The rigour of environmental, social and governance (ESG) analysis must not be “devalued” amid a rush towards compliance, says Generation’s David Blood, flagging up the increasing “grey areas” the sector faces and the importance of “the clarity of first principles”.
Blood is Senior Partner of Generation Investment Management, the sustainability boutique he co-founded with former US Vice President Al Gore, who is the firm’s chair.
In a letter accompanying Generation’s latest financial accounts, Blood writes: “So what have we learned over the last 14 years? Well, to be honest, a lot.”
First is that ESG analysis is difficult, but can lead to “differentiated insights”, better risk management and greater conviction about the valuation of securities. But Blood, one of the leading voices in sustainable finance, goes on to warn against ESG being undermined as it continues to grow.
“We need to ensure the rigour of sustainability and ESG analysis is not devalued as investors rush to claim compliance,” Blood, the former CEO of Goldman Sachs Asset Management, writes.
“Sustainability and ESG analysis require trade-offs. The issues we need to examine will become increasingly complex, as many solutions face some degree of unintended consequences.
“Evaluating trade-offs is an exercise in navigating grey areas.”He continues: “It will require judgment, compromises, openness to new information, understating of systemic implications, practical experience and a constant grounding in the clarity of first principles.”
“The greatest risk to our industry is not a failure of analysis but a failure of imagination”
He goes on to write that sustainable investing is “not a panacea” and that the capital markets and the private sector will not solve the world’s problems.
Blood is just the latest to suggest there are limits to sustainability. Fund manager WHEB, in a note on the Pengana WHEB Sustainable Impact Fund it runs earlier this year, noted how government action against heavy emitters “has stalled and even reversed”. The report goes on: “The question remains: will we reach sustainability? And will it come soon enough?”
As Blood says: “And in this transformative moment, the greatest risk to our industry is not a failure of analysis, but rather a failure of imagination.”
Total consolidated profit for London-based Generation for the year rose to £237.1m (€266.3m) from £142.5m in 2016. The company has $18.5bn+ in assets under management.