of such a coming together. And it serves another purpose you might find surprising: as enlightened investment professionals, one of our goals is to be the least well-informed people on a topic in the room as often as possible. That’s when we learn the most. And each time we sit around a table with authors from book festivals, we tend to achieve that.
Beliefs and purpose
Let’s start with core beliefs. Our primary purpose is to generate good returns through thoughtful long-term investments for our clients. However, we also believe that climate change is the biggest and most complex challenge humans have collectively had to face; that it is human-made; that we must all take steps (as individuals and institutions) to mitigate its ascent; and that we must factor the implications of all this into our company research. We are aligned with you on this and have a clear plan to reduce the emissions from our own operations to net zero by 2040.
However, as an investment management firm, the bigger impact we can have is in the investments we make. At Baillie Gifford, we are well known for taking a very long-term view of our clients’ investments – we seek to own shares that will prosper over a decade, not a few months. A ‘just transition’ to net zero – meaning sharing the benefits of the shift to a more sustainable economy across society – will take years of human ingenuity, and simply eliminating fossil fuels today is not just or practical. Imagining a future powered by renewable energy, however, is realistic and offers exciting opportunities for our clients.
This means that we have been early to invest in companies that can help with the carbon transition, as we think they have a good chance to grow strongly over the long run, disrupting incumbents and making good returns for our clients. Many don’t work out, but we are prepared to accept numerous spirited failures since the few that turn into big winners make all the difference. So, we don’t “profit from climate change”, our clients, which include individuals, pension funds and endowments, profit from companies that address climate change.
Helping the energy transition
We’ve talked Tesla, but what about other companies? We have recently invested in Climeworks, a company pioneering carbon capture from the atmosphere in Iceland. Another potential game-changer and another long shot. And Northvolt, Europe’s best chance at making more efficient batteries for the era of electric vehicles in an industry currently dominated by China. There are plenty more examples: NIO in electric cars, Zipline in drone delivery, Solugen in green speciality chemicals, the list goes on. Indeed, one of our strategies, which has grown in popularity in recent years, is called Positive Change. It is an impact portfolio, where each of the companies we invest in must pass two hurdles: answering which world problem is it helping to solve and can it make a return for our clients in doing so. You can read about this in our impact report, which is available here.
And as a firm, we go further than that. In the way we sponsor arts festivals, we also spend considerable sums each year funding academic research around the world. Some of that research is to further our understanding of climate change and how best to respond to it. Examples include the Low Carbon College, the University of Exeter’s Global Systems Institute, the James Hutton Institute in Dundee and work by Prof Mike Berners-Lee, author of There is No Planet B. This is well beyond the normal remit of an investment manager.
‘The 2 per cent’
But what about the flipside? We have declared that 2 per cent of our investments is in companies that have some sort of fossil fuel connection. This deserves explanation as it is not quite what it seems.
Our fossil fuel exposure has trended down over time, and the 2 per cent of our investments nowadays is a very low number in most asset managers’ books. It is far lower than the oil, gas and coal exposure that index-tracking funds (passive funds) would have naturally – this would typically be more than 10 per cent of their investments. But even the 2 per cent gives an exaggerated picture of our actual exposure since it includes companies that have as little as one-twentieth of their current revenues coming from fossil fuels.
Some of these companies might surprise you. Who would have thought that the supermarket chain Tesco is classified as a fossil fuel company? It’s included because of its petrol stations. It seems unreasonable to either boycott or sell shares in Morrisons, Tesco, Asda and Sainsbury’s for this reason.
Adjusted to account for the varied sources of revenues in these companies, our exposure to fossil fuels would be less than 1 per cent of our investments. This is de minimis.
But it is not zero. Zero fossil fuel exposure today is not realistic. Fossil fuels still make up around 80 per cent of global energy use. It may also not be aligned with the principles of a ‘just transition’ and ‘differentiated responsibilities’ (the principle that countries at different stages of development should have different targets) that lie at the heart of the Paris Agreement.
Total divestment would also actually hamper the energy transition we are all looking for. Take one of the companies in our declared 2 per cent: Ørsted.
Ørsted is a Danish wind energy company, at least it is nowadays. Over a number of years, Ørsted has transitioned its business from legacy fossil fuel assets to alternative energy. We have encouraged it on this path as long-term shareholders, and now most of its revenue comes from wind power. Legacy fossil fuels is now less than 30 per cent of revenue, with a clear plan to continue to zero. But because of this, the whole of our Ørsted holding counts as fossil fuel exposure. Does it make any sense to exclude such a company from our investments? Or is it far more impactful to support its direction of travel?
The easy option would be to sell shares in all firms that don’t meet strict carbon emissions criteria. But if we sold our shares, they would be bought by someone else. That owner may not engage with the company on climate risks or ethical operations. So, it’s far more impactful to be active shareholders to influence a company’s direction of travel. Engagement trumps divestment, and the latter should be viewed as a last resort.
Three further points on these investments. First, we’ve been transparent in disclosing the small number of companies with fossil fuel exposure and have been rather harsh on ourselves in calculating it (as outlined above). Not everyone is so open. The reaction we have had to our bona fide transparency will not encourage other financial service companies to mirror it. This will be unhelpful to the climate cause.
Second, we are asking the companies we invest in to show how they will either chart a path towards net zero over the next couple of decades or manage their transition. And third, we already accommodate and respect clients who have taken the decision that it is right for them to exclude fossil fuel exposure. This has certainly been an increasing trend over the last 10 years.
None of what we have said about the innovative climate transitioning companies we invest in, or how de minimis our fossil fuel investments are, precludes us from trying to get better. We feel a strong sense of responsibility and accountability as a significant player in the asset management industry. After all, we may be the last generation with the ability to affect the climate outcome for future generations. Thoughtful long-term investment can play a central role in scaling solutions to the climate crisis and, in time, help these solutions to become inevitable. But we must be careful that the pessimist poles of cynicism and zero-now arguments do not discourage imperfect optimists on this journey.
We’re grateful to you for reading this far and for taking time to consider our perspective on this complex topic. We agree about the importance of addressing climate change and on the fundamental facts of the warming that is occurring, and, indeed, that we all have a role to play.
Baillie Gifford aspires to be a firm in the transparent-and-trying-hard end of the spectrum of financial services companies. In the meantime, we wish to continue providing an important platform for intelligent and thoughtful debate at the Edinburgh International Book Festival and all the other book festivals we support; they are platforms which should be celebrated, not shunned.
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