Baillie Gifford: zero fossil fuel exposure ‘not realistic’

Baillie Gifford HQ in Edinburgh

Edinburgh investment giant Baillie Gifford has argued that “zero fossil fuel exposure today is not realistic” in a paper called “A response to fossil fuel concerns raised at Edinburgh’s Book Festival.”

The fund management firm said that, adjusted to account for the varied sources of revenues of the companies in which it it invests, its exposure to fossil fuels would be less than 1% of its investments.

It said total divestment would actually hamper energy transition.

Baillie Gifford has about £226 billion under management and advice.

In August, Baillie Gifford hit back against climate activist Greta Thunberg, who pulled out of the Edinburgh International Book Festival alleging that Baillie Gifford, a sponsor of the event, invests “heavily in the fossil fuel industry.”

And a group of authors has called on the Edinburgh International Book festival to cut ties with Baillie Gifford, with some writers threatening to boycott the event.

Baillie Gifford partner Scott Nisbet said that a “just transition” to net zero “will take years of human ingenuity, and simply eliminating fossil fuels today is not just or practical.”

He said imagining a future powered by renewable energy, however, is realistic and offers opportunities for its clients.

“This means that we have been early to invest in companies that can help with the carbon transition, as we think they have a good chance to grow strongly over the long run, disrupting incumbents and making good returns for our clients,” said Nisbet.

“Many don’t work out, but we are prepared to accept numerous spirited failures since the few that turn into big winners make all the difference.

“So, we don’t ‘profit from climate change’, our clients, which include individuals, pension funds and endowments, profit from companies that address climate change.”

In the paper, Nisbet wrote: “We have declared that 2 per cent of our investments is in companies that have some sort of fossil fuel connection. This deserves explanation as it is not quite what it seems.

“Our fossil fuel exposure has trended down over time, and the 2 per cent of our investments nowadays is a very low number in most asset managers’ books.

“It is far lower than the oil, gas and coal exposure that index-tracking funds (passive funds) would have naturally – this would typically be more than 10 per cent of their investments.

“But even the 2 per cent gives an exaggerated picture of our actual exposure since it includes companies that have as little as one-twentieth of their current revenues coming from fossil fuels.

“Some of these companies might surprise you. Who would have thought that the supermarket chain Tesco is classified as a fossil fuel company?

“It’s included because of its petrol stations. It seems unreasonable to either boycott or sell shares in Morrisons, Tesco, Asda and Sainsbury’s for this reason.

“Adjusted to account for the varied sources of revenues in these companies, our exposure to fossil fuels would be less than 1 per cent of our investments. This is de minimis.

“But it is not zero. Zero fossil fuel exposure today is not realistic. Fossil fuels still make up around 80 per cent of global energy use.

“It may also not be aligned with the principles of a ‘just transition’ and ‘differentiated responsibilities’ (the principle that countries at different stages of development should have different targets) that lie at the heart of the Paris Agreement.

“Total divestment would also actually hamper the energy transition we are all looking for. Take one of the companies in our declared 2 per cent: Ørsted.

“Ørsted is a Danish wind energy company, at least it is nowadays. Over a number of years, Ørsted has transitioned its business from legacy fossil fuel assets to alternative energy.

“We have encouraged it on this path as long-term shareholders, and now most of its revenue comes from wind power.

“Legacy fossil fuels is now less than 30 per cent of revenue, with a clear plan to continue to zero. But because of this, the whole of our Ørsted holding counts as fossil fuel exposure.

“Does it make any sense to exclude such a company from our investments? Or is it far more impactful to support its direction of travel?

“The easy option would be to sell shares in all firms that don’t meet strict carbon emissions criteria. But if we sold our shares, they would be bought by someone else.

“That owner may not engage with the company on climate risks or ethical operations. So, it’s far more impactful to be active shareholders to influence a company’s direction of travel. Engagement trumps divestment, and the latter should be viewed as a last resort.

“Three further points on these investments. First, we’ve been transparent in disclosing the small number of companies with fossil fuel exposure and have been rather harsh on ourselves in calculating it (as outlined above).

“Not everyone is so open. The reaction we have had to our bona fide transparency will not encourage other financial service companies to mirror it. This will be unhelpful to the climate cause.

“Second, we are asking the companies we invest in to show how they will either chart a path towards net zero over the next couple of decades or manage their transition.

“And third, we already accommodate and respect clients who have taken the decision that it is right for them to exclude fossil fuel exposure. This has certainly been an increasing trend over the last 10 years.”