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Will Baillie Gifford follow through on its ethical enforcement?

Last Friday, fund management group Baillie Gifford joined ranks of investors and social media users in criticising the CSR and sustainability credentials of online fashion store, Boohoo Group (AIM:BOO).

This followed the announcement that Boohoo would be bringing in renowned judge, Sir Brian Levison, and auditors KPMG, to probe the company’s internal ethics. The decision came after the company was reported to have been paying some staff just £3.50 per hour, while not properly protecting them from the risks of COVID-19, and also admitting supply chain “failings”.

Following the developments, Baillie Gifford UK Growth Fund (LON:BGUK) posted an update which said that its portfolio managers had been “closely involved in detailed and extensive engagements [with Boohoo over] unacceptable practices carried out by some suppliers”.

At the same time, the trust announced that it had been in talks with mining blue chip, Rio Tinto (LON:RIO), following an inquiry into its plans to destroy an estimated 124 sacred Aboriginal sites, with some dating back an estimated 46,000 years. Having previously gained consent from the WA government to destroy two ancient rock shelters back in May, questions have since been asked about the validity of the government’s approval, with opposing WA MPs saying that the government could be liable for a compensation claim from the traditional owners of the Juukan George area.

Responding to both instances, Baillie Gifford rejected the idea of selling off its holdings in the two companies with controversial operational practices, and instead took the view that it can leverage its position of influence to generate positive change.

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The company’s statement read: “Our experience of engaging with companies on sensitive governance matters is that commenting publicly when the engagement is ongoing destroys trust and consequently weakens our ability to influence. […] Yet we also understand that this approach could be misunderstood.”

“So, let us be clear: we have as supportive long-term shareholders expressed in direct language our strong disappointment at serious governance failings at each, but we also acknowledged in our meetings with both that it is what happens next that really matters.”

The company said that it was: “encouraging and expecting significant improvements in some business practices”.

And added that this is “what serious long-term investors should be trying to do in the first instance with companies that in our view exhibit attractive investment potential rather than selling and moving on”.

The company treads a fine line in what is a contentious a topical dilemma for institutional investors. With consumers becoming increasingly aware of the companies their money is being invested in, and fund managers keen to maximise returns while minimising risk, the contentious behaviour of some blue chip equities puts fund heavyweights like Baillie Gifford in a bit of a pickle.

It is undeniable that institutional investors make up the lion’s share of holdings in the world’s biggest companies. Correspondingly, we must understand that they have a large proportion of the agenda-setting power, to influence and adjudicate whether the CSR policies of companies such as Boohoo and Rio Tinto are substantive enough.

At the same time, the discussion surrounding Responsible Investment (RI) has only gained such traction in the institutional investment community, because a new generation of investors and future pensioners are demanding more stringent criteria for ethical and sustainable investment. Therefore, it is the voice and material backing of individual investors that really brings fund strategy to life.

In the words of Baillie Gifford, “it is what happens next that really matters”. Investors must keep a keen eye on the meaningful ESG and RI enforcement of fund managers. And should progress prove insufficient, investors have a moral duty – and the power – to sway funds in the right direction.

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