Baillie Gifford is a British investment management firm with early-20th century roots and a 21st century penchant for high-growth stocks. Its Baillie Gifford Positive Change Equities Fund has been turning heads with eye-popping returns—including an 88% gain in 2020—by investing in growthy, innovative companies like electric vehicle maker Tesla and biotech firm Moderna, which developed one of the Covid-19 vaccines. The fund’s portfolio also includes leading-edge names such as Japan’s M3, creator of a central platform designed to advance global health care; Danish offshore wind power company Ørsted; and … John Deere?
Why Deere & Co, the venerable maker of iconic green farm tractors that traces its origins to 1837, fits into a fund focused on innovation and social impact speaks to the investment methodology of the seven-member team that runs the fund.
That team comprises five investment managers who parse financial metrics and two corporate governance analysts who evaluate the social impact attributes of each company. It’s an intricate research process that aims to create a portfolio filled with companies thought to have sustainable long-term growth prospects as well as positive impacts on people and the planet.
“If you’re investing for impact, you need to have that intent to deliver impact and to be out there trying to find the ideas,” says Kate Fox, an investment manager on the Positive Change Equities Fund and a partner at the Edinburgh, Scotland-based asset manager. “Then you have to report on impact, which is really difficult because we’re investing in companies that are delivering impact in different ways. And it’s difficult because you can’t always easily measure impact.”
Indeed, one of the criticisms of sustainable or impact or environmental, social and governance investing (or whatever moniker one chooses for so-called do-gooder investment approaches) is its lack of quantifiability. It speaks to the nature of trying to balance a company’s financial performance and its “impact” which, depending on the company, can be positive, negative or both.
“We look at impact holistically because there is no perfect company,” Fox explains.
Take the case of Alphabet, the parent company of Google and a holding in the Positive Change Equities Fund. Fox says the fund’s investment team believes Google is democratizing access to information through its search engine, as well as via its operating system that enables low-cost mobile devices.
“It’s a company we admire from a product impact perspective,” she notes. “But we look at its potential negatives, too. When we assessed the company, we recognized that they don’t pay their taxes, which could detract from the impact they could deliver.”
Baillie Gifford views paying taxes as a social contract among industry, government and society that helps provide financial resources to improve the commonweal. Google, along with some other Silicon Valley tech titans, are criticized for using loopholes and foreign tax havens to avoid paying their fair share of income taxes on their billions in profits.
Measuring Impact
The Positive Change Equities Fund includes companies that its investment team believe can deliver positive social change in one of four ways: through social inclusion and education; by serving environmental and resource needs; by aiding health care and quality of life; and by serving what it calls the “base of the pyramid,” in other words, the needs of the world’s poorest people.
To see how companies address these themes, the team uses a methodology where change is mapped out with outcomes shown in relation to each other chronologically. There is a chain of five components showing how the portfolio holdings are delivering.
The first part of the chain is inputs—the resources a company uses such as financial capital or human capital. The second is the company’s activities that use inputs to produce outputs. The third is the outputs themselves—the production or delivery of products or services to beneficiaries. The fourth part of the chain is outcomes—what are the short-term changes as a result of those activities and outputs? And the fifth is impacts—what are the expected system-level changes arising from the company’s activities and outputs?
Because impact-related criteria can vary depending on the company, the team picks one or two of the most relevant factors to a particular company’s business. And because firms can measure and report information differently, the team talks with companies to understand how they compiled their data.
As part of its analysis of impacts, the investment team factors in how each company’s products and services are contributing to one or more of the target areas in the United Nations’ Sustainable Development Goals. Each year, the fund managers crunch the numbers and report on the impacts the portfolio—both the individual holdings and the portfolio as a whole—is having on various target areas, whether it’s carbon emissions reduction or the improvement of health care or something else.
“We think reporting this is important because it holds us accountable to that objective, and because investors want to know what impact their capital is having,” Fox says. “What we’re doing at Positive Change is investing in companies whose innovations are providing solutions to global challenges.”
Long-Term Horizon
On the financial side, Fox says the team looks for 30 to 50 companies with significant long-term growth potential that the fund wants to own for the next five to 10 years.
“We like to invest in businesses with a great run rate for growth and a competitive advantage and have management teams we trust and admire,” she explains. “What my colleagues are doing on the impact side is looking to understand the link [with U.N. Sustainable Development Goals] between the product and the challenge. With Dexcom, it’s a very direct link. It’s different with Alphabet, where there’s an indirect link.”