Partnering with academia: collaborations that count

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Responsible investing presents many complex, long-term challenges.

For example, how can the world feed the next two billion people without intensively farming the nutrients out of the soil? How can we reconcile artificial intelligence’s power with its potential to perpetuate biases in society? And what steps are appropriate for companies to take to preserve shareholder value when facing disputes with unions?

We wrestle with questions like these when deciding which stocks to buy and how much weight to give them in our portfolios. To develop conviction, we sometimes turn to external experts who deepen our understanding of a topic, make us aware of emerging trends and, crucially, help us anticipate real-world outcomes.

Ultimately, this helps us deliver strong returns for our clients while also being responsible shareholders on their behalf. This paper explores three academic relationships that have informed our thinking as we grapple with the thorny questions above.

Climate-positive farming 

The 18th-century geologist James Hutton was arguably the world’s first climate scientist. He inferred that the Earth was immensely old and constantly changing by studying Edinburgh’s Salisbury Crags, a jagged rocky formation created by the now-extinct volcano Arthur’s Seat. Today, a research institute founded in his name employs more than 500 scientists and support staff in Scotland.

Prof Alison Hester holds the Baillie Gifford entrepreneurial research fellowship at the James Hutton Institute (JHI)’s Glensaugh site. The 1,000-hectare research farm near Aberdeen explores transformative approaches to upland agriculture and seeks to prove that farms can sequester more carbon than they emit while remaining economically viable.

JHI’s work is pragmatic by nature. It is not focused on ‘rewilding’ vast swathes of land but on working with communities to improve land management. Often this can involve formalising techniques and ideas that emerged from the farming community – lifelong land workers who have always sought to sustainably feed a growing population.

We’re particularly excited by what we will learn from its HydroGlen demonstration site. It aims to start producing hydrogen when construction is complete, which JHI anticipates will be in late 2025.

The project could demonstrate how farms might move away from fossil-fuel dependence and operate on clean, green energy, almost entirely off-grid. Researchers will use a small wind turbine and a solar panel roof to power electrolysers that separate hydrogen and oxygen to produce zero-emission fuel. In addition to heating and lighting the farm’s buildings, this will power fuel-cell cars, vans and tractors. 

We expect this to inform our views on Kubota and Deere, two makers of agricultural vehicles and other machinery, among other holdings. The latter is currently developing a hydrogen-powered tractor of its own.

More obliquely, we also gain insights on the deployment of artificial intelligence, for example to selectively recognise weeds and spray pesticides. Deere already offers this via its See & Spray technology. This is relevant for some other Baillie Gifford holdings, including NVIDIA, Alphabet and Cognex.

The ethics of AI

It’s telling that one of the most infamous examples of AI bias in corporate history involved one of the technology’s leading practitioners, demonstrating how even the experts can be caught out. In 2014, a team of Edinburgh-based engineers working at Amazon began work on a tool to vet job applicants’ CVs automatically. The effort was scrapped within a year.

Tests revealed their algorithm had learned to screen out women regardless of their skill set. This was a result of the engineers using resumes of Amazon’s male-skewed senior management team as training data. The problem occurred even when gender was removed from the applications because the software looked for other related signals, including sports the applicants played or simply the language they used.

Amazon may have spotted the problem early on, but other companies won’t always be so fortunate. And they will face reputational risks because of artificial intelligence’s ‘black box’ problem – you can test an AI tool by examining its outputs, but it’s often impossible to know how it arrived at them.

Bias isn’t the only ethical issue raised by AI. Concerns also exist about the threat it poses to jobs and how its energy demands contribute to climate change.

Two relationships are helping us begin to understand the complex ramifications of this nascent technology: a partnership with the Leverhulme Centre for the Future of Intelligence at the University of Cambridge and, closer to home, the Edinburgh Futures Institute at the University of Edinburgh, where we sponsor the Chair in the Ethics of Data and Artificial Intelligence held by Prof Shannon Vallor.

We believe that AI can be part of the solution, not just the problem. For instance, new technologies have previously created more jobs than they displaced. About 60 per cent of today’s workers have occupations that didn’t exist before 1940. Issues surrounding energy usage can be mitigated by using renewables rather than fossil fuels. Indeed, AI could unlock previously unattainable sources of energy like nuclear fusion.

There’s also reason to believe biases in AI’s training data may become less problematic as inputs become multimodal, moving from just scrapes of the text sourced from the internet to images and sounds captured from the real world.

While the corporate world remains focused on using AI to make efficiency gains, Prof Vallor has urged us to question companies about their guardrails and policies on the ethics of AI.

We’re beginning engagement efforts with companies on this topic. We have already seen shareholder proposals filed at Apple, Amazon, Meta and Alphabet seeking enhanced policies on AI ethics. So far, we have supported initiatives that build on companies’ existing policies and processes. However, we expect the topic to become more complex and require more thought. Companies may choose not to experiment with AI and avoid these risks entirely, but in our view, that would be like ignoring the internet in the 1990s.

Rights-conscious investing

Prof Jack Donnelly, a leading human rights theorist, advised Baillie Gifford on how his specialist topic applies to investing. We drew on his advice to draw up seven practical principles that serve as a useful resource for our investment teams. (You can read them in full at the foot of this linked article).

Although our partnership with the University of Denver academic ended in early 2023, his framework for rights-conscious investing continues to shape our thinking.

For example, our Sustainable Growth Strategy has developed a set of ‘red flags’ and engagement recommendations on the topic of unionisation. These referenced Prof Donnelly’s work, in addition to conversations the strategy’s analysts had with former members of the Organisation for Economic Co-operation and Development (OECD)’s Trade Union Advisory Committee, among other experts.

Examples of red flags that would act as warning signs include a company closing multiple unionised work sites or apparently discriminating against unionised workers by firing a greater proportion of them than other workers.

Engagement could be helpful here. However, numerous complaints of unfair labour practices being upheld and evidence of widespread poor treatment of employees would suggest the holding is not suitable for the strategy and prompt a formal review.

These indicators proved useful to the strategy when Starbucks faced complaints it had violated US labour laws by dismissing staff and closing coffee shops after workers announced their intention to unionise.

Starbucks has long prided itself on treating its staff well. But strikes by some of its baristas over the matter highlighted the reputational risk it was taking.

A meeting with Starbucks’ chairwoman, Mellody Hobson, reassured Sustainable Growth that the firm’s executive team had learned lessons. And the strategy took note of a change in tack, as Starbucks began negotiating with the unions over pay, staffing levels and other matters. This indicated that while red flags had been raised, the management response had averted the need for a formal review of the holding’s suitability for the strategy.

The strategy subsequently supported a shareholder resolution requesting an independent assessment of worker collective bargaining rights. The resulting report revealed further learning points, which the firm’s management says it has since acted on.

Starbucks isn’t alone in clashing with unions. Tesla, Amazon and The New York Times are among other Baillie Gifford holdings to have been involved in disputes in recent years. Each case is complex, sensitive and has its own unique characteristics. But Sustainable Growth’s approach illustrates how we have drawn on external expertise to thoughtfully and methodically consider such cases. This helps us live up to our responsibilities as shareholders to encourage responsible behaviour and hold management accountable on behalf of our clients.

Conclusion

The examples of our academic partnerships detailed above are complemented by others, including:

• Prof Johan Schot and his team at the Deep Transitions Project, based at Sussex and Utrecht universities, have helped our Climate Team develop narrative scenarios about possible climate change futures. We are using these to identify potential risks and opportunities for our portfolio companies. This will inform investments and conversations with clients and regulators. The project has also supported the Positive Change Team’s approach to investing in companies that are challenging the status quo with products and services that contribute towards a more inclusive, sustainable and healthy world. This involves exploring different future scenarios that illustrate the transformations needed to combat the great challenges of our time. 
• Prof Mike Berners-Lee, a fellow at Lancaster University’s Institute for Social Futures, has advised us on carbon footprinting. He has estimated the emissions that some of our individual holdings indirectly generate via their supply chains, customers’ use of their products and other means. This informs our engagements with the specific companies involved.

By its nature, long-term research is experimental. Some of these initiatives won’t deliver the hoped-for societal benefits, and we won’t glean equal insight from each partnership.

There is a parallel here with our equity investments. Just as we know a few stocks will dramatically outperform others, some academic relationships will also prove to be disproportionately more valuable – both in terms of the insights they give us and in accelerating the pace of research, with all the societal benefits that follow.

For those that don’t work out, we can still take satisfaction in supporting a worthy cause at a time when traditional funding sources for academia are constrained. 

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 July 2024 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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