I think it will ultimately evolve into something useful, which it isn't at the moment. There are a lot of misunderstandings about what ESG is. In my view, it's currently a somewhat unhelpful acronym. It combines certain aspects that we should consider when investing. Consequently, the regulation in this area is well-intentioned but not prescriptive in any way.

For instance, the EU Disclosure Regulation (SFDR) doesn't exactly dictate what one should do. You just need to make transparent what you're doing. In principle, there's nothing wrong with that. It's actually quite clever from a regulatory standpoint.

It is challenging to translate our increased focus on the ecological and social aspects and consequences of our investments into laws. From my perspective, what regulators are trying to do is create transparency that puts pressure on capital flows. In theory, the investment industry would respond by refraining from investing in companies perceived as socially or environmentally irresponsible. So much for the theory.

The difficulty lies in the fact that it doesn't really work. It's well-intentioned, but there will always be a buyer for assets considered unacceptable. The problem can't be solved this way.

When I say ESG can become useful, I mean that more investors need to actively push for improvements within companies. We engage with the companies we invest in, trying to understand where they perceive the negative impacts of their business. Essentially, all companies have negative impacts because almost all of them use energy derived from fossil fuels somewhere along the line. There are countless other examples. There needs to be a much stronger focus on the path towards improvements. The starting point is that as investors, we need to consider social and environmental factors much more seriously. And this is not an ideology.

Even if you're only interested in returns, you can't ignore the fact that sustainability issues are becoming increasingly central to the success of companies. Even if someone is indifferent towards environmental issues or social fairness, it is essential to contemplate how these factors could adversely affect the reputation of individual companies or pose regulatory difficulties for them. The entire industry has indeed moved in this direction. Thus, ESG has improved the industry, but not quite in the way people think.

ESG forces the industry to consider the consequences of the companies they invest in, which they should have been doing all along. If you're running a quantitative investment strategy that buys or sells based on a 200-day moving average, you don't even care about what you're investing in. That's a complete failure in terms of stewardship. ESG and the corresponding regulation have pushed our industry back towards stewardship and a stakeholder approach that considers not only the concerns of shareholders.

We are good at supporting companies in their transformation because we have been deeply engaged with many companies from the start. But we've had to step up, continue evolving. I believe the industry has improved because of ESG, but it doesn't address 'E' and 'S' particularly efficiently.

It was interesting to see how regulation has developed. SFDR came along, and companies initially had no idea what was expected of them or how high the hurdles were for Article 9 funds. Much was unclear. But the core problem is that the regulation doesn't capture the process of change adequately.

Greenwashing looks like the following: I make you feel like you're saving the world because you're investing in my "low carbon" fund. But all I'm doing is investing in a selection of low CO2 intensity companies. I can create a portfolio with a CO2 footprint that's only 10% of the broad market. But that way, I'm not doing anything to reduce greenhouse gas emissions.

When you put your money into a fund that wants to do something positive, the more critical part is how investments in companies lead to changes. For example, the Irish building materials company CRH spends a lot of money developing greener forms of concrete. It's about more energy-efficient production with lower CO2 emissions and stronger yet lighter concrete. Such innovations are absolutely essential for effective climate action. Hence, we invest in the company and encourage them to allocate funds for it. We don't do it to save the world but because we believe it's economically sensible. Plus, there are increasing regulatory costs for CO2 emissions, such as through emissions trading: companies paying less for their CO2 emissions will be the most successful. That's just one example. But people need to understand the process. Based on this idea, investments in specific oil companies, that are serious about change, can also be justified. However, most aren't seriously trying to decarbonize their business and are just pretending.

True. The details always matter. I can provide an example of how the innovations introduced by the oil industry can be incredibly valuable for the green transformation. Look at the hydrogen sector. It's likely that green hydrogen will be part of the energy transition. It can be used to power planes and large vehicles effectively. Nevertheless, the infrastructure for distributing green hydrogen will most likely come from existing infrastructure owned by oil and gas companies. Another example is Climeworks. We invested in this company at a very early stage; they build facilities that extract CO2 from the atmosphere. Right now, it's terribly uneconomical. But as they grow to a certain size, the question will arise: where should the captured CO2 go? In the end, we'll put it back where the oil came from. For that, we need the existing infrastructure of oil companies. These are very complex questions that some people don't really want to think about.

We were recently criticized in our role as sponsors of the Edinburgh International Book Festival. Activists objected to the fact that we had invested a small amount in companies involved in fossil fuels. People wanted to boycott the festival because of it. However, we sympathize with their fundamental concern – climate protection. We just don't believe that everything will be fine if everyone stops investing in companies related to fossil fuels. There are valid arguments that some of these companies can play a crucial role in the desired shift to a greener economy.

I spoke with an author who signed a letter addressed to us. At first, I thought I wouldn't like her, but then I found her quite pleasant. She told me that she understood that you can't simply stop investing in fossil fuels. They didn't demand that. What they wanted was for people to take leadership roles in effecting change. That's a reasonable request.

One of our significant challenges is that not all our clients have the same opinion about this. So, we have to consider diverse views and ultimately make decisions that we believe are in the long-term interest of all clients. The diversity of perspectives can be extremely helpful. For instance, when you think about environmental issues, social aspects quickly come into play. The energy transition will have profound societal consequences. We also consider that in our investment decisions.

It happens. Take many of the commitments, for example. If an investment firm voluntarily commits to not invest in fossil fuels at all, it sounds fantastic. But it doesn't solve the problem because it's much more complex. It's about transformation, not exclusion. Interestingly, under SDR, the UK's SFDR equivalent, there's a category called 'Transition'. Investment forms aiming for positive changes would be enhanced through this approach. I think it's a good idea.

It would allow people, who contemplate these matters more deeply, to invest not just in a "low carbon" fund but in a fund for improvements. For a significant portion of the complex challenges our world faces, that would be a better strategy.

It's not just about the cost of borrowing; it's also about the types of solutions governments choose for climate protection. Climeworks offers a solution that directly addresses the problem of CO2 emissions. Such solutions, which are currently very expensive but have great potential, could be largely financed by the state until they become self-sustaining.

The key is to attain the required magnitude. Maybe it will work for Climeworks. For Tesla, which had a business model at the time that hardly anyone took seriously, it worked. There was no government involvement.

I think Tesla would have accomplished what the company has achieved even in a higher interest rate environment. Most of its funding came from equity, so interest rates weren't a factor. It's more about finding enough people with a long investment horizon and the ambition to implement something like that. Tesla almost failed multiple times because it incurred significant losses and invested on a large scale to reach the necessary critical mass.

The product is not economically viable for users yet. The company is still far from the necessary scale to change that. Moreover, it would require legislative changes obligating companies to offset their CO2 emissions. As of now, the market for emission offset certificates is not functioning well.

The problem is that there are no homogeneous emission offset certificates. Prices range from $3 to $1,000. Those for $3 are entirely ineffective; those for $1,000 are super effective, but also way too expensive. A functional emissions market is hard to imagine without market-wide standards.

I find it difficult to see added value. It falls into the same category as what we see in parts of cryptocurrency trading. If people want to speculate, exchanges will enable them to do so. That doesn't mean that what they're speculating on has a specific intrinsic value. You can speculate on emission offset certificates, or you could do it on flying pigs. The real question is whether we can create meaningful standards for emission offsets that would enable trading. According to our own climate experts, the cheapest credible emission offset certificates cost $200 per ton of CO2. Hardly anyone is willing to pay that.

As a company, we offset our emissions using Climeworks. It's incredibly expensive, but we do it because it's the most effective way to offset our greenhouse gas emissions. From an investor's perspective, early investors enable the scaling that leads to later success. For governments, it's very difficult to provide the necessary resources for something like this in a democratic system. The question is whether we can gather enough private investors to enable such companies to reach the necessary scale. Governments might create the legal framework by mandating a certain level of their products or lead by example.

Governments play an essential role. But again, the world isn't as straightforward as we might wish it to be. You can't categorize entire countries like the US or China simply as good or evil. After all, even in Republican-led US states, a lot of money is being invested in renewable energies. Texas has an incredible amount of wind power. China can generate seven times as much renewable energy as the next ten countries combined. But they're still building coal power plants. That's because they have a fairly credible net-zero strategy for 2060 and have identified the peaks of energy demand on the way there.

The honest answer is: we don't know yet. Many people talk about the opportunities that could arise from recycling electric car batteries. We see those as well. But we're still in a very early phase of the life cycle of these things. The first batteries are only just being decommissioned. There are promising approaches, and we'll see how significant they could become. And as for rotor blades: there aren't many recycling options for them. Maybe they could be used for bus stops. To recycle such composite materials, there's simply no genuinely good solution that is scalable from today's perspective. Companies that think ahead on these issues will have a significant competitive advantage. Many people want answers to these questions, but they're still unknown.

In situations where only discomforting responses exist today, promising solutions could emerge in the future. Obviously, there are problems. But many things are still in an experimental stage. The technologies aren't developed yet. There is no credible path to climate neutrality by 2050 relying solely on already known technologies. Thus, we should be optimistic, but not rely on seemingly simple solutions. From an investor's perspective, I would say: even if a government doesn't do much and we miss climate targets, the companies that have timely bet on progress and change will perform better. Because they'll also be on the right side from a legislative and public perception standpoint.

Indeed, it will happen. We've discussed this internally and repeatedly come to the conclusion: climate solutions are a very interesting area to look for investments. Nonetheless, we also have to allow uncomfortable questions: what if our capitalist economic system doesn't handle the climate change problem well? That's not a very nice scenario. Where would you invest in that case?

Yes. One of the biggest challenges for Europe is the scale of Chinese battery car production, which can be ramped up to a size not seen anywhere else.

There truly is something to it. It also applies to artificial intelligence. China is no longer a producer of cheap toys. It has taken a leading role in many technologies now, with profound consequences. However, this also creates opportunities for long-term-oriented investors.

Especially for advanced forms of AI. We're keeping an eye on the topic and have already invested in the quantum computing field sporadically. The topic is still in an early stage and therefore risky. Quantum computing also has downsides, such as when the computing power is used to override internet security systems. With AI, there's also quite a bit of hype that doesn't differentiate between sensible and unnecessary applications.

Mostly, yes. But there are immensely valuable applications, particularly within the realm of healthcare, like gene sequencing, presenting excellent investment opportunities. However, it's not just AI. It's also partly just enormous computing power. At present, the pivotal elements in this domain encompass technologies such as Nvidia's chips and the machines developed by ASML. We invested in both a while ago. With every potential investment, you always have to look closely at what it's really about: is it just about significant computing power or genuine artificial intelligence?

We tried out ChatGPT to see what we could do with it. It might seem like a nice toy. If you have ten research papers, it can summarize them quite well. Nevertheless, it doesn't give us any new insights.

We spent years attempting to generate insights based on our investment philosophy using AI. Our conclusion was that there's no way to identify the critical turning points essential for us as long-term growth investors. The model didn't provide us with any information we didn't already have.

Stuart Dunbar might be a bit young for the role of the elder statesman. However, he has been with Baillie Gifford for 20 years and is one of the partners at the Scottish asset manager. His genuine and lighthearted manner contrasts the challenging period faced by growth investors in recent months. The fact that he immediately identifies himself as a Glaswegian through his accent makes him even more authentic. Although it leads to his press officer's urge to persuade him to speak more slowly when dealing with international guests.