RI Leaders – David Blood, Generation Investment Management: “All investing has impact”

The Generation IM founder takes a warts and all look at responsible investment today.

David Blood co-founded Generation Investment Management in 2004 with US Vice President, Al Gore. As the firm's Senior Partner, Blood has played a key role in the development of sustainable investing and demonstrating its long-term commercial and societal benefits. Previously, Blood spent 18 years at Goldman Sachs including serving as CEO of Goldman Sachs Asset Management.

In a insightful discussion, RI spoke with Blood about how he sees responsible investment today and in the coming years.

Responsible Investor: One of the core ideas at the launch of Generation Investment Management was for sustainability to go mainstream, and it kind of has … but it kind of hasn't as well? 

David Blood: Exactly. I think the word tipping point is overused and I always hesitate to use it. But I think our observations would be there. Certainly when you go back to where we were 15 years ago the percentage of investors who were thinking about sustainability and ESG was a very, very small number.

Today if you look at the PRI, if you look at the work that you're doing [i.e. at Responsible Investor], it's clear that it's significantly more than a little. Now, whether it's 50% or not, I don't think so. And then the question is ‘what will make it clearly mainstream?’

I suspect that the reiteration of the business case and the continued proof sets that are coming out around sustainability and ESG will make it so; but whether that's going to be in 2020 or 2023 I don't know. I think the question is no longer whether or not it will become mainstream; it will. The question is will it be enough to address the challenges of the climate crisis and the SDG goals and the Just Transition, and at what point will it become even more rigorous.

On the one hand you can have people agreeing that ESG and sustainability are important and claim – or proclaim – that they're considering it in their investment processes. But actually doing it and at the same time learning from it – and then ratcheting up the commitment to sustainability and ESG; that's really what we're going have to see, whether it's mainstream-lite or actually mainstream.

Responsible Investor:  How do you measure that commitment though?

David Blood: We're beginning to believe that there will be three aspects of investing: risk, return and impact. And we believe that asset owners are already thinking about instructing their asset managers to report on impact. We report on impact, and we will get better at it because we think increasingly that will be the norm. 

Then the question is whether that will become the law of the land; whether asset owners or managers will be required to assess impact, report on it and ensure that the investments they make are positive.

All investing has impact. The question is whether you are choosing to have the impact and measure it, and whether you're prepared to take a lower return or higher risk for that impact.

We think that this will have to happen because if we go back and think about the progress we were just talking about over the last 15 years, if we just carry on at that rate for the next 10 years it won't be enough.

All investing has impact. The question is whether you are choosing to have the impact and measure it, and whether you're prepared to take a lower return or higher risk for that impact.

In fact if change occurs at two or three times the current rate it won't be enough. What we need to talk about is not incremental change but transformational change. And we don't know how that will look. But we do know that it's urgent and that's the conversation which is beginning to be had.

It's no longer ‘will sustainability and ESG become mainstream?’, but it's now  ‘how do we accelerate this transition?’ It can't be business as usual.

Responsible Investor: How is this going to happen?

David Blood: I think civil society, government and the owners of capital have to insist that all business has positive impact and that investors have positive impact, and that's within our gift. You can simply say ‘you cannot invest in an oil company unless you can demonstrate that they are paying a proper price on carbon’. There are ways to do this. If we put a price on carbon then maybe that would accelerate it. 

But positive impact, eliminating externalities, being much more focused on the long term, all of these can help accelerate it. I think that some of it will be just best practice, but some of it will need to be mandated. The Europeans are probably ahead of others on this. I know the Australians have done some work too, and the Canadians. But I would not be surprised if over the next five five years that that there isn't a greater focus on impact, reporting impact and requiring impact.

Responsible Investor: You must meet pension fund trustees for whom sustainability is not a prime concern?

David Blood: We have to be realistic to recognize that this journey will be difficult – it's certainly not straightforward – and that we will need to use every tool in the box.

Our public equity business is using sustainability and ESG to understand the quality of business quality management: what a company does, how a company does it. We are reporting on our impact and we are seeking to invest in businesses that have positive impact. And so we will go into a sceptical pension fund with that conversation.

For an organization that is further down the line and who clearly sees the business case and the strength of the sustainability and ESG investment framework, we will then say ‘actually that's not enough’. We'll tell them: now you need to think about impact and it's your fiduciary duty to think about it because it's your job to be sure that your pensioners have a safe, healthy, fair society to retire in.

Responsible Investor: In a recent Responsible Investor article  we covered Bob Litterman, the former Head of Risk Management at Goldman Sachs, talking about the people who are going to benefit from this sustainability shift: the grandchildren of our grandchildren. That's so far down the line that we don't have to think about it isn't it?

David Blood: You do have to think about it because the urgency is so clear now that it's no longer a 2050 question anymore. This is already a 2019 question. And I think what's going to happen is – and the world's already waking up to this – that things are going to move much more quickly than we can possibly imagine. I think that there'll be a price on carbon in the United States in the next five years.

Responsible Investor: How would that come about?

David Blood: We obviously aren't political experts and I certainly don't want to be quoted as giving political advice or regulatory advice, but the percentage of Americans who are interested in climate has gone way up. Climate change will be an election issue. The Democrats will make it an election issue. And I think increasingly Republicans recognize that climate is important to their younger voters. And they're going to have to have a positive stance on it. 

Thirty years ago climate change was bipartisan. Now it's not. It does not need to be political. Obviously Vice President Gore is our chairman, but we're not a political organisation, we're an investment organisation. We don't think climate change is a political conversation, we don't think sustainability and ESG is political. It should be a fundamental business question.

Responsible Investor: What are the tools available to investors to bring about this change?

David Blood: Ultimately the asset owner community will be critical in terms of how quickly they force the issue around impact and around disclosure, particularly for carbon. That will go a long way to accelerate the transition.

But, there's a significant economic opportunity, and they'll have to be comfortable to deploy capital against that that opportunity. We will need, on the asset management side, to have the capability, the products, the knowledge and the humility to acknowledge that this is not straightforward and that there are very few ‘win-win’ situations.

We will need civil society to be part of this conversation. We will absolutely need to engage with businesses and management teams to make the case that the long term and responsible is a smart business decision, and we'll need regulation. So all those different stakeholders will need to be part of this and some are going to move faster than others.

 This is not straightforward and there are very few ‘win-win’ situations.

If we wanted to be discouraged we could be, but I don't think that's an option. I think we're just going to have to say this is going to be really hard, there's going to be trade-offs, but collectively it's the right thing to do.

Responsible Investor: I’m interested in your views on investment engagement and the limits of “quiet diplomacy”.

David Blood: We've always felt that engagement is critical, and we've always tried to do that behind the scenes, and that's still our preference. We have gone public a couple of times in the past, and I'm sure we'll go public on engagement in the future from time to time.

But what we will do more of is to focus on change around positive impact, whether that be board diversity, carbon disclosure or investing in communities because we think these are just smart ways to run businesses.

We have always been clear that we will engage in areas where we think we can add value. We're not activists: we're not going to try to tell a company what their marketing or product strategy ought to be. There's a handful of things we think we know a little bit about like sustainability, governance, remuneration systems, capital allocation, and so on.

We feel that it’s our responsibility to engage, and you'll see us put a lot more muscle into that.

Responsible Investor: I want to get on to this idea that everybody's jumping on the sustainability bandwagon…

David Blood: This is an investment framework that we're talking about, not a marketing tool. And we want to just keep repeating that because it actually makes sense. I think the reason why investors are getting onboard is that they now actually understand. At a minimum, they see the risk management tools. And increasingly they see the security selection benefits. 

There may be some who have not completed their journey, but the more that they get into it, the more we think they will get better at it.

Of course, there are some organizations and investors who still believe that sustainability and ESG is a value destroyer. Or they believe it's a political moniker. And, of course, we need to help them see that that is not the case; that this is a pure investment discussion. You know, I was head of Goldman Sachs Asset Management: there are not that many socialists at Goldman Sachs!

Responsible Investor: Generation Investment Management is closed to new money at the moment; you're not fundraising. Is that because you don't see client demand?

I was head of Goldman Sachs Asset Management: there are not that many socialists at Goldman Sachs!

David Blood: No, we do see demand. Even though we're closed to new money at the moment, we speak to new potential clients all the time. And we do know that there is significant interest in, not just Generation, but in the conversation about long-term sustainability and ESG. We know that there's clear demand.

We work with a lot of new managers who will approach us to share thoughts around how you build a company and approach the market.

Responsible Investor: You're obviously happy to do that.

David Blood: Yes, absolutely. Happy to do it. I would say that twice a month there's somebody in here talking about how to build a business.

Responsible Investor: It's very difficult to get asset managers to talk about investment consultants. When we talk to investment consultants; the ESG person will be really into sustainability, but the field consultant, less so.

David Blood: It's a really important question. We have discovered over the years that there are some extraordinarily strong consultants, field consultants, who understand very well the importance of sustainability in ESG. And so I would say the investment consulting community is really no different than the asset owner community or even the asset manager community.

Responsible Investor: RI was at the recent climate strike and we were thinking ‘what goes on the placard?’

David Blood: Telling folks what you do want is complicated. It's also not a one-sided issue. When we founded Generation, my interest was in social justice and poverty, and Al’s was in climate, but we recognized early on that  it's basically two sides of the same coin.

We will not succeed in addressing the challenges of climate if we don't have a Just Transition. In fact I might even argue that if we don't get to a Just Transition and equality first, we won't be able to deal with the most important crisis in history. So you can't lose sight of both. That means the advocacy needs to be around both, we need to be more holistic in how we think about the problem.

So if you're manufacturing an electric vehicle, what is the whole lifecycle of that from the sourcing of materials to their disposal? There are going to be trade-offs. If a company is an outstanding manufacturer of electric vehicles but treats their employees terribly – naming no names – is that a good company or a bad company? It's not straightforward, but it is a bad company. However, you need to be holistic in terms of how you approach these challenges and as you correctly noted, they don't lend themselves to snippy bumper stickers. 

But again, back to the point, it's going to be really hard.

Responsible Investor: There are strange bedfellows within the climate movement, ranging from ‘Socialist Worker’ types to green conservatives…

David Blood: And you need them all! In my evening work I'm the co-chair of the World Resources Institute. They have an important role to play, but so does Greenpeace Conservation International WWF, The Nature Conservancy and Extinction Rebellion. The reason there are some strange bedfellows is there is a lot of touch points for this challenge. It is not easy by any stretch of the imagination.

Responsible Investor: Who do you consider your investment peer group?

We have to do more in our advocacy and more in driving impact for impact’s sake

David Blood: We consider ourselves to be a mainstream investor. And when we work with our clients we are asking them to choose us based on our investment acumen.

We will always look to see who has the best global equity portfolio or is among the top 10 global equity managers in the world. They tend to be boutiques like Generation, so those would be one set of peers. Then we look at organizations who have made sustainability and the research around sustainability and ESG their primary goal or raison d'être: Bridges Fund Management is an example, and there are other good research organizations we like.

And then there are some extraordinary voices – Jeremy Grantham, for example – who are very powerful in what they say and do. That includes other CEOs who are talking about climate and engagement etc. They not may not always carry their organization with them, but they're doing good work too.

We don't support folks who are knowingly, wilfully misleading of course, but there are very few people who are. There may be some marketing spin along the way but most folks I think are trying to make a difference and change.

Responsible Investor: What keeps you awake at night?

David Blood: We believe the next five years will be the most important years of our career. We believe that we have to do more in our existing businesses, and more in our foundation. We have to do more in our advocacy and more in driving impact for impact’s sake. And we don't know yet exactly what that means, so that keeps me up at night. We are working hard at Generation on how to do that. We hope to be part of the solution. I'm sure there will be some groups who think we could do more and we'll try to. You'll know and we'll know whether we've been successful in 10 years’ time.