“ESG is an area where we all need to be roughly right rather than precisely wrong,” says Charles Plowden in the final weeks of his near four-decade career – all spent at Baillie Gifford, the last 15 years as joint senior partner. As the conversation progresses, it becomes apparent it is also an area the pioneer of the firm’s Global Alpha strategy and manager of Monks investment trust views as unfinished business.
“I have become a passionate advocate on ESG because I really do believe investment has a higher purpose than simply trading second-hand bits of paper,” he says. “It is perhaps the one thing that makes me regret I am retiring now because I like to think I could help to make a difference – certainly, as investors, we are in a position to accelerate the sort of change that is needed if, in 100 years’ time, the planet is going to be liveable in.
“So, as long as we are progressing, it is probably a good thing and there is a real sense of mission now – certainly at Baillie Gifford, but across the industry too. Yes, it can be quite hard to know how much of that wider enthusiasm is genuine and how much is ‘greenwashing’ but the regulators – particularly in Europe – are increasingly getting behind this.
“As a result, questions such as whether you believe in global warming, whether you believe it is addressable, whether you want to tie yourself to it – those are no longer going to be optional issues but compulsory for asset managers. If you want to stay in business and keep your clients, you are going to have to be investing broadly in line with the Paris Agreement and the targets that set – and we are seeing this happen really quickly.”
Growing pains
Plowden describes ESG as “still a bit of a jungle”, however, on account of the proliferation of competing definitions and categorisations. “The ESG definition industry is certainly suffering from growing pains and the existence of so many different bodies,” he continues. “I do think investors will quite quickly coalesce around some generally accepted standards, though – similar to how we have over performance and costs and so on.”
Another area in need of attention is the quality and comparability of ESG data provided by businesses. “Company data is still pretty poor, which can make it easy to pick holes in a lot of investment methodology,” Plowden points out. “As an example, our Positive Change strategy did not do well on some ESG scorecards because it was designed in a thoughtful way to actually make a difference and not merely to tick boxes.
“Frankly, we had believed we were well ahead of the industry as we were more thoughtful and already offered some appropriate strategies with decent multi-year track records. In reality, though, we found we had not been moving fast enough and others in the industry were being quicker to build their taxonomy, arrive at descriptions and build their brand stamps.”
Plowden accepts that, while Baillie Gifford’s strong US client base may have helped the firm to refocus its investment approach at the turn of the millennium and so be ahead of the curve on active management, it may have been less of an advantage with ESG. “It may be our antennae were not sufficiently attuned because we do not have huge numbers of clients in Europe and it is Europe that is really leading the charge,” he says.
“The Americans are not so interested yet – although that is changing – so it is possible we were listening to the wrong group of clients. Either way, there is now a high level of urgency internally to get all our funds in line and a lot of hard work and thinking going on just to ensure we can call our sustainable funds ‘sustainable’. We believe they already are sustainable, of course, but do they quite fit with all the box-tickers?”
Awkward question
Some professional investors can be reluctant to address the awkward question that, in any other context, would automatically be raised as soon as a huge wave of money was spotted flowing, often uncritically, towards one type of investment. Is Plowden inclined to offer a view? “Truthfully, I do not know if we are looking at a surplus of capital or a shortage,” he replies. “Even a question as simple as that is hard to answer right now.
“I cannot work out if there is so much money chasing what is effectively a commodity market that returns will be driven down or if we just have not grasped the scale of the problem. The world is spending about $500bn a year on renewable infrastructure and the energy transition but, by some estimates, we need to be spending up to $2.5 trillion or $3 trillion a year – so, arguably, we are seeing only about a fifth of the annual spend needed.
“At the moment, it is fair to say there is a lot of money chasing too few projects that have gained planning consents, which has implications for returns. Still, once governments realise this is no longer optional and it is more important to save the health of the planet than it is to save a particular seagull or whatever the objection may be, then supply will increase and there will be more opportunities for investors.”
Investors are hardly piling into windfarms yet but, muses Plowden, perhaps that is what is needed. “We need a flood of ‘unthinking’ money simply so renewables move from 10% of electricity, say, to 80% or 90%,” he adds. “In fact, maybe renewables need to get to 150% of our energy needs. One thing I would say is, like so many technologies, the more we scale up and the more companies that get involved, the bigger the advances will be.
“Prices have been coming down so rapidly for wind and solar – but particularly for solar, and also for batteries – that, if the next 10 years is like the last 10, there could be another 80% to 90% price decline in the cost of the equipment required for renewable energy and, at that point, the problem is very largely solved. It could be the power of capital will achieve results much faster than anyone is expecting.
“Until about 10 years ago, the ingenuity of mankind and the application of technology were not focused on the challenge of finding a replacement for fossil fuels but I have this optimism – maybe naïve – that they are now. Availability of capital is one thing but it is technological ingenuity that is ESG’s number-one priority – and number-one opportunity. I am very confident this will come up with solutions – and economic ones too.”
This interview first appeared in Portfolio Adviser‘s sister publication ESG Clarity’s digital magazine
