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.
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.
