Baillie Gifford: our NZAMi commitments
- Baillie Gifford announces its first set of Net Zero Asset Managers initiative targets and portfolio commitments
- They focus on the increasing alignment of companies with net zero goals over time
- These targets and commitments are embedded in our fundamental approach to research and engagement
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A year ago, in the run-up to COP26, Baillie Gifford joined the Net Zero Asset Managers initiative. As COP27 opens in Egypt, NZAMi is publishing our first set of climate-related commitments. We have taken care to ensure the portfolio-level targets align with our clients’ investment objectives.
We consider a wide range of factors that can impact long-term investment performance. As part of this, we believe that competitive advantage will accrue to the climate-prepared. Companies readying themselves for the challenge will do so in different ways. We hope to make a positive impact by selectively backing both innovative solutions providers and long-standing business models that can adapt and thrive.
There is growth of every type – expansionary, disruptive and replacement1 – in the climate transition. Finding the winners over our preferred five-year-plus time horizon requires us to be imaginative but not deterministic. It requires us to work in the multiple dimensions of technology, geography, policy and evolving social values.
Our focus on active, relatively concentrated portfolios lets us apply our detailed research and engagement process to the complexities ahead.
It looks very premature to suggest the world is on track to limit warming this century to 1.5C over pre-industrial levels. Many of the required technologies are visible, but the countervailing forces of system inertia and the simple lack of time are hard realities.
COP26 inched forward, and we should expect COP27 to be another evolutionary rather than revolutionary advance as it struggles with the politics of global equity.
But on any long view, the direction of travel is clear:
- Expectations for the business-as-usual temperature rise in 2100 have fallen by almost 1C since 2016, albeit to a still way too hot 2.8C increase
- Massive drops in technology costs across power, batteries, electric vehicles and efficiency-enabling digitisation are bringing forward the tipping points for their mass adoption
- The US’s Inflation Reduction Act and the EU’s RePower deals have followed China’s efforts to provide direct economic support, and thus accelerated business opportunity, for green substitutes
Russia’s invasion of Ukraine has created near-term chaos in energy markets. But it has also highlighted the fragility of being fossil fuel dependent. That is likely to accelerate the adoption of renewable energies, as well as redouble India and China’s efforts to reject a gas-based transition. The shift to low carbon is underway – only the pace of change is uncertain.
The achievements of the last decade are simultaneously insufficient and tremendous. As climate damage and climate mitigation continue to accelerate through the 2020s, at Baillie Gifford we will continue to factor climate considerations into our investment approach. Over our stated investment time horizon, we expect such issues will often be linked inextricably with companies’ long-term performance.
We recognise that this is still a learning process and that approaches must be conscious and dynamic to be impactful. Through NZAMi and other initiatives, we can continue to develop and share with our industry, clients and investee companies as we all strive for positive outcomes.
Our NZAMi-committed portfolios
Over the last year, we have continued to develop our climate-related research and engagement practices across all our investment strategies. We see a clear need and responsibility to address the associated issues as a prerequisite to optimising long-term investment returns for clients. You can find details of our approach and ongoing plan for improvement in our annual Climate Report.
In addition to this firmwide activity, over the last year, portfolios amounting to 20 per cent of our assets under management have set climate-related targets for 2030 and 2040 that meet NZAMi’s standards.
Given our active and focused investment approach, it will be our fundamental research, stock selection and engagement with holdings that have the most significant climate-related impact. So, our related commitments must be embedded at a portfolio level from the outset rather than applied top-down on any blanket basis.
Where appropriate to our clients’ requirements, our investment strategies have developed net zero-aligned commitments consistent with their philosophy and process. We expect the quantum of NZAMi-committed assets to increase over time as more of our strategies obtain client support to be managed in this way.
We require portfolios that are managed in line with our NZAMi commitment to fulfil several elements, including:
- An interim target for 2030 consistent with a fair share of the 50 per cent global reduction in greenhouse gases, alongside the prioritisation of ‘real economy’ impacts
- Facilitation of investment in climate solutions
- Commitment to active engagement
- Transparency in reporting
Our NZAMi portfolio targets are focused on the robust alignment of each company with a 1.5C pathway and strategy appropriate to its industry and regions of operation.
Each committed portfolio will be invested and managed such that by 2030, at least 75 per cent of all holdings – or for less concentrated portfolios, at least 75 per cent of financed emissions – will have robust targets, strategies and performance that demonstrate company-level alignment with an appropriate fair share of a global net zero 2050/1.5C outcome.
For our committed funds, the 2030 commitments actually vary from 75 to 90 per cent, depending on the portfolio. But by 2040, all committed portfolio holdings will be so aligned.
The concepts of alignment and the pathways themselves are still evolving but, as described in our annual Climate Report, our methodology and assessments are rooted in the company-level criteria of the Paris Aligned Investment Initiative Net Zero Investment Framework.
We have extended and developed the framework using our bottom-up research and that of groups such as the Science Based Targets initiative, the Transition Pathway Initiative and our academic partnerships.
The current alignment status of holdings will vary in concentration by portfolio. But for reference, as at the end of July 2022, we assessed 30 per cent by value of our firmwide listed equity holdings to be ‘leaders’ in terms of commitment to targets and strategies that appear consistent with a global net zero/1.5C outcome.
Our research process requires us to monitor emissions performance. However, we do not consider the setting of a simple top-down portfolio or firmwide emissions pathway as a critical tool to direct our approach. We will keep this under review as we continue to aim for real-world impact.
For reference, as at the end of July 2022, the average carbon footprint of our firmwide listed equity holdings was 62 per cent lower than that of firms within the MSCI ACWI index2.
You can obtain details of our NZAMI-committed portfolios from the relevant fund pages at bailliegifford.com, or by contacting us.
We will provide regular progress updates through general portfolio communications and annual firmwide and product-level TCFD (Task Force on Climate-Related Financial Disclosures) reports.
1. We define these as:
• Expansionary growth – demand grows, and supply rises to meet it
• Disruptive growth – demand doesn’t grow, but supply innovates to meet it better
• Replacement growth - new demand supersedes old demand following broader change
2. The exact figure was 107 tonnes of carbon dioxide equivalent per million dollars invested. That figure incorporates scope 1 and 2 emissions in all cases and added scope 3 emissions for companies belonging to sectors defined as ‘material’ by the PCAF partnership of financial institutions. These include oil, gas and mining companies. For reference, our listed equity holdings represent 90 per cent of our total assets under management
Source: Factset. MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect 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 November 2022 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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