QUESTIONSMarianne Harper Gow
Integrating ESG into company research requires rigour, nuance and a long-term perspective says Marianne Harper Gow
ESG is the buzzword of today’s investment industry, the three letters encapsulating a complex and challenging range of environmental, social and governance responsibilities. They range from climate change to employee rights and working conditions, data governance and cyber security to supply chain resilience, ownership, corporate culture and remuneration structures.
Context changes definitions. Health and safety, for example, used to be the preserve of heavy industry (injury rates and fatality statistics) but in the context of Covid-19, it is at the top of every company’s risk agenda.
But the opportunities associated with being ‘good’ at ESG far outweigh the risks, particularly over the long term. During the pandemic for example, the spectrum of positive company responses included the proactive and the reactive, ranging from paying suppliers faster to helping laid-off employees with healthcare insurance and career advice. These were measures that, respectively, French cosmetics group L’Oréal and short-term rentals business Airbnb got credit for putting in place when the coronavirus struck. They highlight how ESG issues came further into focus amid the crisis.
Within the context of global challenge it is easy to understand why ESG-focused funds are booming as investors plough money into sectors for the apparent benefit of humanity and the planet.
But how do we distinguish between genuine integration and box-ticking efforts?
It’s an important question, because the hamster wheel of the quarterly earnings cycle engenders a short-term mindset. Yet responsible investing should be for the long term and that involves commitment, time and resources.
As an investment house that seeks to invest in companies offering long-term sustainable growth, Baillie Gifford looks to identify companies with management teams and boards that take a thoughtful, positive, progressive and proactive approach to the broad range of ESG matters. The materiality of these can vary significantly between companies, sectors and geographies, and over different timeframes.
Too often we see signs of company ‘greenwashing’, giving a false impression of environmental soundness, and reliance on easy metrics that allow box-ticking. But data should be viewed in the context of the business, not just be generated for its own sake.
External ESG research providers producing reports looking at dozens of datapoints are not the answer. Worse, that approach can often be misleading. Nor does their research compare like-for-like. Far from it, in fact.
Research last year comparing ESG ratings by academics at the Massachusetts Institute of Technology (MIT)’s Sloan School of Management looked at ESG ratings provided by five ratings agencies. They found that the information decision-makers received from them was uncorrelated, leading to what researchers called 'aggregate confusion', meaning the findings diverged from each other significantly. Baillie Gifford recently carried out its own research, comparing the ESG ratings by MSCI and by Sustainalytics, with similar findings.
Relying on others’ data effectively means outsourcing the ESG assessment. That is not what clients and the ultimate owners of capital invested should expect. There is no substitute for doing your homework, working with portfolio managers, and engaging directly with the companies in which you invest.
For this, appropriate resource is required. Doing ESG analysis well is an investment in itself. Companies cannot be thoughtfully analysed on a case-by-case basis if the analyst is responsible for hundreds of companies and reliant on third-party data. In contrast, our ESG analysts are individually attached to different investment teams, so the number of companies is controlled and manageable. They are involved in pre-buy research, they join our investors on research trips, company meetings and in stock evaluation. They gather their own data and piece together information that helps deepen their understanding of the company. It is resource intensive and time consuming, but we regard it as the most effective way to properly integrate ESG issues into our portfolio management process.
Companies sometimes ask us what data we want to see. We turn the question around and ask what their material ESG risks and opportunities are. Where there is a gap, we have an opportunity to engage with the company directly.
And engagement takes time. We need to learn about the company and to build relationships with management and board. When it works, meetings evolve from being transactional to being real relationships, where robust but constructive discussion can focus on challenging issues. This builds longstanding trust.
The relevance of ESG factors is also influenced by a company’s cultural and regulatory environment. We opened our Shanghai office last year to engage Chinese companies in their own language and on their home turf. It has also allowed us to deepen our understanding of the culture in which we are investing.
One last issue stands in the way of being a good steward of our clients’ capital and a responsible and engaged owner. Proxy voting is an important stewardship activity, but responsibility is surrendered if the shares are lent out, as they are by many managers in stock lending programmes.
We laid out our unvarnished view on the dangers of stock lending in 2018, and agree with Japan’s Government Pension Investment Fund (GPIF), the world’s largest pool of retirement savings, which recently deemed the practice inconsistent with the stewardship responsibilities of a long-term investor.
To cut through greenwash, we formulated five questions for clients to ask us and their other managers:
The ability to give full and encouraging answers to these questions, with examples, should give confidence that the baseline ingredients are there for an investment approach that supports long-term, sustainable growth, whatever the global context.
Important Information and Risk Factors
The views expressed in this article are those of Marianne Harper Gow 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 2020 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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.
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.
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. 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.
Baillie Gifford Investment Management (Shanghai) Limited is wholly owned by Baillie Gifford Overseas Limited and may provide investment research to the Baillie Gifford Group pursuant to applicable laws. Baillie Gifford Investment Management (Shanghai) Limited is incorporated in Shanghai in the People’s Republic of China (PRC) as a wholly foreign-owned limited liability company under the Company Law of the PRC, the Law of the PRC on Wholly Foreign-owned Enterprises and its implementing rules, and other relevant laws and regulations of the PRC. Baillie Gifford Investment Management (Shanghai) Limited is registered with the Shanghai Municipal Administration for Market Regulation, with a unified social credit code of 91310000MA1FL6KQ30, with its registered office at Unit 4203-04, One Museum Place, 669 Xin Zha Road, Jing An District, Shanghai 200041, China.
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 licence 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 Room 3009-3010, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong. Telephone +852 3756 5700.
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.
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.
This material is provided on the basis that you are a wholesale client as defined within s761G of the Corporations Act 2001 (Cth). Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth). It is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth) in respect of these financial services provided to Australian wholesale clients. Baillie Gifford Overseas Limited is authorised and regulated by the Financial Conduct Authority under UK laws which differ from those applicable in Australia.
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.
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. 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 Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.
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 document 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.
This strategy is only being offered to a limited number of investors who are willing and able to conduct an independent investigation of the risks involved. This does not constitute an offer to the public and is for the use only of the named addressee and should not be given or shown to any other person (other than employees, agents, or consultants in connection with the addressee’s consideration thereof). Baillie Gifford Overseas Limited has not been and will not be registered with Qatar Central Bank or under any laws of the State of Qatar. No transactions will be concluded in your jurisdiction and any inquiries regarding the strategy should be made to Baillie Gifford.
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 document is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.
Ref: 48868 ALL WE 0378
Marianne Harper Gow Governance and Sustainability Specialist
Marianne joined Baillie Gifford in 2004 and her role has evolved over the past 16 years, along with the Governance and Sustainability function, meaning her experience extends over many areas, including research and analysis, company engagement, voting and client reporting. Her current role involves engaging with institutional investors, regulators and industry bodies across the globe on topics as diverse as climate change, dual class share structures and human capital management. Prior to joining Baillie Gifford, Marianne worked offshore carrying out environmental and geological survey work. She graduated BSc (Hons) in Environmental Science from the University of Aberdeen in 1996 and MBA from the University of Edinburgh in 2002.
She is also a member of the Social Investment Scotland (SIS) Ventures Investment Committee.
YOU MAY ALSO LIKEInsights.Visit Baillie Gifford's Insights page.A Long-Term Manifesto.Investment Manager Iain Campbell does not claim that Baillie Gifford’s investors are cleverer, have better systems or information, or that they work harder, travel further or construct more complex spreadsheets. Rather, he elaborates on an identifiable market inefficiency that our unusual structure and long-term philosophy allows us to exploit.Actual investing in action: investment trust conference 2022.In volatile markets, our investment trust managers focus on being on the right side of structural change.The History of Keystone Positive Change Investment Trust.Historian John Newlands looks back at the origins of the trust and its surprising connections.