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Generation IM on getting to Net Zero: ‘The need for system change is as relevant in the finance sector as it is in the mobility and energy sectors’

David Blood and Colin le Duc on why investors’ current asset allocation calculations will stop the world from decarbonising

As the eyes of the world turn to Glasgow ahead of next week’s climate summit, the number of financial firms with Net Zero commitments now stands at around 300, with nearly $90trn of assets. 

“That goes in the good news column,” says David Blood, Senior Partner at Generation Investment Management, one of the founding members of the Net Zero Asset Managers Initiative that coordinates the pledges made by investment houses. “But it’s one thing to have a plan, and another to actually do something about it.” 

Blood co-founded Generation in 2004 with former US Vice President Al Gore, to invest in sustainably-managed private and public equity. Since then, it has garnered a reputation for being a credible and concentrated green investor, well-known for its client waiting lists. 

“We have nine years to cut carbon emissions in half,” he says, referring to the 2030 interim target for getting to Net Zero by 2050. “That’s half the time that Generation has been established. That’s it. That’s all the time we have left to fundamentally decarbonise our economy.” 

But time isn't the only problem, says Colin le Duc, another of Generation’s founding partners: it’s the financial system itself. 

‘We need to acknowledge that if we don’t bring climate impact into actual capital allocation calculations, we will miss our climate goals’ – Colin le Duc

“The need for system change is just as relevant in the finance sector as it is in the mobility and energy sectors,” he says. “There are folks from the hardcore sustainability community that went into bigger companies with very good intentions, but after three or five years they realised they can’t change them. I think there's a lot of that – good people caught in a bad system.”  

Le Duc describes the belief that current financial markets will get the world to Net Zero as “a fallacy”. 

“The way investment mandates are driven today, capital is allocated in a certain direction, and that leaves a whole suite of decarbonisation opportunities that are basically neglected by the capital markets. We in the finance industry need to recognise that mismatch, and we need to acknowledge that if we don’t bring climate impact into actual capital allocation calculations, we will miss our climate goals.”

It’s this thinking that has prompted Generation to launch a new company, focused on investments that support decarbonisation in the real economy. Just Climate, unveiled today, will chase unlisted investments that aren’t on the radar of traditional private equity or venture capital firms – partly because it will have a much longer, 15-year investment horizon.  

“When we define our opportunity set, we’re going to focus first on identifying the most impactful climate opportunities that are not yet being funded,” explains Blood. “And from then on, it's a traditional approach to allocating capital in terms of risk and return.”

The point, says le Duc, is to push finance towards those “neglected” sectors he mentioned earlier. “There are plenty of well-funded climate solutions, like renewable energy in North America and Europe, and climate venture tech, but what about all the others?”

‘Now is the time for investors to do something that is uncomfortable and difficult’ – David Blood

Heavy industry is one area that’s central to achieving Net Zero but lacks the capital to decarbonise accordingly, he notes.   

“And emerging markets don't get anywhere near the level of capital they need, but that’s where most emissions are going to come from in the future. So how do you fix that? You need to institutionalise the notion that success is defined by the amount of impact you deliver, as well as the amount of returns you generate.”

Just Climate plans to identify investment opportunities that lend themselves to catalysing third-party institutional investment – which explains the appointment of Shaun Kingsbury as its Chief Investment Officer. Kingsbury was the founding CEO of the UK’s state-backed Green Investment Bank, which successfully leveraged billions in private capital for clean energy before being sold to Macquarie in 2017. 

“We’re at a point in history where we need collaborative allocation of capital,” says Blood, although he’s quick to point out that Just Climate is not offering the kind of concessionary finance that the Green Investment Bank did – it will be aimed squarely at fiduciary investors seeking market returns. 

For now, the firm has announced six ‘strategic partners’ that will invest in Just Climate’s strategies as they are developed. They include the Microsoft Climate Innovation Fund, Ireland’s Strategic Investment Fund, the Ikea-backed IMAS Foundation, Harvard Management Company and Hall Capital Partners. Goldman Sachs Asset Management, where Blood was CEO before he started Generation, has also signed up its impact arm, Imprint Group. 

“It’s become clear to us over the last few years that simply accelerating the current incrementalism will not get us to where we need to be,” says Blood. “Now is the time for investors to do something that is uncomfortable and difficult, but urgent. The clock is ticking.”