Fund Size: £1999.00m

Total screened & themed / SRI assets: £23437.00

Total Responsible Ownership assets: £224399.00

Total assets under management: £224399.00

As at: 30/06/24

Overview

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Policy

After centuries of progress and advancement, humanity is now facing a number of challenges that must be addressed in order to place our society on 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. We have two, equally important objectives, and we aim to measure both over periods of at least five years.

1.  We aim to deliver attractive investment returns. Patient ownership of listed equities offers a liquid, low-cost way to invest in the economic fruits of human ingenuity. In broad terms, we look for companies with the potential to double in value over a five-year period, while still having significant growth prospects thereafter. Patience is required to tolerate short-term volatility that we embrace in order to generate superior long-term financial returns.

We expect our portfolio of 25–50 companies to be significantly different from the index, many of whose major constituents are likely to suffer from precisely the challenges we outline below. While measuring portfolio returns relative to an index can be a helpful way to monitor the output of our investment process, we do not consider the index when constructing the portfolio.

1. We aim to deliver a positive impact. 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 impact themes:

• Social inclusion and education
• Environment and resource needs
• Healthcare and quality of life
• Base of the pyramid (addressing the needs of the poorest four billion people in the world)

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 years plus is a useful timeframe for assessing companies’ social and environmental contributions.

Process

Positive Change focuses on bottom-up, fundamental research rather than technical analysis, as is the case for all Baillie Gifford equity strategies.

All 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 mainly 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.

What we look for

 Positive Change is a global strategy, so 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 dual objectives and focus on:

• the company’s potential to address one of our four thematic global challenges;
• its potential to build a profitably growing business.

Idea generation

 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 investment 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 more than c.180 investors, including regional and global teams and sector specialists, and our ESG resource.

Gaining insight into social and environmental challenges and impact of companies is complicated and requires a consistent and robust process.

Reflecting that Positive Change has two objectives: investment returns and impact, we have two stages to our research process: fundamental company analysis and impact analysis. 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 whose people conduct business with honesty and integrity.

Fundamental company analysis

Our fundamental company research involves an investment manager or analyst examining eight questions relating to the quality of the business and its growth prospects as well as the impact the company is expected to deliver.

1. What change is the company driving?
2. What is the scale of the growth opportunity and how might it evolve over time?
3. What is required to unlock the opportunity and how quickly can the company capitalise on it?
4. What is the competitive edge and how might it develop?
5. What attributes of the culture, governance and management attitude will support or detract from the company’s ability to capitalise on the opportunity?
6. What are the financial characteristics today and how might they evolve?
7. What might the company look like and what might its valuation be in 5 to 10 years?
8. What will it take to be an outlier?

To assess the growth potential and quality of a business, we consider the company’s broad opportunity set, the strength and durability of the competitive advantage, the financial characteristics and management attitudes. To assess the expected impact of a holding, we consider the challenge the company is tackling, its product characteristics and business practices. If a company has backing from an investment manager, it will be taken forward to the second stage of research: the impact analysis.

Impact analysis

This stage of research focuses specifically on the impact potential of a business. Research is carried out by one of the Positive Change teams’ dedicated impact analysts. Analysing impact is complex and can be highly subjective. Our impact analysis is carried out independent of the investment case using a rigorous, qualitative framework that is based upon three factors, shown below.

• Intent
• • How committed is the company to delivering impact?

• Product impact
  • What impact will the company deliver?
  • How material will this be to environmental or social challenge(s)?
  • Is this the best way to address the challenge?
  • What negative impacts could undermine the positive change?

• Business practices (ESG)
  • What about the company’s business practices detract or support it delivering positive change?

This analysis is holistic: we recognise that there is no perfect company and under each of these three factors we also consider areas of controversy, the negative consequences of operations and a company’s awareness of those issues.

Monitoring and reporting impact is important: as one of our dual objectives it is as important as monitoring and reporting financial performance. The monitoring of impact is ongoing and is interwoven with our monitoring of the investment case for a company. We look at company reports and disclosures and are engaged with management, we monitor significant news, always with a focus on the long term and the key milestones we expect a company to reach in order to deliver impact.

Portfolio construction - investment and impact considered in tandem

 The Positive Change Team meet regularly to discuss new ideas and the level of conviction in existing holdings. The team’s conviction in both the impact and investment potential of a company is taken into consideration when making portfolio decisions. Investment decisions are made by the decision making group which comprises both investment managers and senior impact analysts. Every stock must have the backing of an investment manager and at least one sponsor of the impact objective. The group heavily relies on and respects the opinions of team members to help inform individual views. We think this process allows us to harness diverse perspectives while also retaining conviction and accountability of individual decision-making and reducing personal bias.

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 – there are no compromises.

With a long-term investment horizon, portfolio turnover will be low. 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 case, for either element of our dual objectives, we will sell a holding.

Monitoring, engagement and reporting: rigorous, ongoing and with a long-term focus

The investment process does not stop once we have bought shares in a company. Monitoring and reporting on impact is important: as one of our dual objectives it is as important as financial performance. Ongoing company engagement is also a key part of our process.

The impact different companies make is not always quantifiable, nor should it be. Furthermore, comparing impact across companies with very different activities is problematic. And, where impact is more easily quantifiable, it is not always measured and disclosed in a uniform way. Despite its challenges, we have developed a robust approach using our in-depth knowledge of companies, and we report annually to clients, though we always remain focused on our five-year-plus time horizon.

Annual Impact Report

 We report the below three metrics in our annual Impact Report. Reporting on the impact the strategy delivers holds us accountable to our impact objective and helps clients understand the impact their capital is having.

Company impact

Consistent with our bottom-up, fundamental investment approach, we identify bespoke metrics for each company that will help us monitor its progress in delivering positive change. We represent this impact through ‘the positive chain’, a model which illustrates how each company is contributing to positive outcomes and impacts through their inputs, activities and outputs. We depend primarily on company reported data but don’t limit ourselves to current levels of disclosure: where there are gaps, we will engage with companies and request more information.

Company engagement more broadly is ongoing, and we will discuss with management teams both areas where we would like to see improvements as well as areas where companies excel.

Portfolio contribution to UN SDGs

 At an overall portfolio level, we also link the product impact for each company to the United Nations’ Sustainable Development Goals (UN 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 via the underlying 169 targets allows us to assess the contribution of the portfolio as a whole using an independent framework.

The companies in the portfolio take different approaches and we hope to gain insight into what works best and to share our learnings across holdings. For those companies that report how their business is aligned with the SDGs, we take this into consideration when making the linkage to the goals, but we are selective in order to be as consistent as possible across all holdings.

Portfolio level aggregate data

We also aggregate metrics to illustrate portfolio impact and produce an impact indicator to help clients understand the impact from their own investment.

We expect the contents of our impact reports to evolve over time in our constant bid to improve – after all, a willingness to experiment and change is key to progress. While we would be disappointed if we didn’t enhance our process over time, one thing that won’t change is our philosophy. Our team is passionate about our dual objectives and the role that our investment strategy has in helping drive positive change.

Annual ESG and Engagement Report

As an accompaniment to our annual Impact Report, we produce a ‘Positive Conversations’ document which focuses on the business practices (the ESG) of the holdings in the portfolio. It looks at environmental issues such the portfolio’s carbon footprint and biodiversity, social issues such as supply chain risk, digital disruption and AI and equitable access to medicines, and governance issues such as the value of an effective board. We provide an overview of all company engagement over the 12-month period demonstrating the types of ongoing conversations we have had with portfolio holdings and highlight where our engagement has resulted in a positive change. We also include an overview of all voting over the period.

Resources, Affiliations & Corporate Strategies

ESG resource

Baillie Gifford has a dedicated ESG resource of over 40 people. In conjunction with the investment teams, the ESG analysts are responsible for ESG research and engagement and coordinating the proxy voting process for all our clients’ holdings where we retain the voting rights. They are also 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.

All ESG analysts have knowledge, and a broad understanding, of global ESG matters including board composition and effectiveness, remuneration, labour practices, health and safety expectations, climate change, and other social and environmental challenges and opportunities.

When conducting our research, we have access to a range of external data providers including: BoardEx, CDP, Conflict Securities, MSCI, Sustainalytics and RepRisk to name a few. The advantage of these third-party providers is the breadth of their coverage and standardised approach. This allows for a quick understanding of areas of potential risk. However, this breadth can be to the detriment of complexity, nuance and context. They often don’t focus on the direction of travel or the ESG opportunities available to a company.

Conducting our own ESG research allows us to focus on the areas important to us. We are also able to leverage our in-house knowledge and relationships with companies and academic partners to supplement available data on ESG issues. In many cases, ESG issues have no clear right or wrong as issues evolve over time and best practice emerges from comparative approaches taken by different companies and sectors. We can use this insight to help other companies we invest in make better long-term decisions on material ESG matters.

ESG membership

We seek to set a positive example as an investor, as an employer and within our own communities. We aim to uphold and promote the highest standards of service and professional behaviours and to enhance the reputation of the investment industry. This also encompasses a responsibility to promote well-functioning financial markets. To support this, we are a member of several groups and industry bodies including:

• International Corporate Governance Network (ICGN)
• Carbon Disclosure Project (CDP)
• Asian Corporate Governance Association (ACGA)
• UN Global Compact (UNGC)
• Principles for Responsible Investment (PRI)
• UK Stewardship Code signatory
• Japan Stewardship Code signatory
• Investor Forum
• Council of Institutional Investors (CII)
• Institutional Investors Group on Climate Change (IIGCC)
• Global Impact Investing Network (GIIN)
• Investor Stewardship Group (US Stewardship Code, ISG US)
• Focusing Capital on the Long Term (FCLT) Global
• European Fund and Asset Management Association Stewardship Code (EFAMA)
• Global Institutional Governance Network (GIGN)
• Task Force on Climate-Related Financial Disclosures (TCFD)
• Farm Animal Investment Risk and Return (FAIRR)
• UK Centre for Greening Finance and Investment (CGFI)
• EM Investor Alliance (EMIA)
• Taskforce on Nature-Related Financial Disclosures (TNFD)
• Sustainability Accounting Standards Board (SASB)
• Net Zero Asset Managers initiative (NZAM)
• Climate Action 100+

ESG governance

The ESG Oversight Group is responsible for setting the firm’s strategic approach to ESG matters in relation to investment strategies and client activities and, along with the head of ESG, for overseeing the ESG function. It provides coordination for the firm’s approach to ESG and the multiple strands of ESG activity that take place. It aims to ensure that the rapidly evolving demands of ESG from an investment, client and regulatory perspective are met. It is chaired by the head of ESG and comprises senior representatives from the Investment Department, Clients Department and ESG function.

The ESG Oversight Group aims to:

• Coordinate and monitor progress towards the firm’s ESG strategy, working with the individual investment, client and operational teams.
• Empower and encourage investors to systematically consider ESG, as relevant for the investment strategy, throughout the investment process.
• Create and oversee ESG-related research groups and ESG professionals to ensure Baillie Gifford has sufficient specialist knowledge.
• Oversee the different components of the ESG function to ensure they continue to meet the requirements of investors, clients and regulators.
• Ensure accurate ESG reporting to clients.
• Oversee the ESG Assurance Group, ensuring that Baillie Gifford is equipped to meet its regulatory requirements and honour ESG commitments made by investment teams.
• Review and recommend any key ESG disclosures for approval or adoption by the Management Committee or any relevant Baillie Gifford entities. This includes the TCFD Climate Report, Our Stewardship Principles and Guidelines and the Investment Stewardship Activities Report.

This group reports into the Management Committee, and the Equity Leadership, Multi Asset and Income Leadership and Clients Management Groups – which include partners from investment, client facing and operational areas. These reporting lines help ensure that our research and stewardship activities are aligned with, and remain of value and relevance to, our clients.

ESG Assurance Group

The ESG Assurance Group is responsible for ensuring that the firm is equipped to meet its ESG-related regulatory requirements and that ESG commitments are being met. This group is comprised of individuals from our ESG function, Clients Department, Business Risk Department, Compliance Department and Legal Department. During 2023, we continued our integration of ESG into these and other operational areas. Evidence of this is the establishment of an ESG group within legal and compliance. This is an ongoing process, but important progress has been made during the year.

We have a dedicated ESG resource of over 40. In conjunction with the investment teams, the ESG resource is responsible for ESG research and engagement, coordinating and processing proxy voting. The ESG 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.

Literature

• Baillie Gifford Positive Change Fund
• Governance & Sustainability

Last amended: 04/01/24 12:45