Generation’s Gore and Blood call for creation of sustainable investment consultancy

Boutique’s founders issue blueprint for sustainable finance

Al Gore and David Blood, the founders of Generation Investment Management, have called for the creation of a sustainable investment consultancy as part of a sweeping blueprint to “re-energise” sustainable finance, which they argue has reached a plateau.

“We support the creation of an independent investment consultancy focused on providing high quality advice on the relative attractiveness of sustainable investment products as well as on sustainable asset allocation,” the pair say in a new report. It would create “healthy competition” in the mainstream investment consulting industry, where sustainability “has not yet penetrated”.

The duo, who set up Generation in 2004, have put their thoughts into a new 33-page paper called simply ‘Sustainable Capitalism’, which builds on their “A Manifesto for Sustainable Capitalism” published in the Wall Street Journal last December.

Drawing on advice from more than 70 high-level experts, the paper makes the economic case for mainstreaming Sustainable Capitalism – saying it’s not a trade-off with profit but indeed actually fosters superior long-term value creation.

“Sustainability has plateaued – if anything it’s gone backwards,” Blood, the former chief executive of Goldman Sachs Asset Management, told a briefing. “We’ve not made the business case well enough.”

The paper, which is aimed at the investor and capital markets community, puts forward five key actions for immediate adoption. They are:

  • Identify and incorporate risks from stranded assets – i.e. whose value can change dramatically, e.g.: carbon or water price
  • Integrated reporting – this could be mandated by exchanges or regulators
  • End quarterly earnings guidance – promotes short-termism
  • Compensation structures – should be aligned with long-term sustainable performance
  • “Loyalty-driven securities” – to encourage long-term investing“The discussion around the business case for sustainability has not been short on words but the follow-through has been short on actions,” Gore and Blood argue in the report.

They point to the $30trn of assets signed up to the UN Principles for Responsible Investment – some 20% of the world’s capital – and say: “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 mainstream.”

Asset owners should proactively ask their fund managers “direct and pointed questions” about how they are considering environmental, social and governance (ESG) factors in the investment decision process. The paper says asset managers should be subject to rolling multi-year performance milestones: “We therefore urge asset owners to evaluate and benchmark the compensation and performance fee structure of asset managers to assess whether or not they truly have embedded a long-term horizon in their practices.” And it proposes that the pay structures for both corporate executives and asset managers be revised (“either through voluntary action, board mandate, or pressure from asset owners”) to be aligned with long-term financial and ESG performance.

Former US Vice President and Noble Prize Laureate Gore, speaking via a TV link from New York, likened stranded assets such as carbon “externalities” to sub-prime mortgages in the run-up to the financial crisis.
“By analogy we now have trillions of sub-prime carbon assets – the real value of those assets are concealed,” he said.

Other issues identified for discussion include reinforcing the idea that sustainability is a fiduciary issue, expanding the range and depth of sustainable investment products, reconsidering GDP as a measure of growth and the integration of sustainability into business education.

Both said they were personally supportive of financial trading taxes, with Blood pointing to the UK’s existing stamp duty as an example.
See downloads – left hand column – to read Sustainable Capitalism