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Since leaving political office and joining the asset management industry, former U.S. vice president Al Gore Jr. has learned not to tempt the fates. Asset managers, he has discovered, are a superstitious bunch. “My own impulse is to knock on wood,” Gore, 67, tells Institutional Investor. “I do that a lot more now.”

Gore’s business partner David Blood, with whom he founded $12.2 billion, London-based Generation Investment Management in 2004, is also a worrier. Blood is concerned about hubris. The former head of Goldman Sachs Asset Management hates to boast about Generation’s success. “I am very reluctant to talk about performance,” says Blood, 56. “In some respects because I am suspicious.”

Blood’s reticence is not just old-school paranoia; it is a reflection of the principles on which Generation was built. The firm is dedicated to investing in sustainable businesses. One of its bedrock beliefs is that companies and investors should be focused on the long term, not lurching from quarter to quarter or fixating on the size of their annual bonuses. Generation is designed to encourage long-term thinking. That includes an incentive fee structure that defers payment for three years or longer, and a compensation structure to match.

When Blood and Gore founded Generation, they intended to lead by example. They wanted to prove that an approach to investing that concentrates on things other than the immediate bottom line can work. Specifically, they wanted to demonstrate that when companies pay close attention to factors such as the environment, social responsibility and corporate governance (commonly called ESG), they improve their profitability. As Blood puts it, “Our objective is to try to help make the business case for sustainable investing.”

Nothing speaks louder than results, and Generation has the numbers to back up its principles. The firm’s flagship investment vehicle, an $11 billion long-only global equity strategy, celebrated its ten-year anniversary this spring and has an annualized return since inception of 12.14 percent, according to data provider eVestment. That’s a whopping 559 basis points a year more than the MSCI World Index for a period that saw the collapse of the subprime mortgage market, the global credit crisis, economic upheaval in Europe, China’s ascent to become the world’s second-largest economy and the growing recognition of the economic and social ramifications of climate change.

When it comes to getting the word out for Generation, Gore is not above a little bragging. “This has been one of the most interesting and intellectually challenging journeys of my life,” the former Democratic presidential candidate says of his work with Generation. “If you do this the right way, you don’t have to trade values for value. Indeed, with some good fortune and skill, you can get enhanced returns.”

Generation’s edge comes from its ability to recognize and value good businesses that are likely to do better than their peers. “The important part of material nonfinancial [ESG] factors is that they can give you some information about how a company is going to perform in the future,” says George Serafeim, an associate professor at Harvard Business School and an expert on sustainability.

During the past decade Generation has changed ESG data from something that was largely meaningless for asset managers into a useful investment tool. When Blood and Gore founded Generation, very few managers were incorporating ESG factors into their investment approaches and even fewer thought that doing so could drive returns. The common wisdom was quite the opposite — that the consideration of issues like climate change or labor relations was likely to be an impediment to good results. Generation has proved that wisdom wrong. Yet the more investors come to share their worldview, the less edge that Blood, Gore and their team will have. Such is the price of transforming how the world thinks about capitalism.

Generation seeks to project the values and best practices it admires in others. Its elegant, contemporary offices at 20 Air Street in London’s West End are environmentally friendly and use recycled wood. The firm even buys carbon credits to offset its emissions. There is a heavy emphasis on corporate culture and creating a meritocracy that encourages creativity, hard work and innovation. Out of a staff of 75, 28 are partners with equity in the business. The core team has been in place since the beginning, and there is very little overall firm turnover. Such cultures of excellence, however, can sometimes lead to groupthink and insularity, as the Generation team knows well through its research: It has created a focus list of some 125 companies around the world in which it invests based on the quality of their business and management.

As co-CIO of global equity, Mark Ferguson is not worried that Generation will lose its competitive advantage any time soon. Ferguson and his co-CIO, Miguel Nogales, shoulder much of the responsibility for the day-to-day running of the flagship Generation IM Global Equity Fund, the firm and its culture. “There are no short cuts,” says Ferguson, 47, who introduced Blood to sustainable investing when the two worked together at GSAM in the early 2000s. “This is really hard.”

Ferguson and Nogales often quote value investing greats such as John Templeton and Benjamin Graham. Nogales is particularly partial to Templeton’s belief that “it is impossible to produce superior performance unless you do something different from the majority.” From Graham, Nogales takes the idea that, to outperform, a manager must have a disciplined, unique process. “We do something different from the rest,” says Nogales, 42, who specializes in health care investments. “Our difference is looking at firms using a much wider information set.”

As value investors, the Generation equity team wasn’t spooked by the China-induced market sell-off in August. With close to 10 percent of the fund’s assets in cash, in part because the firm considered the valuations of many of the companies on its focus list to be too high, they used the downturn as an opportunity to buy.

The California State Teachers’ Retirement System, the second-­largest public pension fund in the U.S., with $191 billion in assets, was the first American institutional investor to invest in Generation; longtime CalSTRS CIO Christopher Ailman knows the firm’s investment team well. Ailman agrees that much of what Generation does, including its focus on ESG, fits with a value investing ethos. “If you talk to deep-value investors, the good old hard-nosed active stock pickers, they absolutely get this stuff,” he says. “They always paid attention to it. They just didn’t call it E, S or G.”

If Ailman has one major criticism of Generation, it is the lack of competition. Typically in a capitalist world, a good idea will be adopted by others, he explains. To date, despite a strong ten-year track record and a commitment to changing the capital markets ecosystem, Generation’s efforts to lead by example have fallen short.

The firm’s founders believe a larger change is coming. “It has become increasingly apparent to people who pay attention to what is going on in the world that we are facing a real turning point in the future of humanity,” Gore says. “The combination of rapid population growth over the past century with increasingly powerful technologies and the unfortunate dominance of short-term, distorted thinking in too much of the marketplace and too much of our culture generally — those three factors have combined to produce an increasingly obvious collision between human civilization as it is presently organized and the ecological system of our planet, on which the flourishing of humankind completely depends.”

Still, most analysts and investors remain blind to the usefulness of ESG factors. Traditional asset managers lack a language to understand these inputs. “Wall Street needs a model to translate everything into something that everyone understands,” explains Harvard’s Serafeim. In financial accounting “the bottom line translates into an earnings number,” he adds. “That is something that all analysts can understand. That’s the beauty of financial accounting.”

Early in its existence Generation tried to lead a coalition aimed at integrating sustainability into sell-side research, producing in-depth reports on issues such as carbon investment risk, and it has repeatedly called for investors to be more long-term-focused. Yet the global sell-off in August was a sharp reminder of how short-term the financial services industry remains.

Initiatives like the San Francisco–based, nonprofit Sustainability Accounting Standards Board (SASB), which Generation helped seed through its foundation, aim to make analysts better able to understand the value of nonfinancial data. Industry leaders Michael Bloomberg, founder of data and news empire Bloomberg LP and a SASB board member, and Laurence Fink, co-founder and CEO of asset management giant BlackRock, are speaking out in favor of sustainability and recognizing the value of ESG as a business and investment approach. They are being joined by a new generation of fund managers and market participants, including SASB founder Jean Rogers; Erika Karp, who two years ago started her own sustainable financial services firm, Cornerstone Capital Group; and John Goldstein and Taylor Jordan, who in July agreed to sell their San Francisco–based impact investing firm, Imprint Capital Advisors, to GSAM.

Increasingly, investors are not waiting for Wall Street or the asset management industry to catch up. Faced with mounting evidence of the damaging effects of a warming atmosphere and pressure from various stakeholders, including environmental activists pushing for institutions to divest from fossil fuel providers, more and more institutional investors are paying attention to the carbon risk in their portfolios.

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