Investing in sustainability: An interview with Al Gore and David Blood
The former vice president and his partner in an investment-management firm argue that sustainability investing is essential to creating long-term shareholder value.
As McKinsey research indicates, executives around the world increasingly recognize that the creation of long-term shareholder value depends on a corporation’s ability to understand and respond to increasingly intense demands from society.1 No surprise, then, that the topic of socially responsible investing has been gaining ground as investors seek to incorporate concepts like sustainability and responsible corporate behavior into their assessments of a company’s long-term value.
Yet socially responsible investing has always been an awkward science. Early approaches simplistically screened out “sin sectors” such as tobacco. Subsequent evolutions tilted toward rewarding good performers, largely in the extraction industries, on the basis of often fuzzy criteria promulgated by the corporate social-responsibility movement. These early approaches tended to force an unacceptable trade-off between social criteria and investment returns.
Three years ago, former US Vice President Al Gore and David Blood, previously the head of Goldman Sachs Asset Management, set out to put sustainability investing firmly in the mainstream of equity analysis. Their firm, Generation Investment Management, engages in primary research that integrates sustainability with fundamental equity analysis. Based in London and Washington, DC, Generation has 23 employees, 12 of them investment professionals, and a single portfolio invested, at any given time, in 30 to 50 publicly listed global companies.
The two partners recently sat down with McKinsey’s Lenny Mendonca and Jeremy Oppenheim to discuss reconciling sustainability and socially responsible investing with the creation of long-term shareholder value.
The Quarterly: What do you mean by the term “sustainability,” and how does it influence your investment philosophy?
David Blood: Sustainability investing is the explicit recognition that social, economic, environmental, and ethical factors directly affect business strategy-for example, how companies attract and retain employees, how they manage the risks and create opportunities from climate change, a company’s culture, corporate-governance standards, stakeholder-engagement strategies, philanthropy, reputation, and brand management. These factors are particularly important today given the widening of societal expectations of corporate responsibility.
Al Gore: When, several years ago, David and I were separately looking for ways to integrate sustainability into investing, mutual friends told each of us of the other’s search. We discovered immediately that we had a common goal, and that led to a series of meetings and a friendship and, ultimately, to a decision to form a partnership. We researched the history of sustainable investing under its various names and decided to start a new partnership in order to design it, from the ground up, according to the architecture that we believed was essential to address the challenges in the investment-management industry.
The Quarterly: What did the history of sustainability investing teach you?
David Blood: Sustainability investing has a long history, starting back with the first wave of negative-screening strategies, where investors excluded entire sectors based on a set of ethical criteria. This strategy remained niche; returns were lackluster due to the fact that your investment-opportunity set was limited. The next wave of sustainability investing was called the positive-screening, or best-in-class, approach. That’s the philosophy of the Dow Jones Sustainability Indexes and the KLD Broad Market Social Index-these indexes replicate the underlying benchmarks but select only the best performers on environmental, social, and governance parameters.
However, the problem with this approach is that it’s difficult to get a real sense of what’s happening in those businesses, because it’s basically a one-size-fits-all approach, often using questionnaires for decision making. In addition, often one team does the sustainability research and then hands it over to the investment team to do the financial research. That approach, we believe, has too much friction in it because it misses the explicit acknowledgment that sustainability issues are integral to business strategy. So in setting up Generation, we saw the need to fully understand sustainability issues alongside the fundamental financial analysis of a company.