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What
is the risk?
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How
is it managed?
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Current assessment of risk
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Financial Risk: The Company's
assets consist mainly of listed securities and its principal and
emerging financial risks are therefore market related and include
market risk (comprising currency risk, interest rate risk and other
price risk), liquidity risk and credit risk. An explanation of
those risks and how they are managed is contained in note 19 to the
Financial Statements.
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In order to oversee this risk, the
Board considers at each meeting the composition and diversification
of the portfolio by impact theme and holding size, along with sales
and purchases of investments. Individual
investments are discussed with the
investment managers together with their general views on the
various
investment markets and sectors. A
strategy meeting is held annually. The Board has, in particular,
considered the impact of macroeconomic and geopolitical concerns.
The value of the Company's investment portfolio would be affected
by any impact, positively or negatively, on sterling but such
impact would be partially offset by the effect of exchange rate
movements on the Company's US$ denominated borrowings.
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This risk remains high due to market
volatility as a result of heightened macroeconomic and geopolitical
concerns.
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What
is the risk?
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How
is it managed?
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Current assessment of risk
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Investment strategy risk: Pursuing an investment
strategy to fulfil the Company's
objective which
the market perceives to be
unattractive or
inappropriate, or the ineffective
implementation of an attractive or appropriate strategy, may lead
to reduced returns for shareholders and, as a result, a decreased
demand for the Company's
shares. This may lead to the
Company's shares trading at a widening discount to their net asset
value.
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To mitigate this risk, the Board
regularly reviews and monitors: the Company's objective and
investment policy and strategy; the investment portfolio and its
performance in terms of impact and shareholder returns; the level
of discount/premium to net asset value at which the shares trade;
and movements in the share register, and raises any matters of
concern with the Managers.
During the year, the
Board
sought enhanced
performance
analysis reports and
metrics
from the Managers, and
provided additional challenge
in
portfolio discussions.
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This risk remains high as the
market's appetite for the innovative growth stocks typically held
by the Company remains subdued, owing to macroeconomic and
geopolitical concerns.
Notwithstanding the
Board's
confidence in the
long-term
prospects of the
investment
strategy, the
disappointing
shareholder returns led
the Board to conclude
that
the proposed Scheme of
Reconstruction best served the
interests of shareholders. This enables shareholders to choose
between retaining an exposure to a global impact strategy or
receiving a cash exit at a modest discount.
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What
is the risk?
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How
is it managed?
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|
Current assessment of risk
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Climate and governance risk: As
investors continue to place emphasis on Environmental, Social and
Governance ('ESG') issues, perceived inaction on ESG matters in an
investee company could lead to that company's shares being less
attractive to investors, adversely affecting its share price, in
addition to potential valuation issues arising from any direct
impact of the failure to address the ESG weakness on the operations
or management of the investee company (for example a failure to
identify a pathway to Net Zero or poor employment practices).
Repeated failure by the Managers to identify ESG weaknesses in
investee companies could lead to the Company's own shares being
less attractive to investors, adversely affecting its own share
price.
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This is mitigated by the Managers'
strong ESG stewardship and engagement policies, which have been
endorsed by the Company, and which are fully integrated into the
investment process, as well as the extensive up-front and ongoing
due diligence which the Managers undertake on each investee
company. This due diligence includes assessment of the risks
inherent in climate change.
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The Managers continue to employ
strong ESG stewardship and engagement policies.
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What
is the risk?
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How
is it managed?
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|
Current assessment of risk
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Discount risk: The price at
which the Company's shares trade relative to its net asset value
can change. The risk of a widening discount is that it may
undermine investor confidence in the Company and the wider
investment trust sector, and attract arbitrageurs whose interests
may not be aligned with those of long-term investors.
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To manage this risk, the Board
monitors the level of discount/ premium at which the shares trade
and the reasons for movements in either direction. The Board has a
range of options available to address widening discounts and/or
premiums, including reviewing the investment strategy or marketing
approach. The Company also has authority to buy back or issue
shares when deemed by the Board to be in the best interests of the
Company and its shareholders, and embarked on a programme of
buybacks during the year. At the previous year end the Board also
introduced a continuation vote to be held following five full years
of the Positive Change strategy. During the year, the Chair and the
Company's brokers met with
shareholders to discuss their
concerns, and in response to feedback proposed the Scheme of
Reconstruction as set out in the Chair's Statement and Shareholder
Circular.
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The Company's discount narrowed
during the year.
The terms of the Scheme of
Reconstruction offer shareholders the possibility of rolling their
investment over into the Baillie Gifford Positive Change Fund at
NAV or receiving a cash exit at a modest discount to
NAV.
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What
is the risk?
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How
is it managed?
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Current assessment of risk
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Regulatory risk: Failure to
comply with applicable legal and regulatory requirements such as
the tax rules for investment trust companies, the FCA Listing rules
and the Companies Act could lead to the Company being subject to
tax on capital gains, suspension of the Company's Stock Exchange
listing, financial penalties or a qualified audit
report.
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To mitigate this risk, Baillie
Gifford's Business Risk, Internal Audit and Compliance Departments
provide regular reports to the Audit Committee on Baillie Gifford's
monitoring programmes. Should major regulatory change seem likely
to impose disproportionate compliance burdens on the Company,
representations are made to ensure that the special circumstances
of investment trusts are recognised. Shareholder documents and
announcements, including the Company's published Interim and Annual
Report and Financial Statements, are subject to stringent review
processes and procedures are in place to ensure adherence to the
Transparency Directive and the Market Abuse Directive with
reference to inside information.
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All control procedures are working
effectively.
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What
is the risk?
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How
is it managed?
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|
Current assessment of risk
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Custody and depositary risk: Safe custody of the Company's assets may be compromised
through control failures by the depositary, including breaches of
cyber security.
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To mitigate this risk, the Board
receives six-monthly reports from the depositary confirming safe
custody of the Company's assets held by the custodian. Cash and
portfolio holdings are independently reconciled to the custodian's
records by the Managers. The custodian's internal controls reports
are reviewed by Baillie Gifford's Business Risk Department and a
summary of the key points is reported to the Audit Committee and
any concerns investigated.
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All control procedures are working
effectively.
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What
is the risk?
|
How
is it managed?
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|
Current assessment of risk
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Operational risk: Failure of
Baillie Gifford's systems or those of other third party service
providers could lead to an inability to provide accurate reporting
and monitoring or a misappropriation of assets.
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To mitigate this risk, Baillie
Gifford has a comprehensive business continuity plan which
facilitates continued operation of the business in the event of a
service disruption or major disaster. The Audit Committee reviews
Baillie Gifford's Report on Internal Controls and the reports by
other third party providers are reviewed by Baillie Gifford on
behalf of the Board and a summary of the key points is reported to
the Audit Committee and any concerns investigated. In the year
under review, the key third party service providers have not
experienced significant operational difficulties affecting their
respective services to the Company.
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All control procedures are working
effectively.
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What
is the risk?
|
How
is it managed?
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|
Current assessment of risk
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Gearing risk: The Company may
borrow money for investment purposes. If the investments fall in
value, any borrowings will magnify the extent of this loss. If
borrowing facilities are not renewed, the Company may have to sell
investments to repay borrowings. The Company can also make use of
derivative contracts.
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To mitigate this risk all borrowings
require the prior approval of the Board and gearing levels are
discussed by the Board and Managers at every meeting. Covenant
levels are monitored regularly. The majority of the Company's
investments are in listed securities that are readily realisable.
Further information on gearing can be found on page 34 of the
Annual Report and Financial Statements and in the Glossary of Terms
and Alternative Performance Measures.
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The Company's revolving loan
facility can be repaid with no penalties, should the decision be
taken to reduce the gearing.
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What
is the risk?
|
How
is it managed?
|
|
Current assessment of risk
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Political and associated economic risk:
Political change in areas in which the Company
invests or may invest may increasingly have practical consequences
for the Company.
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To mitigate this risk, developments
are closely monitored and considered by the Board. The Board has
particular regard to macroeconomic and geopolitical tensions, and
monitors portfolio diversification by revenue stream where
appropriate, as well as by investee companies' primary location, to
mitigate against the negative impact of military action or trade
barriers.
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This risk remains high due to the
conflicts in Ukraine and Gaza and ongoing US/China
tensions.
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What
is the risk?
|
How
is it managed?
|
|
Current assessment of risk
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Cyber security risk: A cyber
attack on Baillie Gifford's network or that of a third party
service provider could impact the confidentiality, integrity or
availability of data and systems.
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To mitigate this risk, the Audit
Committee reviews Reports on Internal Controls published by Baillie
Gifford and other third party service providers. Baillie Gifford's
Business Risk Department report to the Audit Committee on the
effectiveness of information security controls in place at Baillie
Gifford and its business continuity framework. Cyber security due
diligence is performed by Baillie Gifford on third party service
providers which includes a review of crisis management and business
continuity frameworks.
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All control procedures are working
effectively.
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Emerging Risks
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As explained on pages 64 and 65 of
the Annual Report and Financial Statements, the Board has regular
discussions on principal and emerging risks, including any risks
which are not an immediate threat but could arise in the longer
term. The Board considers emerging risks at each Board meeting and
discusses any mitigations required. The emerging Execution Risk
identified in connection with the proposed Scheme of Reconstruction
is mitigated by consultation with shareholders and the appointment
of appropriately qualified professional advisors.
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