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Most managers are ‘extremely economical with the truth’ on ESG, says Baillie Gifford’s Mathison

15 September 2023

Most funds claim to have integrated some form of ESG mandate but few are doing it authentically, the SAINTS manager argues.

By Tom Aylott,

Reporter, Trustnet

Most fund managers claim to use some kind of environmental, social and governance (ESG) screenings in their investment process, but few are doing it properly, according to Scottish American Investment Company (SAINTS) deputy manager Ross Mathison.

Asset managers have scrambled to adopt sustainable mandates in recent years as ESG themes became more popular with investors, but Mathison said many groups still lack the long-term thinking to pull it off properly.

“Whenever you sit in front of any fund managers now they will tell you, ‘ESG is really important to me. ESG has always been really important to me – it's integrated,’ he explained.

“I would say most are being extremely economical with the truth. I would argue that unless you're a truly long-term investor, it is really difficult to do this authentically because you just lack the incentives to do it right.”

Mathison – who became deputy manager of the trust in August after nearly four years at the firm – said ESG risks don’t impact companies in the short term but can have a damaging impact on their long-term profitability.

That is why most funds can easily hold unsustainable companies on a short time horizon, because they are unlikely to be impacted over that brief holding period.

Indeed, Simon Holman, partner at Castlefield – a firm dedicated to ethical financial planning – said he has seen a growing number of non-sustainable funds stating to be ESG.

“As ESG investing has grown, it’s been accompanied by a proliferation of new and existing funds claiming to incorporate ESG considerations in their process – and by a growing incidence of greenwashing,” he said.

“Some try overtly to align to sustainable development goals but are often really only ‘seriously dodgy greenwashing’.”

SAINTS is not an ESG fund, but Mathison said he will not hold an unsustainable company because its misalignment with the direction of travel towards net zero is probably going to be harmful to returns over the long term.

“It's not about imposing my ethical beliefs on the strategy because I believe that if a company is systematically mistreating one of its wider stakeholders, that gets in the way of long-term durable compounding,” he added.

“If you own a company for one or two years as most in the market do, it's unlikely to get in the way of what you're trying to do, but we're in companies for 10 years plus, so that will come to light over our holding period. That’s why we need to take this really seriously.”

Baillie Gifford was hit with its own accusations of greenwashing in August by climate activist Greta Thunberg, who cancelled her appearance at the Edinburgh International Book Festival due to the firm’s sponsorship of the event.

She took issue with the group’s investment in oil companies, but Baillie Gifford partner Nick Thomas said only 2% of its holdings are in fossil fuels compared to the 11% average of the market.

Mathison said the firm’s exclusion of these companies isn’t due to any ethical reasoning, but a financial one – companies not committed to the energy transition have limited long-term growth prospects.

He added that the case for investing sustainably is so strong that even a climate denier would want to invest in ESG because of its potential for long-term capital growth.

“Even if you don't believe that climate change is real, I would still argue that this is additive to the financial outcomes,” Mathison said.

This was backed up by Joe Krancki, investment director at Gresham House Ventures, who said investors don’t need to have any personal views on ESG – investing sustainably is just sensible.

“ESG is nothing special,” he said. “It encapsulates a set of factors that could create or damage future value. Evaluating those value drivers is simply what good investors do. ESG should therefore be a core consideration in every investment decision.”

There is a misconception that companies spending money to improve their sustainability is counterproductive, according to Krancki, but he said it creates far greater cost reduction and efficiency over the long term.

Businesses can skirt around ESG spending in the near term but they will ultimately be hit with much higher costs down the line.

Krancki said: “Investors sometimes worry that investment in ESG runs counter to the imperative for organisations to reduce cost and improve efficiency in response to current market volatility and uncertainty. But the two agendas do not have to be contradictory. ESG is often margin-accretive, particularly over longer-term periods.”

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