Case study: How Baillie Gifford is tackling ESG by putting data first
Catherine Flockhart, Director, Client Communications at Baillie Gifford explains how the firm has translated its ESG strategy into a process that can be used every day
clearpat POSTED ON 9/21/2020 3:04:59 PM
We are an asset management partnership who is primarily focused on active, long-term equity investing.
We have the luxury of holding a relatively small number of companies and being able to get to know them incredibly well across all our portfolios.
We have also launched our positive change impact strategy, which sets ESG targets as equally important to financial. This goes to a whole other level in terms of integration of ESG or impact alongside investments.
"There is no shortcut to what makes a good ESG portfolio or investment"
Firstly, there is no shortcut to what makes a good ESG portfolio or investment. The credentials of a company cannot be boiled down to just one number.
For instance, one of the ESG passive funds out there, which is scrapping data from some of the larger providers, one of them has a higher weighting in British American tobacco and the other to a micro lender in Indonesia who we hold in our impact portfolio.
This is because whilst British American tobacco has all the good ESG policies and its staff really like working for them, there isn’t a way for these vast data systems to factor in the subjective value judgment.
"We have taken the approach of having a dedicated governance and sustainability team"
The fact that one of those companies provides a product that is very damaging to people’s health, whilst the other is keeping afloat small farmers in areas of the world who desperately need access to more finance.
We have taken the approach of having a dedicated governance and sustainability team comprised of 24 individuals.
We also rotate all our investment managers to a graduate program through our governance and sustainability team, so that we can attack this from both angles.
We are using a huge range of data, as it is important not to use just one but to get many different approaches.
"We rotate all our investment managers to a graduate program through our governance and sustainability team"
Of course, speaking to the companies themselves is also critical indicator. As are the views of specialists throughout the finance industry who really know the ESG elements inside out.
Whilst there are lots of challenges that we face, to do this properly and thoroughly there are no short cuts.
It is about having an asset manager who knows what they are invested in, inside out.
What we are doing for our impact portfolio is a good example of what is at the cutting edge of initiatives being tried in the industry.
"Speaking to the companies themselves is also critical indicator"
We do have the luxury of being able to do this on our portfolios with a 5-10 year holding period that has an explicit impact focus.
I am not suggesting that the rest of the industry will necessarily be here yet because it is very complex.
For each company in the portfolio, we lay out what we call the positive chain, which is the industry best practice for how you report on systemic changes that the company can drive.
We will report bespoke metrics, which is done annually. For example, if it is a healthcare company, we will show how many patients they have treated or for a clean energy company, how many tons of carbon the company has saved.
"We will report bespoke metrics, which is done annually. "
This is done for every stock portfolio. We also outline where there are materially negative contributions because this is important.
We then map all the business activities of the holdings to the UN sustainable development goals. We do this ourselves at target level using a robust framework, as this is an increasingly common language that people like to see.
We also produce overall portfolio snapshots for the clients who do not want all the detail.
For example, in 2019 the products and services of companies in our portfolio helped customers to save 152 million tons of carbon. This is the equivalent to taking 32 million passenger cars off the road.
"Data and the comparability of it is not perfect"
We have also produced a calculator, which allows clients to plug in what their investment would have been and to see the share of that impact.
Data and the comparability of it is not perfect, in terms of what we are getting out of the companies.
We air on the side of conservatism and only report where we can clearly get data that can be verified by companies, but even then it isn’t always a perfect like-for-like, so we try to be as transparent as we can about this and don’t guestimate or inflate the numbers.
We also have KPMG audit the reporting that we give to clients. It is quite labour intensive, but as the data starts to improve and it becomes more of the industry norm, this type of reporting will become more easily providable across the industry.
To read more about how other firms are tackling the issues of ESG data and client reporting, download our research report produced in partnership with SimCorp, Taking the Lead on ESG Investing Through Client Communications.
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