February 22, 2012
Generation Investment Management Calls for Sustainable Capitalism by 2020
by Robert Kropp
The firm expands upon a manifesto written by co-founders Al Gore and David Blood and calls for
mandatory integrated reporting and the pricing of externalities, an end to quarterly earnings
guidance, and loyalty-drive securities for long-term investors.
An essay included in the recently published Evolutions in Sustainable
Investment: Strategies, Funds and Thought Leadership surveys the investment philosophy of Generation Investment Management, founded
in 2004 by former Goldman Sachs executive David Blood and former US Vice President Al Gore.
The essay, authored by Malte Griess-Nega and Nick Robins, notes that by the end of 2010
the firm had attracted $6.6 billion is assets from institutional investors and high net worth
individuals. By March, 2011, the authors found, the firm's Global Equity Fund "had delivered a
positive 17.38% outperformance over the benchmark since inception in the middle of 2008."
The investment philosophy driving the fund's outperformance includes a long-term strategy; the
firm recognizes that environmental, social, and corporate governance (ESG) factors affect the
long-term profitability of companies.
Also, "Sustainability challenges are increasingly
interconnected: the climate crisis and poverty, pandemics and demographics, water scarcity and
migration/urbanization," the firm states. "We never consider sustainability challenges in
"Sustainable solutions will be the primary driver of industrial and economic
development for the coming decades," the firm continued.
Yet, despite the success of
Generation's sustainable investment strategy, capital markets in the US and elsewhere persist in
maintaining short-term investment strategies antithetical to the long-term view of sustainable
investment. And the vast majority of traditional socially responsible investment (SRI) fails to
incorporate the rigorous and often expensive research necessary for sustainability to realize
outperformance, Cary Krosinsky argues in his introduction to Evolutions in Sustainable Investment.
"While trillions of dollars are invested in a 'socially responsible' manner, upward of 90%
of that sum has been deployed over time using unsophisticated screens," Krosinsky wrote.
Griess-Nega and Robins write in their essay, "Generation's vision of investment extends beyond
its funds to the economy as a whole, where it aims to promote 'sustainable capitalism.'" An example
of this promotion occurred in December, when Gore and Blood published A
Manifesto for Sustainable Capitalism.
Gore and Blood do not mince words in describing
the challenges requiring a global transition to long-term sustainability. "We are once again facing
one of those rare turning points in history when dangerous challenges and limitless opportunities
cry out for clear, long-term thinking," they write. "Businesses cannot be asked to do the job of
governments, but companies and investors will ultimately mobilize most of the capital needed to
overcome the unprecedented challenges we now face."
The authors define sustainable
capitalism as "a framework that seeks to maximize long-term economic value by reforming markets to
address real needs while integrating environmental, social and governance (ESG) metrics throughout
the decision-making process."
The benefits to companies that embrace sustainable
capitalism include increased profitability through sustainable products and services, improved
energy efficiency, superior management of risk, and lower cost of debt.
capitalism is also important for investors," the authors continue. "Investors who identify
companies that embed sustainability into their strategies can earn substantial returns, while
experiencing low volatility."
Gore and Blood recommend five actions "by companies,
investors and others to accelerate the current incremental pace of change to one that matches the
urgency of the situation."
The risk from stranded assets, which are described as those
whose value would change dramatically should externalities be priced, should be identified and
incorporated. Integrated reporting—the practice of embedding ESG information into corporate
financial reports—should be mandated. Executive compensation should be linked to long-term
Gore and Blood also recommend two actions designed to
eradicate the short-termism that "fosters general market instability and undermines the efforts of
executives seeking long-term value creation." Companies should issue loyalty-driven securities that
reward investors for holding onto shares over the long term.
And, the authors state,
companies should "end the default practice of issuing quarterly earnings guidance."
Earlier this month, the London office of Generation published a report entitled Sustainable
Capitalism, a document which builds upon the positions espoused by Gore and Blood. "Sustainable
Capitalism encourages us to generate financial returns in a long-term and responsible manner," the
report states, "and calls for internalizing negative externalities through appropriate pricing."
"Asset owners and fund managers with US$30 trillion in assets under management, which is
approximately 20% of the world's capital are signatories to the UN Principles for Responsible Investment (UN PRI)," the report
observes. "If the majority of those assets were actually shifted into truly sustainable investment
models, the effect would be dramatic and would signal that Sustainable Capitalism is entering the
The report repeats the recommendations of Gore and Blood in their manifesto,
but also addresses the responsibilities of governments and civil society to help bring about a
transition to sustainability. In addition, the report includes five additional ideas deserving of
Sustainability as a fiduciary issue should be reinforced, and
investment consultants must include in their advice to clients the financial materiality of
sustainability factors. More sustainable investment products should be developed for asset classes
other than equity. Sustainability should be included in the education and training of corporate
managers and executives, as well as consultants and investors.
The report also calls for a
reevaluation of Gross Domestic Product (GDP) as an accurate measure of economic growth, arguing
that it "must be reconsidered in the context of consumption, income distribution, and
"The barriers to mainstreaming Sustainable Capitalism are
formidable but not insurmountable," the report from Generation concludes. "We believe that the
actions for change we are recommending, taken together, will affect the entire business ecosystem
and encourage reform by investors, companies, government and civil society alike to adopt long-term
horizons and consider ESG factors in addition to financial ones."
Underscoring the urgency
of Generation's message is its call for the adoption of sustainable capitalism by 2020.