How fair was it for protesters to single out Baillie Gifford for its approach to fossil fuels, and what does this tell us about the pensions industry’s relationship with carbon? John Lappin reports
Last August, Scottish asset manager Baillie Gifford found itself in the crosshairs of campaigners who seized on its support of literary festivals to demand complete divestment from fossil fuel holdings.
BG manages money for 14 of the world’s biggest funds including UK public and private sector pensions across both DB and DC. At the end of 2023, it had around £225bn under management in total.
Yet a small campaigning organisation, styled as representing workers in the literary industry, called Fossil Free Books began to put significant pressure on BG and the festivals it sponsored.
High-profile critics include Swedish climate campaigner Greta Thunberg, who pulled out of attending the Edinburgh book festival last year, accusing BG of greenwashing.
At least 800 authors more recently have signed a petition calling for full divestment by the firm. Eventually as the bad press built up, by this summer the upshot was that BG’s sponsorship of all book festivals ended (some by the firm, some by the festival or by joint agreement) including the Borders, Cambridge, Cheltenham, Edinburgh, Henley, Stratford and Wigtown events. Edinburgh’s festival saw the end of a 20-year affiliation.
US author, academic and appointed scourge of neo-liberal economics Naomi Klein accused the firm of being thin-skinned for pulling out of festivals (presumably instead of divesting). What got less attention, except in the specialist investment press, were the firm’s rebuttals and defences.
Perhaps most pertinent was its assertion that it had a much better record on climate change than the global index average.
For example, in response to Thunberg’s concerns, the firm asserted that “2 per cent of our clients’ money is invested in companies with more than 5 per cent of their revenue coming from some form of fossil fuel activities. This is a low threshold and while it includes some exposure to oil and gas companies, such as Petrobras, some have already moved most of their business away from fossil fuels, and many are helping to drive the transition to clean energy.”
It noted that firms with some exposure included Orsted, the Danish wind power giant that still has a small amount of fossil fuel exposure, Indian giant conglomerate Reliance Industries which has gas and refining holdings but also a net zero pledge of 2035 and Tesco, due to its petrol forecourts.
The firm used as a comparison the MSCI All Companies World Index (MSCI ACWD) which it noted was 11 per cent not 2 per cent.
BG was also defended by Jenny Niven, chief executive of Edinburgh International Book Festival, partially in terms of Baillie Giffords’ support for the energy transition, as she stressed the joint nature of the decision to cease the sponsorship.
Back in May 2024, while describing the situation as intolerable, she said: “We speak to all our supporters about these complex issues and continue to believe that Baillie Gifford is part of the solution in transitioning towards a more sustainable world and that the firm operates in line with our Ethical Fundraising policy.”
In something of a postscript, the campaigners offered the opinion that instead of pulling support from the book festivals including literacy programmes, they had wanted BG to pull out of fossil fuel holdings, seemingly prompting Klein’s ‘thin-skinned’ comment. That call for divestment still features on the home page of its website.
It may be significant that in one of its most recent statements accompanying the decision to pull out of festival sponsorship BG noted that simply divesting could put it in breach of its fiduciary duty to its investors.
Such challenges are not new for asset management and the pensions world.
The workplace pension sector is increasingly facing regulations requiring the creation of climate transition plans and the disclosure of carbon footprints. The past few years have seen campaigners such as Make My Money Matter seeking to encourage pension funds to act on deforestation and fossil fuel expansion. As well as encouraging investment into climate solutions it also proposes divestment as a last resort.
Part of MMMM’s approach is to raise awareness among members of where their pensions are invested which is certainly something for pension advisers and managers to be mindful of.
In short, even if the book festival sponsorship kerfuffle is ‘somebody else’s problem’ for now, it may not remain so for long, especially with regulators increasingly requiring disclosure.
For pensions specifically the requirements are as follows: trustees must on an annual basis and as far as they are able obtain the scope 1, scope 2 and scope 3* greenhouse gas emissions of the scheme’s assets; use the data obtained to calculate their selected absolute emissions metric and selected emissions intensity metric; and use the metrics they have calculated to identify and assess the climate-related risks and opportunities which are relevant to the scheme. Sceptics may point to the proviso in the regulations which adds ‘as far as they are able’.
The FCA has required asset management firms with more than £50bn to produce a TCFD report (named after the Taskforce on Climate-Related Financial Disclosures) since June 2023. As a result, we can see where Baillie Gifford sits based on a number of measures and it does present a strong case for being committed to the transition despite some fossil fuel holdings, although comparisons with peers remain a little difficult, as explained below.
So is this essentially a case of never the twain shall meet between campaigners and the sector?
Former analyst and author of the book New Fund Order, Jon (JB) Beckett says: “Three years of policy moderation and row-back, both governmental and industry, towards net zero has antagonised the environmental left on the lack of policy divestment from high emitter sectors. Rightly so.
“However, despite the volume rising I am less convinced this protest will spread into the wider pension populous in quite the way activists might hope. Protestors are not fiduciary, and they do not have to deal with the consequences of radical policy change. Asset managers are fiduciary. Despite this, there are little grounds for complacency. The reality is that allocation to fossil sectors has only marginally changed since COP26 and commitments made in Glasgow then resonate as awkwardly hollow today. It is on this basis that the industry is now being judged.
“The problem was that the industry, in having been found lacking on a clear transition plan, or at the very least been accused of a lack of honesty, has conflated transition and divestment. It has done this by overly favouring process over policy. By introspecting on ESG data, labels, greenwashing and the virtues and false promises of engagement.”
He also suggests a variation on comply or explain – divest or explain. “Only clear policy, reporting and a ‘divest or explain’ approach will sate the protests. Yet as long as protests and pension flows remain divergent then the industry is not suitably incentivised to change.
“The greatest observable change remains towards divesting active UK strategies in favour of sending money overseas into US index. Indexation itself does little to transition from fossils once you adjust for the skew arising from Footsie divestment. Indeed, the balance currently remains that to transition too rapidly poses the greatest commercial risk in an industry that remains affixed on peer performance comparisons not peer policy.”
Considering the practicalities, Syndaxi Financial Planning principal Robert Reid says: “You have to treat the public like grownups when providing information on this subject. “But there are extremes on both sides of the debate who can selectively quote from the disclosures to support climate denial or ultra hard-line positions on divesting holdings.
“It is difficult to see any way in which that can be fully resolved whether when informing members about schemes or individuals about their financial plans.”
He adds that there remains a huge emphasis on keeping costs down from regulators, but researching climate and sustainability disclosures add to the burden on intermediaries amid a huge range of developing costs. Clients may also fear higher costs and less return from more specialist strategies.
The Financial Inclusion Centre’s director Mick McAteer, who campaigns for tougher more effective regulation around sustainability and the transition says that common data is key. Firms need to be disclosing data on an agreed set of measures including the carbon intensity of portfolios which should be centrally collected and publicly available.
He does not want to comment on the specifics of any campaign but says that agreed data might go some way to better inform the public and activists. If the sector or a firm believes it has a case to make for how it is supporting the transition, it would also make that easier to make.
Otherwise, there is a great deal of confusion which will see the sector likely facing more challenges. One particular concern is the FCA’s fund label of Sustainability Improver which he says cannot work unless there is agreement on the data as the basis for where funds start off and where they are going as they seek to ‘improve’.
Others may believe the twain can meet. Chief strategy officer at Cognito Media Charles Ansdell takes a reasonably optimistic view around education: “Fund firms would be forgiven for thinking that they’re damned if they do and damned if they don’t.
“People expect companies to take a stance on a wide variety of issues, which puts them in the crosshairs of culture warriors with opposing views. This has an asymmetric risk-reward profile for companies – 24 per cent* of consumers will buy from a company whose stance they agree with, but 48 per cent will boycott a company they disagree with”.
“The simple reality is that today it’s near impossible for a fund firm to have zero exposure to oil and gas – either through their investments or their investments’ supply chains/customers.
“The challenge is one of education. Once the public – and particularly action groups – understand the critical role that fund firms play in getting capital to climate projects, they may start to see them as ally not foe.”
BOX: Carbon in numbers
In its entity-level TCFD report – there are separate reports for specific retail funds – Baillie Gifford says that the proportion of total assets managed to specifically achieve net zero rose from 20 to around 25 per cent over the course of 2023, something done at the behest of clients.
In terms of its carbon footprint, it shows that Scope 1 and 2 emissions (tonnes per CO2 equivalent) per $m invested were 28 versus 54 for the MSCI All Companies World Index.
For Scope 1, 2 and material Scope 3 emissions (tCO2e) per $m invested it is 127 versus 330 for MSCI ACWI and for Scope 1,2 and 3 emissions (tCO2e) per $m invested it is 188 versus 395.
For the Weighted Average Carbon Intensity (WACI) Scope 1 and 2 emissions (tCO2e) per $m revenue, BG was 63 versus 123 for the MSCI ACWI.
Scope 1, 2 and material Scope 3 emissions (tCO2e) per $m revenue was 315 versus 617 for the MSCI ACWI.
Scope 1 ,2 and 3 emissions (tCO2e) per $m revenue were 543 versus 825.
Important distinctions can be divined from this plethora of data. For example, a footnote explains the inclusion of the word ‘material’ for one measurement. It says: “We define material Scope 3 emissions in line with the recommendations of the Partnership for Carbon Accounting Financials (PCAF). In the 2022 reporting year this covered the oil and gas and mining sectors, however for the 2023 reporting year it also includes the transportation, construction, buildings, materials and industrial activities sectors, per PCAF guidance. Material scope 3 emissions are therefore very likely to be higher for the 2023 reporting year vs. the 2022 reporting year.”
Among other academics, the firm is working with Dr Matthew Brander at the University of Edinburgh to develop a new ‘avoided emissions’ methodology. It is working with, among others, Dr Dimitri Zenghelis (ex-head of the Stern Review team at the Office of Climate Change and now at the Bennett Institute at the University of Cambridge) on climate scenarios.
It has five climate specialists in its 40 strong ESG team. It runs an annual Climate Audit assessment of at least 90 per cent of its holdings (on an Assets Under Management (AUM) basis) including its 250 largest holdings. It has begun carrying out several portfolio biodiversity audits.
In 2023, it discussed climate change 217 times with investee companies as part of its ESG engagement activities with a common feature the encouragement of greater levels of ambition from holdings in navigating the climate transition.
Amid these interesting assertions, we thought we would look at some other TCFDs for 2023, to see where BG sits.
Taking WACI, we looked at Fidelity’s entity level TCFD. It’s WACI for equities (showed 73 and for fixed income 24.9 but this was only scope 1 and 2.
M&G including many Prudential entities showed a WACI scope 1 and 2 of 158 and separately pulled out Scope 3 at 947.
It also showed Scope 1, 2 and material Scope 3 emissions (tCO2e) per $m revenue of 960.8.
Examining Nest’s TCFD, we find that it uses the carbon footprint based on the enterprise value including cash (EVIC) but doesn’t use the WACI for now despite some of its outsourced managers preferring and only supplying it in these terms.
However, even a casual observation shows that pension funds and asset managers are dividing things slightly differently, though with progress registering within firms on most of the measures where 2023 and 2024 measures were to hand.
All including BG admitted the calculations did not cover some stocks though the former was very thorough in explaining why.
