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Twenty-five per cent of the money Baillie Gifford invests is now entrusted to us by clients who wish us to manage it in a way that explicitly supports the delivery of global net zero greenhouse gas emissions by 2050. This proportion has risen a quarter, from 20 per cent, over the last year. It represents a growing partnership with clients who have asked us to deliver both long-term investment returns and a genuine contribution to the chances of a successful climate outcome.
Given today’s challenges in delivering rapid decarbonisation, living up to our clients’ wishes poses real complexity. Quick and easy fixes won’t work. Open conversations and adjustments will be required as the transition unfolds. But our determination to try is grounded in a belief that a successful transition that keeps increases in global temperatures to below 2C, and ideally to 1.5C this century, offers our clients a better opportunity for strong long-term investment returns than a failed transition, as described in our Statement of climate-related intent and ambition.
We take to the challenge knowing that the world’s path to climate success is not pre-set. We don’t know how society, technology, and the climate will evolve and combine to create the necessary solutions. But, as active investors of generally concentrated equity portfolios, we aim to bring fundamental, bottom-up analysis to bear on the companies we invest in and the uncertainties ahead.
Investing in innovation
The sheer scale of the innovation and change underway makes the climate transition a material investment factor across the funds we manage for all clients.
Combining new energy technologies with the global climate response creates huge shifts in capital and investment. We want to understand how companies are preparing and managing the associated risks. We want to find those that are creating new competitive advantages. Such opportunities will be obvious for some companies, but for others, those emergent but impactful products, supply chains, or customer relationships will take deeper research and engagement. We want to find such opportunities to deliver great long-term investment returns.
Among those seeking to create new products to lead global decarbonisation, our portfolios include companies such as Tesla and NIO (electric vehicles), CATL and Northvolt (batteries), SolarEdge and Vestas (solar and wind), Ginkgo (synthetic biology) and many more. We also hold decarbonisation evolvers. These are companies finding new investment opportunities and new customers by aligning their businesses with the transition. Our portfolios feature leaders as diverse as CRH and Cemex (cement), Ryanair (airlines), Analog Devices (smart electrification), Microsoft (low-carbon computing), Netflix (positive programming), BioNTech (vaccines) and more.
We have an expanding range of funds with clear commitments for the growing proportion of clients who wish us to work in a way that explicitly reinforces the drive for a successful climate outcome. Right now, these sit across eight fund families, including full mainstream strategies (LTGG1, our Europe and UK portfolios and the Managed Fund), sub-variants (Global Alpha Choice, Global Alpha Paris-Aligned and Responsible Global Equity Income) and our sustainable and impact strategies (Sustainable Growth and Positive Change).
Beyond the awareness of transition materiality that we provide for all the assets we manage, these net zero committed funds work consciously to support climate leadership across their portfolios. The funds’ investment beliefs expect financial advantage to accrue to well-prepared companies who can create positive climate impact. They encourage company management to set ambitious strategies to manage their emissions and look for those enabling the creation and adoption of climate solutions. When the funds prioritise their engagement, they take a whole-of-society approach to potential climate impact: timely success will need all companies, almost regardless of sector, to bring their most material contributions.
In pursuing these fund goals, we know that the proof points for net zero committed funds are difficult to express. The benchmark is the aspiration of the Paris Agreement: to try to halve global emissions by 2030 and reach net zero by 2050. But underneath that simple headline lies the complexity of many different regions, industries and companies all having slightly different abilities to deliver – and changing opportunities to do so as technologies evolve and policies fluctuate.
1. Our NZAM commitments do not apply to the Baillie Gifford US Mutual Funds, including The Baillie Gifford Long Term Global Growth Fund.
Moving slowly is still moving
Right now, in the autumn of 2023, that headline 2030 emissions goal looks very hard. Society has many of the tools it needs. Still, the pace of deployment is very challenging without clear policies to level the playing field against carbon emissions that are still mostly unpriced. But being off the aspirational track is not the same as ultimately failing. Indeed, failing to recognise that there are many potential ways to reach the overarching goal of successfully holding down the temperature is itself a threat to success. Real-world net zero alignments, at the company- and the portfolio level, will come in many different forms.
We wrote about one such example earlier this year. The work of Professor Doyne Farmer and his team at Oxford on the tremendous cost reductions achieved – and likely to be continued – by renewable energy technologies suggests that deployment will continue to accelerate exponentially. Viewed on a decadal basis, the growth and cost reductions are extraordinary. Solar and wind generation was negligible in 2011, but five years later, they accounted for 5 per cent of global electricity supply. By 2022, they reached 12 per cent. Looking forward, 30 per cent seems eminently achievable for 2030. On the demand side, electric vehicles have gone from novelty in 2014 to 3 per cent of global sales in 2019, to 15 per cent in 2022 and are highly likely to beat 25 per cent before 2025. When considering global energy needs, the joint impact of these supply-side and demand-side revolutions compounds: solar and wind lose little energy in generation, and electric vehicles waste no energy in combustion. Together, their innovation is delivering a massive improvement in overall efficiency: we are doing a lot more with a lot less.
This success story does, however, carry implications for the aspirational emissions pathway. Just as the deployment of these technologies into the world is non-linear, their emissions impact will be non-linear. It takes time for individual sales to translate to entire fleets. It may well be that emissions do not fall as fast as we’d like this decade, but they may collapse exponentially in the 2030s as the rapid deployments reach system-level scale.
The lesson here is not to abandon the idea of ultimate alignment too soon. And not to be too quick to judge what alignment looks like.
Where do these realities of technology deployment and policy support leave the net zero-committed investor? At this point in the transition, we think the aim is best served by:
- Focusing on the most material impact that each portfolio company can have. Explore how that might play out and how we can best support this.
- Being aware that influence and advantage can come from almost any area of the economy. This is a whole-society transition, so behaviours and expectations can be climate solutions as much as solar panels and batteries. Talk to as many companies as possible.
- Recognising that different sectors and regions will move at different speeds. As the technology and policy options change, so will the capacity to align: a sector that looks doomed today might find its solutions tomorrow. Don’t allow your views to get static in a changing world.
- Using scenarios in narrative form to help understand the dynamic and potentially dramatic nature of the transition. Explore the plausible outliers across technology, policy and the climate. Think about the signposts to different pathways and consider the likely volatility ahead.
All of this speaks to staying alert to the transition landscape, staying engaged with companies, and being willing to manage portfolios that might not progress towards overall alignment in a straight line.
The case for climate leaders
Our net zero committed portfolios are constructed on the premise that portfolio alignment will be the sum of underlying company alignment. We’ve set targets for the proportion of aligned companies to be held by 2030 and 2040 (at least 75 per cent for the former, 100 per cent for the latter). We think this gives us a decent period to engage and support while setting a clear deadline beyond which we can’t see how there could be space to hold climate laggards.
Given the complexity of absolutely defining the term ‘aligned’, we track progress through the twin lens of overall strategic positioning (most simply: what kind of company is this relative to the transition) and the ambition of strategy and targets relative to appropriate +1.5C emissions pathways (with those furthest ahead designated ‘leaders’). The graphic below illustrates the current positioning of the largest 50 holdings across Baillie Gifford as a whole (together accounting for around 50 per cent of our total assets under management). We expect each axis’ definitions and proof points to get steadily clearer and more explicit over time.
We began evaluating companies on this basis in 2021 and reached effective firmwide coverage across the first half of 2022. Taking June 2022 as a base date, all but one of our net zero committed fund families have seen the proportion invested in climate ‘leaders’ increase.
Looking within portfolios at the progress of the individual companies held is perhaps most telling. Taking our Long Term Global Growth strategy as an example: within a portfolio that aims to own 35–40 stocks at any one time, 32 companies have been held consistently since December 2021. Of these, eight have improved their alignment ranking, while one has slightly regressed.
For LTGG, this positive trajectory at the bottom-up, company level reinforces the philosophical belief that climate alignment forms part of enduring competitive advantage (and thus the potential for strong financial returns). However, the trend need not be so clearly linear at the top-down portfolio level. Indeed, three of our net zero funds have seen the proportion of ‘leaders’ dip slightly in recent months. And one has added weight to our ‘laggards’ category (the weakest of our three assessment groups).
Transition-positioning of Baillie Gifford's largest 50 holdings
More information on our approach to net zero portfolio target setting can be found in our firmwide Taskforce on Climate-related Financial Disclosures (TCFD) document, or on the fund pages of our website at bailliegifford.com.
Volatility is expected
As active, engaging managers, we are happy with some volatility in the apparent progress of portfolio alignment. In fact, at this stage of the transition, we would almost encourage it. Our research process should screen out those companies that we think are fundamentally unable to make the transition to the benefit of shareholders. If we are bringing in laggards, it is because we believe they can align, that we can support them to do so and that they will generate attractive returns along the way.
Moving too quickly to own only today's `leaders' may, like decarbonising portfolios through simple metric-based divestment screens, result in a portfolio divorced from the real world and one unable to contribute through positive engagement.
Combining long-term financial returns with actions that aim to maximise the chances of a successful global transition demands that we continually seek out and stay open to the potential for aligned change. We believe these are the real-world impacts sought by our net zero committed clients. Again, there are no simple fixes, but rather we need to be open to discussion. We maintain our belief that a successful transition that keeps increases in global temperatures to below 2C, and ideally to 1.5C offers our clients a better opportunity for strong long-term investment returns.
Risk factors
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 2023 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this communication are for illustrative purposes only.
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