TO THEIR DISMAY, Al Gore and David Blood have watched some
institutional investors, money managers, corporations and
analysts show dwindling interest in sustainability. The former
vice president of the U.S. and the ex-CEO of Goldman Sachs
Asset Management want to reenergize the debate while
theres still time.
Heading into 2007, Gore recalls, asset owners and other
capital markets participants were increasingly coming around to
the idea that long-term investors should care about ESG matters
those related to the environment, social responsibility
and corporate governance. But the stress and uncertainty of the
worldwide economic collapse left many investors and
corporations fixated on immediate concerns. We came to
believe that in the aftermath of the global crisis, momentum
had slowed, Gore tells Institutional
Ironically, what Gore and Blood call unhealthy capitalism,
including short-term behavior by investors and company
management, and misalignment of interests between companies and
owners, helped trigger the crisis. Because a sustainable
approach to capital markets and investing seeks to avoid such
calamities, the case for it has never been stronger.
Last month, as part of an effort to bring attention back to
the issue, Gore and Blood published a white paper called
Sustainable Capitalism through the foundation
established by their firm, Generation Investment Management.
The pair founded London-based Generation in 2004 to practice
what they preach. Their fundamentally focused shop aims to
prove that sustainable investing not only works but can be a
superior way of managing money.
In its paper the Generation Foundation defines sustainable
capitalism as a framework that seeks to maximize
long-term economic value creation by reforming markets to
address real needs while considering all costs and
stakeholders. Investors in Generations main global
equity fund, currently closed, include the California State
Teachers Retirement System and the pension plan of the
U.K. Environment Agency.
The traditional investment management industry cant
take all the blame for tuning out sustainable investing, says
Blood. He thinks proponents havent always done a good job
of conveying the empirical evidence that supports their
message. We have not been rigorous enough and clear
enough about the business case for sustainability, says
the Generation senior partner.
The white paper makes that case by pointing to a growing
body of evidence. For example, it cites Maastricht University
finance professor Rob Bauer and thenfinance Ph.D.
candidate Daniel Hanns 2010 study Corporate
Environmental Management and Credit Risk, which links
proactive environmental practices and lower financing costs.
The Generation Foundations report also quotes a 2011
Financial Analysts Journal paper titled Pricing Climate
Change Risk Appropriately that explains why investors
should address the cost of carbon on corporate balance
Beyond this intellectual appeal, the foundation lays out
five calls to action. They include integrating ESG issues into
companies financial reports, aligning compensation with
long-term performance and getting shareholders to invest for
the long haul through securities that foster a buy-and-hold
mind-set. In the latter case a company might offer a financial
incentive for investors to hold shares for an agreed-upon
period. We acknowledge this is not complete, Blood
says of the document. We hope we will inform the
conversation around sustainable capitalism.
Orin Kramer, former chairman of the New Jersey Division of
Investment, which oversees the states $69.6 billion
pension plan, thinks Blood and Gore have hit the mark.
Fiduciaries will come to regard this as a seminal
statement of the case for sustainable investing, says
Kramer, CEO of New Yorkbased hedge fund Boston Provident
Partners. This will be an evolving dialogue, but these
issues arent about some set of policy or ideological
values; theyre about risk management, he adds.
Frankly, their message and lines of argument should, in
my view, be core elements of fiduciary training. Kramer
chairs the Robert F. Kennedy Center for Justice & Human
Rights, a nonprofit that promotes the discussion of
sustainability among institutional investment fiduciaries.
The Generation Foundation study calls for the identification
of so-called stranded assets those that would be
unprofitable under scenarios such as enforcement of a fair
price on carbon and water or higher labor standards in emerging
economies and their incorporation into financial
Gore likens the cost of carbon emissions to subprime
mortgages and the banking crisis. In 2007 banks and other asset
owners held mispriced subprime mortgages on their books.
Accurately pricing those securities wiped out value estimated
in the trillions of dollars, bringing on the recent crisis.
Today companies are holding trillions of dollars in
subprime carbon assets, Gore says. When that risk gets
fairly priced, theyll feel the pain. As the former vice
president points out, its already happening. Last
November, Australia established a carbon tax; the next month
Hong Kongbased utility CLP Group announced that it was
writing down the value of its carbon-emitting assets in
Australia, a move that lost the company almost
$250 million. Their Australian subsidiary held
assets whose carbon assets were mispriced, Gore notes of
Robert Litterman, former head of firmwide risk for Goldman,
Sachs & Co. and now a partner at New York quantitative
hedge fund firm Kepos Capital, likes the reports proposal
about stranded assets. If we priced carbon appropriately
today, there are a lot of investments that would not make
sense, says Litterman, author of the FAJ climate change
risk paper cited by the foundation. Carbon will be priced
much more quickly than people think, and investors should get
ahead of that.
Talk of climate change can leave the impression that
Generation is about so-called green investing. Gore, the
firms chairman, is strongly identified with the green
movement: His 2006 documentary, An Inconvenient Truth, helped
take the climate change debate mainstream. Generation does have
a private equity fund called Climate Solutions that it launched
in 2007 to take advantage of emerging opportunities. But the
vast majority of its assets are in the main global equity fund,
which treats climate change as part of a much bigger picture.
(Generation doesnt disclose assets under management, but
estimates put them at about $6 billion.)
Long-term economic value creation lies at the heart of
Generations sustainability thesis. The firm argues that
pension plans, foundations, endowments and sovereign wealth
funds are investors for the coming decades and into perpetuity
and should act accordingly because its in their
best interest and a better way to make money. It goes back to
the notion of fiduciary responsibility, or what Blood describes
as understanding the risks associated with and the
ability to meet long-term liabilities.
Generation encourages long-term thinking, both among its
investors and more widely. Five percent of profits go to the
Generation Foundation, which was set up to promote sustainable
capitalism. Generations fee structure eschews the typical
yearly or quarterly schedule: In the global equity fund, fees
are paid three years after the investment and then on a rolling
Now, Generation is exhorting the financial community to
change its time horizon. Perhaps the most radical of the
papers five calls to action is for companies to stop
automatically issuing quarterly earnings guidance. As Blood
makes clear, this doesnt mean companies wouldnt
produce quarterly reports or hold quarterly calls with
shareholders. Instead, they would forgo an expected quarterly
earnings bogie in favor of a time horizon that is appropriate
for their business.
Some CEOs, such as Paul Polman of Anglo-Dutch consumer goods
conglomerate Unilever, no longer offer quarterly earnings
guidance to analysts. But Blood admits that driving widespread
change will be tough partly because a swath of the
investment industry, including many hedge funds and electronic
trading houses, takes a short-term outlook. Those that
operate on short-term information are traders, not
investors, he says. Also, Wall Street makes much of its
commission revenue from short-term trading.
Still, Gore is optimistic. Thanks to Europes debt woes
and the subprime meltdown, the problems associated with
unsustainable forms of capitalism are on vivid display,
he says. By 2020, Gore predicts, Generations long-term
approach will be mainstream financial thinking. Sound
far-fetched? Six years ago almost no one realized that the
global economy stood on the brink of disaster.