Below are Atlantic notes, from James Fallows and others, in response to his November, 2015 article on Al Gore’s campaign to make capitalism more sustainable—and profitable.
The new issue has my piece on the Generation Investment Management firm co-founded more than a decade ago by Al Gore, and why Gore thinks its profitable track record can shift capitalist incentives in a pro-environmental direction. I hope you’ll read it, because I think the arguments Gore and colleagues are making bear directly on the “saving capitalism from itself” debate that has been running for years in Europe and which the Democratic candidates waded into during this week’s debate.
Yesterday I posted a long, largely skeptical response by the financial writer Felix Salmon, of Fusion. You’ll see it lower down on this page. Salmon had once looked into Generation himself, and he had questions about both the details of its operation and the significance of its example.
My purpose in this story is different from that of some others I’ve written. For instance, in the big Chickenhawk Nation piece I did in January, the narrative structure boiled down to: I’ve been wrestling with this topic for years, I’ve been reporting on it in recently, and now I have a line of argument. So sit back and let me see if I can convince you. Some other long stories, on fields I’ve dealt with for decades, follow that same structure (for instance this and this and this and this or this.)
Many other stories are in more straightforwardly reportorial mode. (The Atlantic is one of a handful of publications comfortable with both.)
For those stories the narrative structure boils down to: I heard about some new subject, I found out what I could, and now I am going to show and tell you what I’ve seen, which you may not have heard about before. Most of my reporting from China was in this second category, and so in this current story about Generation.
At face value, I find the Generation story an example very much worth taking seriously, on a subject of tremendous world-wide importance. And at a minimum I find very interesting. But my main ambition with this story was to move the “sustainable capitalism” argument closer toward the limelight of public attention and discussion, both by financial experts and by informed amateurs. Toward that end, even a note as querulous as Salmon’s helps the discussion.
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Nothing that follows should be construed as an response from Al Gore, David Blood, Miguel Nogales, Mark Ferguson, or the other Generation co-founders I write about in the story. I haven’t spoken with any of them. These are my answers, based on things I learned during my reporting or inferences I make. Their intention is to put in context questions like those Salmon raises. Here goes, starting with a lot of specific points.
Is the Generation team cooking the books, index-shopping, “p-hacking,” or in other ways cheating by choosing the MSCI World Index as the benchmark for their success? (Over the past 10 years, that MSCI index had a 7 percent average annual return. Generation averaged 12.1 percent.) Answer: Not as far as I can see. From the start the broadly accepted MSCI World Index was the benchmark for their global-equity fund, which accounts for most of their holdings.
Why not use the better-performing S&P 500 as a benchmark? Because that is a U.S. index; their holdings are international.
What is the MercerInsight assessment that shows Generation’s results to be so strong? It’s from Mercer, a well-known firm that among its products offers a proprietary assessment of asset-manager performance. That is where I got my figures. Also a recent article in Institutional Investor quoted another source, eVestment, as saying that Generation’s returns had been 12.14 percent over the past decade, versus the 12.1 percent I attributed to Mercer.
Does Generation really have $12 billion under management? That’s what they tell the regulators.
Why has Generation closed its best-performing global equity fund? In London they told me they were deliberately capping its size because they did not want to let it get unmanageably large. Instead they have been opening new funds.
Why do they have a $3 million minimum-investment threshold? Their clients are mainly big institutional investors.
Do they hold any bonds? The global-equity fund is mainly for stocks.
Do they actually hold shares longer than other managers? When I asked, they said that their average share-holding duration was 3 years. I didn’t check systematically, but published reports suggest that many managers turn over their entire portfolio within a year or less.
Why are they buying only companies they like, rather than shorting companies they don’t? I asked this in London and was told that they consider themselves an investment fund, not a hedge fund. That is, as one of their people put it to me, “We want to reward companies we think are doing well, not penalize ones we think are doing poorly.” For better or worse it’s a deliberate choice.
Why do they hold less of the Irish company, Kingspan, than they used to? Because (as they told me when I asked) they have a “value” measure as well as a “sustainability” measure. If they like a company but it’s too expensive, they don’t buy. If they like it but it gets too expensive, they sell.
Do they really interact with management, as active “owners”? That’s what they said. “We want to be active owners, not activists,” one said.
Is Al Gore more than a rainmaker? They claim he is.
Why didn’t I write more about the mechanics of buying and selling? I thought I did a fair amount, but for more you can check an explicitly financial publication (Institutional Investor) or a business case study (this proprietary one from Harvard Business School).
Now, the big and important question:
Does anyone at Generation imagine that, on their own, they’re changing the course of capitalism? That’s not what I understood. I understood them to say that their track record deserved consideration as a test case of the proposition that “sustainable” investment could bring high returns.
As it happens, that’s just what I said in the piece: “Their demonstration has its obvious limits: It’s based on the track record of one firm, which through one decade-long period has managed assets that are merely boutique-scale in the industry’s terms…. Generation’s goal is to present an example of a less environmentally and socially destructive path toward high returns.”
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Where can you read more, for the sorts of things I didn’t get to in the piece? Here is a start:
“Sustainable Capitalism,” the main “what we’re trying to accomplish” policy paper from the Generation Foundation, the advocacy arm of Generation, published in 2012.
“From the Shareholder to the Stakeholder,” an influential report last year from Oxford University and Arabesque partners, which I mentioned in my piece. It argued that recent evidence showed that long-term-minded, “sustainability”-conscious investors made more rather than less money.
“Capitalism for the Long Term,” by Dominic Barton, head of McKinsey, which was one of the papers I mentioned in my story. Another by Barton and Mark Wiseman is here.
A “Letter to CEOs” from Laurence Fink, head of BlackRock
Following my article on the implications of the so-far-very-profitable “sustainable capitalism” approach of Al Gore’s Generation Investment firm in London, and the previous call-and-response you’ll see further down on this page, some more reader response.
First, from a veteran of the U.S. high tech industry who is now a professor in Israel:
Like Felix Salmon, I have an active BS detector that begins to buzz when the success of what is essentially a technical advance (usually something that I encounter in a popular treatment of an engineering breakthrough, like recent stories on i-phone sized cameras with 16 different lenses and imaging chips) is defended by one number and a lot of good intentions.
The Institutional Investor article which you link to leaves me feeling much better about the likelihood that Generation is really doing well for fundamentally sound reasons, and will have a broader impact. It does make the case that others are following similar directions.
A theme in these two articles which caught my interest is that European investors and governments take a broader, more philosophical approach to capitalism than does the US. (Leaving aside the London Whale and similar stories.)
In the world that I see, European support for research in science and technology, this is definitely true. The EU's programs, such as Horizon 2020, have broader boundaries, and their goals combine technical excellence with sustainability and industrial exploitation. "Welfare capitalism" is accepted, e.g. Airbus. In the US, the NSF and DARPA seem to care most about continuing US scientific and military dominance on steadily shrinking uncertain budgets. Perhaps each side of the Atlantic is still thinking in terms that have not changed much since the 1950s.
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And from an American with extensive experience in big-project investments (and also environmental projects):
It is going to be a stretch just to get investors to put their money into things that are good for the world and also yield no more than the level of returns that the investors are otherwise accustomed to (especially at no greater than customary risk to the investors). In fact, it is also going to be quite difficult just to find such investment opportunities for them, and to structure them so that they actually are good for the world and also actually do yield even customary returns with customary levels of risk.
It may be possible to invest in things that are good for the world and also produce HIGHER than customary returns at no more than ordinary levels of investor risk. But people familiar with finance and investing will so skeptical of that proposition that even if Generation has indicated that it has already accomplished this (to some extent), the cognoscenti are likely to think: Really? To what extent, exactly? And how scalable/replicable is this – currently – even if Generation has actually accomplished it (to some extent).
Cut through Salmon’s screed, and those are essentially the questions he’s asking. A subsidiary set of questions, to which he also alludes, arises around how acting largely like a hedge fund buying and trading securities – not investing in projects directly, or in start-up companies – actually advances the “good for the world” cause.
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On politics, from a reader in California:
I know that Mr. Gore has done a lot to bring the climate change issue to the fore and that with Current TV he promoted progressive ideas, but this Generation thing is a bit of a head-scratcher.
Here is a man who had built the mechanism and personal brand to influence tens of millions of Americans to take action (i.e., vote) on progressive ideas. One would think that he could have carved out a larger roll for himself being involved in the public discourse and getting people more active in politics.
But instead he chooses to get into investment management? Seriously? It seems that the guy he really admired was not Gandhi but Mitt Romney. And meanwhile, after building Bain, Mitt Romney longed to attain to the status and influence that already belonged to Al Gore as a trusted political voice and leader.
I can’t help but think that the 52 year old Gore could have used his energies much better than running after pension funds to play with their money and get returns that were 2-3% higher than average. Whooopde do. I wish he had instead worked in building coalitions to elect leaders that make a difference.
I have responses on many of these points but will save them for an upcoming round. For now, thanks to these and other readers. Again the point of my article was to try to get the “sustainable capitalism” concepts into broader discussion, and scrutiny, by the non-financial-pro part of the public. So responses pro and con all advance the cause.
An “it’s about time!” welcome to Al Gore and David Blood, on the Resilient Investor site.
In early responses to my article in the current issue about the surprisingly profitable track record of Al Gore’s Generation Investment Management firm, Felix Salmon and other commentators have given variants of what I’m calling the “$20 bill on the sidewalk” argument. The $20 argument goes: if an economics professor sees some money on the sidewalk, he thinks, That can’t really be a $20 bill, because if it were someone would already have picked it up. The analogue when viewing sustainable investment would be, This approach can’t really be so profitable, because if it were other people would already be doing it.
For this installment, a sample of responses that say: As a matter of fact, it is that profitable! And lots of other people have been doing it. And, even if Al Gore and David Blood didn’t “invent” this approach, perhaps their prominence and their recent success will help it become better known.
First and most extensive is a long report by Jim Cummings at the Resilient Investor site, which essentially says: Welcome aboard, Mr. Gore! And it’s about time! It’s worth reading in detail, but here is a sample:
Convincing quotes from [various experts I cite in the article] all seem to agree [that Generation’s profitability] flies in the face of conventional wisdom. Where have they been?
When we wrote Investing With Your Values in 1999 (published by Bloomberg, not exactly a fringe outfit), there was already a solid track record of clear parity and frequently out-performance by SRI funds; our own Jack Brill had completed a 5-year New York Times mock-management quarterly feature, running a strong second with the only SRI portfolio. Indeed, the co-authors of our new book were in the audience at the annual SRI Conference in 2005 when David Blood, who had recently launched Generation Investment Management with Gore, told the gathered crowd, “You were right. You’ve been right for 25 years. Incorporating social, environmental, and corporate governance considerations into the stock selection process adds value.”
We were happy to welcome Blood to the club in 2005, and we’re surely excited that Generation’s first ten years of results can be added to the steady stream of mainstream reports confirming and expanding on the message that socially and environmentally responsible firms outperform their values-neutral peers.
After the “welcome aboard!” joshing, Cummings goes on to emphasize why the Generation story might be significant:
But we don’t mean to dismiss the power of what Blood and Gore (!) have accomplished. In two ways, they are making a statement that few others are in the position to do. First, they’re showing that sustainable capitalism can do more than just slightly outperform the norm (which is impressive enough; over time, the increased returns really add up)….
Secondly, their target client audience is the extremely rich, with most of the assets they manage being held by institutional investors. Though most laymen aren’t aware of the fact, institutional investors (pension funds, universities, foundations) hold a large proportion of the world’s market equity. If capitalism really is going to evolve into a force for good, as argued by SRI pioneers John Fullerton and Hunter Lovins, then getting institutional investors and the uber-wealthy on board is going to be key.
I should clarify that, even more than I mentioned in the piece, everyone at Generation whom I interviewed stressed that they were part of a long tradition — but that they hoped that their recent results might add more oomph to an ongoing, international effort.
I’ve been following ethical investing for over forty years and independently founded Investing for the Soul in 2002 to help investors everywhere apply their personal values to investing. The site covers SR-ethical investing news and research from around the world, plus related insightful commentary and services for investors, investment professionals and organizations.
I believe that if everyone invests according to their personal values, then, since so many of our core values are alike—and are supportive of higher ideals—that in the long run, only companies employing these higher values will truly prosper.
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In his note Felix Salmon asked if I had talked with any of Generation’s investors. The answer is yes, but none of those I spoke with wanted to be quoted by name. I have followed up with one of them, asking whether he would be willing to join the on-line discussion. He said:
I found Felix Salmon’s piece depressing for its being infused with a skepticism so severe it borders on denialism. You had already answered many of his objections in the main piece, thought he chose not to mind, and you dealt with the rest of them in your follow-up note. I have nothing to add.
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And just to round this out on a “many readers, many perspectives” note, here is one more note from a person drawing the opposite inference:
I'm inclined to think well of Al Gore, and my reaction to hearing about his investment approach is "I hope he succeeds"! Reading the persuasive response by Felix Salmon pulls me back from this bias.
It's not the inherent contradiction of what Al Gore proposes (live sustainably and be rich!). It's the fallacy of his investment philosophy - that his firm will consistently pick winners. Yes, some seem to be able to do that, but for everyone who picks a winner, there is someone who picks a loser. Investment as practiced, or should I say "sold" by Al Gore is a zero-sum game. If I buy low and sell high, there is someone else selling low and buying high. For every firm that claims above average returns, there is a firm that has below average returns. And, an approach of picking winners leads to active trading and high expenses, reducing investment returns, but making the brokers rich.
Investing in companies that reflect your values is a good thing, but as I infer from Felix Salmon's commentary, there is nothing magical about it.
If you’re joining us late: my article in the current issue, about the Generation Investment Management firm of London, explained its potential as a test case for the “sustainability can be profitable!” hypothesis.
Over the past ten economically tumultuous years, the returns of this environmentally and social minded firm have beaten nearly all other investors. Thus Al Gore, Generation’s chairman, and his colleagues say that financial managers should give sustainability another look.
The counter-argument is: this can’t be right. If sustainability really were so lucrative, more people would be doing it already.
In counter to that, Gore et al say: in fact, more firms are taking this approach, and it is paying off. One recent indication, which I mentioned in my article, is the report from Oxford University and Arabesque partners about the growing popularity and profitability of a longer-term, socially minded investment strategy.
The Wharton study looked at 53 “impact investing” funds from the private equity world, and how both their financial returns and their social-responsibility “impact” measured up. This is an allied but different approach from Generation’s. (Generation’s main fund holds publicly traded corporate stocks, not private equity, and has its own definition of “sustainability.” But “impact investing” and “sustainable capitalism” are part of the same movement.)
Here’s what the study found:
A common critique of impact investing broadly is that investors must expect concessionary financial returns in exchange for pursuing a social or environmental impact… [JF note: ie, most people assume that social responsibility comes at a cost.]
WSII assessed the financial performance of the subset of funds seeking market-rate returns, assuming that the tension between financial performance and mission preservation would be most acute in this group… The data show that impact funds did not have to make concessions in order to preserve the portfolio companies’ missions upon exit. [Ie, as with Gore’s fund these funds have been able both to “do good” and to do well.]
The study goes on to explain its methodology and results and then concludes:
Market-rate-seeking impact investments in the sample, therefore, may be financially competitive on a gross basis with other equity investing investment opportunities. This financial performance may be why impact fund managers often assert that there is little inherent tension between profits and “purpose.”
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.
Company logo for Opower
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.
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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.
A Generation Foundation report on why sustainable businesses should also be more profitable than others
On the eve of the Paris climate talks, let’s get back to “sustainable capitalism.”
After my piece about Al Gore’s sustainability-minded, and so-far very profitable, Generation Investment firm came out last month, Felix Salmon of Fusion wrote an email on all the reasons he was skeptical of the company, its claims, its founders, the story, and everything else. You can see it at the bottom of this Thread, or here.
Salmon now offers what he calls the “considered” version of his critique, as a new post on Fusion. As with his email, I’m glad Salmon is directing attention to Generation, even though as with his email obviously there is a lot I disagree with in his arguments and dislike about his tone. (The Fusion version begins, “Al Gore has become a salesman.”) But by all means read this latest installment and judge for yourself.
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Before getting to an important point on which I actually agree with Salmon, let me address one of his continuing “something seems fishy here” themes. It concerns whether Generation is somehow cooking the books in reporting its very high returns, which have averaged more than 12% per year through the booms and crashes of the past decade.
In his original email, Salmon wondered if Generation had been cheating by choosing a benchmark index only at the end of a decade, when it could pick the one that made its returns look best. As I pointed out here, that’s not so; they’ve used the same one throughout.
Now Salmon wonders whether Generation’s very attractive long-term results mask some shorter-term fluctuations. “What we don’t know, however, is how much the fund returned over other time periods: are they only going public with this figure now because they’ve finally arrived at a number which looks good?”
As a conceptual matter, this is a very strange complaint to make about a firm whose announced goal is to look past short-term fluctuations to maximize longer-term results. (“Coach, we know you were ahead when the game ended. But you were behind in the second quarter!”) It also has no factual foundation:
Eight years ago, Lenny Mendonca of the McKinsey Global Institute interviewed Gore and his Generation partner David Blood about their then-nascent approach. What they told him in 2007, just before the world financial crash, is very consistent with what they told me 2015, after the crash and recovery. By 2009, when the crash was upending investment models around the world, Gore was already considering telling the story of Generation’s better-than-normal returns. I know this first-hand because he spoke with me about it at that time. In the end he and his partners decided to wait until they had a ten-year record to discuss.
Felix Salmon also wonders whether Generation’s higher returns are eaten up in higher fees. I don’t know the exact fee level, which is confidential. But I have no reason to disbelieve Generation’s claims that the fees are “normal” for their manager class. I have “no reason to disbelieve” this because the many Generation claims I could check independently all stood up. I have subsequently spoken to some of their individual and institutional investors, who said that the fees were “normal.” To close the loop here, Salmon has no grounds for speculating that the fees are unusually high, and I have reason to believe they are not.
Salmon closes his new column saying that the most interesting question raised by Generation is whether, in principle, more “sustainable” business practices should also prove more profitable in the long term. That’s exactly the question Al Gore and David Blood are hoping to raise; it was what Lenny Mendonca wrote about; it is the subject on the ongoing reports from Generation’s advocacy arm, the Generation Foundation; and it’s the theme of the many other analyses I mention here.
It’s also the idea behind an organization called Aspiration, which is meant to be “an investment firm with a conscience” for members of the middle class. This month it announced a new Redwood Fund, which offers sustainable-capitalism investment options for low fees, and for minimum investments of as little as $500. (Generation’s funds, as a comparison, are mainly for pension managers or other institutional investors, or for wealthy individuals who can put up a minimum of $3 million.) You can read more about Aspiration here and about the Redwood Fund here. Andrei Cherny, Aspiration’s founder and CEO, said about the fund in an email:
The Aspiration Redwood Fund has a minimum investment of $500 in companies whose sustainable environmental and employee policies make them likely to be more profitable. This is the first fund built in parallel to the new Sustainable Accounting Standards Board (SASB) metrics.
This will open up the Generation model -- investing in companies whose sustainable ESG practices make them more valuable -- to the retail marketplace for a $500 minimum investment. This is a product being run for us by UBS based on a strategy previously only available to their private wealth clients that has beat the S&P 500 each of the past 6 years by 3.5%.
While sustainable investing is growing fast in funds like Gore's, it has, until now, been mostly available only to the very wealthy and what’s been available to everyday investors has often meant sacrificing returns.
Felix Salmon says that this fund looks worth checking out, and I agree. And on what financial innovators at groups as new as Aspiration, as relatively small as Generation, or as established and enormous as BlackRock, may be trying to do, again this point from the original article:
No single small company is going to change finance by itself, and Generation’s past results are no guarantee of its future. But previous examples of market success—Peter Lynch of Fidelity in the early mutual-fund days, Warren Buffett of Berkshire Hathaway with his emphasis on the long term, David Swensen of Yale with his returns from unconventional investments, John Bogle of Vanguard with his advocacy of low-cost indexing—have shifted behavior. Generation’s goal is to present an example of a less environmentally and socially destructive path toward high returns.
