The leitmotif of the pieces you see collected in this Thread, based on my article in the current issue about the Generation Investment Management firm of London, is whether “sustainable” investing can actually pay off. Al Gore and his colleagues say: Yes! Look at our returns. Skeptics say: something must be fishy here.
For this installment, we’ll hear from a company that Generation decided to take a large position in, after the elaborate decision-making process I described in the article. This note comes from Alex Laskey, president and co-founder of a software-as-service company called Opower.
As I mentioned in the article, when I got a look at Generation’s holdings list, a few of the names were familiar—Microsoft, Qualcomm, Unilever—but many were of companies I’d never heard of before. Opower was one of these. I hadn’t been aware of it but now know that it is a cloud-based service that is designed to increase efficiency in the utility business. Laskey recently told Harvard magazine: “Last year alone we saved close to three terawatt hours. Just to compare, the Hoover Dam—one of the country’s largest hydroelectric power sources—produces 3.9 terawatt hours a year.”
I didn’t ask questions about Opower when I was speaking with Generation officials in London. Since then I have learned that Opower had been on the Generation “Focus List” for a while, but seemed too expensive. When its stock price took a dive early this year, Generation bought heavily and now holds a major position.
Here is what Alex Laskey says about the experience. To be clear, I’m quoting this not to tout/endorse his company but to give a specific and interesting real-world example of how the “sustainable” investment process looks on the receiving end. Laskey writes:
It isn't yet clear to me how Generation distinguishes itself as an owner of our shares. However the thoughtful and patient way in which they approached an investment in Opower indicates they're a different kind of investor and holder.
Though Generation has been an investor in Opower for less than a year (they first invested in March of 2015), I have known [some people] there for more than four years. I first met them at a meeting with Al Gore and the CEOs/Presidents of several clean energy companies in London in October of 2011. This was one of the "solution summits" you describe in the article.
We hadn't yet signed our first international client and we were eager to get some exposure to the European utility sector. The invitation to participate in their summit was well-timed and very helpful.
In the intervening years they've included us in several summits, made introductions to potential clients and prospective partner companies, visited our offices and called on our clients. [JF note: again, during the period Generation was interested in the company but held no shares.] Along the way, they've had the opportunity to get to know my co-founder and me fairly well and we've had the opportunity to get to know and really like and respect them.
They're incredibly knowledgeable and insightful both about environmental and utility regulatory policy (not surprising) and software (more surprising). They're very well connected and can be helpful with introductions. And, they're extremely inquisitive and curious. The effort and time they put into getting to know us and the company distinguishes them, in my estimation, from other public market investors.
This effort -- over a long period of time -- speaks directly to the sustainable capitalism you describe -- and others deride -- in your article.
I've quickly skimmed the article by Felix Salmon and I think he misses the point. Or rather, I think he confuses it -- perhaps on purpose -- to make his own point about the relative ineffectiveness of divestment campaigns.
As I understand it, Generation isn't arguing that divesting of holdings in fossil-fuel burning companies and industries will change those industries but rather than over the long haul, investing in environmentally and socially responsible companies should earn greater returns than investing in firms which score worse on environmental and social measures.
It is perfectly reasonable, as he suggests, to think that the safest bet for investing is to invest in low fee index funds. But, if you're going to choose a manager then you're already determining that you're willing to accept more volatility. And, you've already decided you think you can beat the market.
In that regard, Generation shouldn't be compared to investing in passive index funds but rather in comparison to other managed funds. In that context, it strikes me as a perfectly reasonable hypothesis that the financial markets -- which are incredibly short term oriented -- discount the long term liabilities that companies with lousy environmental and social practices carry on their books.
There is quite a bit in your article about how Generation looks at management quality and our incentives (compensation, governance etc). What the article doesn't describe -- but I suspect Generation knows -- is that employee quality is higher in companies that are mission oriented.
We attract more talented and passionate employees because when they come to Opower they know that not only do they have the opportunity to make a lot of money and solve difficult and challenging problems, but because they know that they're going to be a part of something bigger than themselves. Our employees work harder and with more pride because they know they're working to help the power industry transform itself….
I have had the opportunity to meet with the leaders of several companies which are trying to make money while making the world a better place. They all believe that their company's mission and purpose builds pride amongst their employees. That pride is a productive force.
Ultimately, for software companies like ours, our employees are our most valuable -- and expensive -- asset. Companies making mobile games, serving ads and helping people shop may present engineers with difficult technical challenges to solve; they can afford to pay big salaries and offer nice perks; but, they can't compete with us on mission. This allows us to attract, retain and get more out of our employees. I can't imagine Generation hasn't realized this too when developing their investment thesis.