Baillie Gifford Positive Changes B Acc (OEIC/Unit Trust)
SRI / Ethical Overview
After centuries of progress and advancement, humanity is now facing a number of challenges that must be addressed in order to place our society onto a path of sustainable development. Everyone has a role to play: governments, businesses, investors and individuals. We believe that the best way for the investment community to contribute to this effort is through a positive and proactive approach, where investing is focused on companies that are addressing those challenges, rather than simply excluding companies that cause harm. We believe companies that are solving those challenges should see rising demand for their products and services and are naturally growth companies. By focusing on a subset of those companies that enjoy sustainable competitive advantages and are run by committed management teams, we should be able to deliver attractive investment returns over the long term. In summary, we think that taking a positive and proactive approach towards sustainable investing and generating good long-term returns go hand-in-hand.
The challenges to sustainable development are numerous and complex. They include the lack of basic infrastructures and services, resource constraints and degradation, rising inequality, and persistent poverty. Furthermore, they are complicated by cultural and political factors. As a result, we don’t believe a simple rule-of-thumb or negative screen is a viable solution to our sustainable development challenges.
We believe that human ingenuity and the economic progress it brings are beneficial to our society. Although economic growth sometimes has a negative connotation, inclusive economic growth means a rising standard of living for the vast majority of citizens. Economic growth fosters greater opportunity, tolerance of diversity, social mobility, and commitment to fairness and democracy. Therefore, we believe that capitalism and entrepreneurial spirit should be regarded as part of the solution, rather than the cause of the problem. This view contributes to our dual objectives:
- To deliver attractive long term returns (+2% p.a. relative to global markets over rolling 5 years)
- To deliver a positive social change
SRI / themed / ethical assets under management – overview
- Fund Size (GBP): £24 million as at 31 March 2018 in the Baillie Gifford Positive Change Fund.
- Total value of SRI/ethical/environmental/ social/ environmental or sustainability themed funds: £52 million as at 31 March 2018 in the Positive Change Strategy.
- Total value of assets covered by any additional ESG or responsible ownership policy: £52 million as at 31 March 2018 in the Positive Change Strategy.
- Total assets under management: Firm-wide assets under management of £177,603 million as at 31 March 2018.
SRI Policies (Primary strategy in bold)
- Measures positive impacts Find funds that measure the positive effect of their investment decision making on society and/or the environment. (This may involve eg carbon saved or jobs supported.) Managers aim to quantify the benefits they deliver (relative to other strategies or other benchmarks) to ensure they are delivering positive benefiting. This is a new and evolving area. See fund literature for information
- Positive social impact theme (new) Find funds that specifically state that they aim to deliver positive social (ie people related) impacts and/or outcomes
- Positive environmental impact theme (new) Find funds that specifically set out to help deliver positive environmental impacts, benefits or outcomes
- Aims to generate positive impacts Find funds that aim to help deliver positive social or environmental impacts or outcomes through their investment decisions - which typically involves holding companies that are viewed as being necessary or beneficial. Strategies and approaches vary. A small number of funds have recently started to measure outcomes (see 'Measures Impacts' in the Policy filter). This is a new area - so most funds do not do this yet. See fund literature for further information.
- Responsible ownership / stewardship policy (new) Find funds that have a policy that sets out what they do with regard to responsible investment ownership - also known as 'stewardship'. This typically relates to issues such as dialogue with companies and shareholder voting.
- ESG integration strategy (new) Find funds that factor in 'environmental, social and governance' issues as part of their investment decision making process. (These typically relate to improved risk management.)
- ESG/SRI engagement Find funds and fund management companies that actively encourages higher 'environmental, social and governance' and/or 'sustainable and responsible investment' practices amongst investee companies - when positive change is aligned with the best interest of investors. This may apply to a single fund or a group of funds. Read fund literature for further information.
- Responsible Ownership policy for non SRI funds Find funds run by fund managers that apply Responsible Ownership or 'Stewardship' policies to all or most of their investment assets. This means that active involvement (e.g. voting, dialogue) with the companies they invest in across funds (not normally limited to ethical or SRI options.) Read fund literature for further information.
- Vote all* shares at AGMs/EGMs This fund manager votes or aims to vote all* the shares they own at Annual General Meetings and Extraordinary General Meetings. A commitment to voting shares is a key indicator of 'responsible share ownership' - where fund managers consider - and express their views on - the key business issues effecting the companies they part own. (*Allowance is made for exceptional situations such as when shares are in the process of being sold.)
- In house responsible ownership/voting expertise Find fund / fund management companies where there is in-house expertise that enables the fund manager to make their own decisions on issues such as shareholder voting, setting of in-house guidelines - for example - particularly with regard to environmental, social and governance (ESG) issues.
- Responsible Ownership/ESG a key differentiator The fund managers have said they consider this area to be a key differentiator for their business
- UK Stewardship Code signatory Find fund managers that are signatories to the FRC UK Stewardship Code, which sets out a framework for constructive investor / investee relations where fund managers are encouraged to behave as responsible 'company owners'.
- Publish Responsible Ownership/Stewardship report Find fund management companies that publish information on their approach to responsible investment ownership - also known as 'Stewardship' - following the introduction of 'the Stewardship Code'. This sets out their approach to voting, dialogue with company management and any related activity. This is publicly available.
- Publish full voting record Find fund management companies that publishes a full record of how they vote at AGMs and EGMs. This information is publicly available.
- PRI signatory Find fund management companies that have signed up to the UN backed 'Principles of Responsible Investment' initiative.
- Encourage board diversity eg gender (new) Fund managers encourage the companies they invest in to have more diverse board structures (eg more women on boards)
- Encourage responsible corporate taxation (new) Fund management company is working with the companies it invests in to encourage more responsible corporate taxation (new)
- Encourage carbon / GHG reduction (new) The fund management company is working with the companies it invests in to encourage reductions of carbon dioxide and other greenhouse gas emissions.
- Employ specialist ESG/SRI/sustainability researchers (new) The fund management company directly employs specialist ESG/SRI/sustainability researchers or analysts
- In house carbon/GHG reduction policy (new) The fund management company is working to reduce its own carbon/greenhouse gas emissions.
- Full SRI policy information available on request (new) Information on all selected filter options will be supplied by the fund manager if you ask them to do so
SRI / Ethical Policy
We look for companies for whom delivering a positive impact is core to their business; whose products and services represent a significant improvement to the status quo; and who conduct business with honesty and integrity. We look for areas where there is a meaningful, and widely-accepted, opportunity gap between the current situation and the desirable social outcome, and for companies that are proactively narrowing that gap through their business activities. To this end, we have identified four broad areas.
Similar to financial returns, making a meaningful positive impact on society requires patience and perseverance. We are not looking for quick fixes, but genuine improvements which often take years, if not decades, of hard work. We believe a period of five to ten years is a useful timeframe for assessing companies’ social and environmental contributions. We expect the four themes shown below to evolve over time, hopefully because some of the challenges will be resolved in the future. We review the themes on a regular basis
Delivering a Positive Impact
Social Inclusion and Education:
- Challenge: Income and wealth inequality has risen
- Investment Focus: Building a more inclusive society and improving the quality and assessibility of education
Environment and Resource Needs:
- Challenge: Environmental impact of human activities & climate change and famine limit development
- Investment Focus: Improving resource efficiency and reducing environmental impact of economic activities
Healthcare and Quality of Life:
- Challenge: Living longer but not necessarily healthier & richer but not necessarily happier
- Investment focus: Improving quality of life in developed and developing countries
Base of the Pyramid:
- Challenge: Eonomic growth has not filtered down to everyone
- Investment Focus: Needs of those at the bottom of the global ladder
What We Look For
The universe of companies in which we can invest is very large – there are roughly 9,000 listed stocks with a market capitalisation greater than $1 billion. We make no attempt to cover the whole universe. Neither do we use quantitative screens to cut it down to a manageable size. Instead, we rely on a clear and consistent set of filters to focus our attention on the relatively small number of businesses that might be of interest to us. These filters flow naturally from our twin objectives, and focus on: (1) the company’s potential to address one of our four thematic global challenges; (2) its potential to build a profitably growing business.
We are bottom-up stock-pickers who let our curiosity and enthusiasm drive our research agenda. Idea generation takes place throughout the investment process: when we meet companies; through attendance at conferences; during team meetings; and through general reading. Our long-term time horizon, focus on fundamental in-house research and desire to take a different perspective means we use diverse sources of information, from independent research to engaging with academics and industry experts. Sharing a common objective with the rest of our investment colleagues (seeking high quality growth companies), we are fortunate in being able to leverage the intellectual resources of our wider investment department of around a hundred investors, including regional and global teams and sector specialists, and our Corporate Governance team.
Fundamental Company Research
Gaining insight into social and environmental challenges and impact of companies is complicated and requires a consistent and robust process. Our analysis consists of two stages: a fundamental company research and an impact analysis. Our fundamental company research involves us examining 6 questions relating to the quality of the business and the impact the company is expected to deliver. Analysing both aspects in tandem can provide insight into the less tangible elements of the investment case, such as corporate culture and management motivation. To assess the growth potential and quality of a business, we consider the company’s broad opportunity set, the strength of the competitive advantage and the management attitude. To assess the expected impact of a holding, we consider the challenge the company is tackling, its product characteristics and business practices.
A company’s impact on society cannot be summed up by a single metric or score. Our impact analysis is an in-depth due diligence of the company’s social and environmental impact, focusing on three factors: Intent, Product Impact, and Business Practices.
- When assessing Intent, we look at management commitment, ownership structure, corporate governance and company culture.
- When assessing Product Impact, we look at the extent to which the company’s products and services address one of our four impact themes.
- Finally, we assess Business Practices by looking at the company’s working environment, its consideration of external stakeholders and its commitment to reducing environmental impact.
We are active investors and our portfolio of 25–50 companies will be significantly different to the benchmark, many of whose major constituents are likely to face headwinds from the challenges we identify. In order for a company to enter our portfolio, it must meet both of our objectives.
When considering the quality of the business, we adopt a sponsorship approach, where after careful debate, we have a bias towards backing the PCG member who is putting forward the idea. This allows us to harness our diverse perspective and retain the conviction and accountability of individual decision making.
When considering the positive impact, we require a majority vote from the PCG members. This ensures a decision is not heavily influenced by an individual’s personal values or biases. We recognise that there is no perfect company, so under each of these three factors we also explicitly consider areas of controversy, the negative consequences of operations and the company’s awareness of those issues. Whereas the fundamental company research is conducted by the investors, the impact analysis is carried out by one of our Corporate Governance analysts. This ensures an element of independence and objectivity. With a long-term investment horizon, portfolio turnover will be low and we expect it to be below 20% per annum over the long term.
We will carefully monitor the companies in which we invest through ongoing research and engagement with management teams. It is inevitable that companies will have setbacks and we are happy to own companies through periods of short-term operational weakness. However, if longer term concerns develop that are not addressed by management or, if we detect a deterioration in the fundamental investment case, for either element of our twin objectives, we will sell a holding.
Monitoring and Engagement
Monitoring impact is important: as one of our dual objectives it is as important as monitoring financial performance. Using our in depth knowledge of companies and long-term focus, we have developed a practical approach based on two layers.
Consistent with our bottom-up investment approach and focus on company fundamentals, we identify bespoke metrics or milestones for each company in the portfolio. We look at both the positive change delivered through products and services as well as through business practices, consistent with our impact analysis. Monitoring of progress at a company level will be ongoing via regular company disclosures and engagement with management. Each stock will also be reviewed annually, in line with their reporting schedule.
Using the bespoke, company specific measures we map the contribution of the portfolio to the United Nations’ Sustainable Development Goals (SDGs). The UN developed the SDGs in 2015 as part of an ambitious programme which aims to end poverty in all forms, to build peaceful and inclusive societies, to protect human rights and promote gender equality, and to ensure the protection of the planet and its natural resources by the end of 2030. With 17 goals split into 169 specific targets covering a broad range of topics, we don’t intend for the portfolio to address every single goal. However, mapping the contribution of individual holdings to these goals allows us to assess contribution of the portfolio as a whole using an independent framework. Having assessed both company and portfolio level impact we intend to produce an annual impact report. Crucially, we always retain a long-term focus.
Resources, Affiliations & Corporate Strategies
All the investment staff at Baillie Gifford are first and foremost analysts, regardless of seniority, and spend the majority of their time carrying out research. Research is conducted in regional and global teams all based in our open-plan Edinburgh office. It is widely shared and openly discussed. The aim is to gain broad, long-term insights into business models and competitive advantages of companies.
We believe that the firm’s culture, helped in part by the stable environment that the partnership provides, is crucial to the success of the collaborative research that our investors undertake. We believe that open and challenging discussion of ideas helps to improve the quality of our research, and gives us a better opportunity to make good decisions for our clients.
Baillie Gifford makes very little to no use of broker research as our investment horizons are very different (years not months).
We have a dedicated Governance and Sustainability team of thirteen. In conjunction with the investment teams, the Governance and Sustainability team is responsible for ESG research and engagement, coordinating and processing proxy voting. The Governance and Sustainability team is responsible for highlighting ESG risks and opportunities to the different investment strategies, monitoring companies we have holdings in, engaging with companies on ESG criteria, and challenging them when appropriate.
The team is structured so that specific members have regional market expertise but all members have knowledge of global ESG issues. This ensures that everyone in the team has a broad understanding of governance structures, norms and variations, as well as a specialism. Every member of the team is responsible for considering all environmental, social and governance matters which requires broad understanding of key ESG matters including remuneration, board diversity, labour practices, health and safety expectations, climate change and other social and environmental challenges. As this illustrates the role of Governance Analyst is wide ranging. The discussion and debate within the team and with the investment teams is an important part of the analysis process. The team reports directly to our Investment Management Group (a committee of five investment partners). This reporting line helps to ensure that our research is of value to the investors and integrated into the investment decision-making process.
In conducting ESG research our Governance and Sustainability team have access to several external information providers and are members of several industry organisations such as third party research providers; MSCI, RepRisk and South Pole. We also employ several external corporate governance advisers including ISS and BoardEx which assists us in voting clients’ shares and analysing board experience, diversity and independence.
We are members of the UNPRI, the UK Corporate Governance Forum, the Investor Forum, the International Corporate Governance Network, UK Sustainable Investment and Finance Association, the Japan Focus Group, the Council of Institutional Investors, the Carbon Disclosure Project and the Asian Corporate Governance Association.
Positive Change Fund
Like all Baillie Gifford equity strategies, Positive Change focuses on bottom-up, fundamental research rather than technical analysis.
Two member of the dedicated Governance and Sustainability team mentioned above sit on the Positive Change Portfolio Construction Group and carry out the impact analysis stage of the investment process. This ensures an element of independence and objectivity.
The Positive Change team engage with and collaborate with the Global Impact Investing Network (GIIN), Pacific Community Ventures, the UNPRI, Bridges, Big Society Capital and Pensions for Purpose.
This document is intended for the use of professional investors and UK advisers only and should not be relied upon by any other person. It is not intended for use by retail clients.
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.
This document contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.
All data is at 31 March 2018 in GBP and sourced from Baillie Gifford & Co unless otherwise stated.
All investment strategies have the potential for profit and loss and your or your clients’ capital may be at risk.
Past performance is not a guide to future returns. Any performance objective stated is not guaranteed.
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