In every issue and most every article, we try to tell you about ideas and developments you might not have come across before. As a reporter, I like the job best, and feel most alive, when being exposed to some new-to-me culture or organization or approach to life. A Chinese factory, a software startup, a genomics-research lab, an aerospace design center, a Border Patrol unit—these are the sorts of places that I’ve had the luck to spend time inside, begin learning about, and try to describe in the magazine. The structure of a great many of our Atlantic stories, and nearly all of mine, then boils down to: “Here’s a question I had, here’s how I looked for answers, and here’s what I found.” That’s what I’ve done in this case, and I think the results contain genuine news.
Through the past few months I’ve had what I found one of the most engrossing of these exposures. It’s the one this piece describes, involving the Generation Investment Management firm of London, which Gore helped found. In the article I do my best to describe why the firm’s approach to the world is interesting, unusual, and potentially quite significant — and why its approach has led to better returns than virtually any other asset-manager in its class. I’ll let you go there yourself to judge the case the company is making. Why the “green Warren Buffett” comparison? Because Buffett shifted investment strategies by showing that his could pay outsized returns. That is what Gore is attempting as well.
Just one other word of set-up: perhaps the most interesting substance sections of tonight’s Democratic debate on CNN about the future of capitalism. That wasn’t something you’d expect from this kind of event, but it came up — and it isdirectly connected with the ideas Gore is dealing with. Over to the article for more.
Meanwhile, I talked with Kai Ryssdal of Marketplace about the piece, for a segment they ran this evening. You can find it here.
The new issue (subscribe!) has my article on Generation Investment Management, the London-based financial firm Al Gore co-founded more than a decade ago. Generation has been very profitable, and Gore and his colleagues contend that its success should draw attention toward the rewards of environmentally conscious “sustainable capitalism.”
Felix Salmon, the prominent financial writer and senior editor for Fusion, has some thoughts about this piece, what Al Gore and his colleagues are up to, and what it all does or does not mean. As will become obvious, there are parts of Salmon’s letter I like and agree with more than other parts, and I think that many of his complaints boil down to this not being a different kind of article for a different kind of readership in a different, more financial-insidery kind of newspaper or magazine. Or by a different writer! Some other parts, I think, are versions of the “$20 bill on the sidewalk” outlook I mention in the article: the Gore/Generation practices can’t really be that successful, because if they were everyone would already have adopted them. (“That can’t be a $20 bill on the sidewalk, because if it were someone would already have picked it up.”)
But there are also some good fundamental questions he asks about the implications of this model, which I’m resisting answer piecemeal and will begin responding to tomorrow. For now, I’m grateful to Salmon for letting me quote it in full and kick off the discussion.
Felix Salmon writes:
This is a fascinating and yet frustrating article, at least for me. It’s by far the most in-depth thing that has ever been written about Generation, but I feel like it doesn’t really answer any of the questions I had about the company, most of which arose when I wrote this piece about why more investors don’t divest from fossil fuels. The Generation view would have involved me putting something in there about how solar is a much better investment than coal, or some such, but because Generation is so secretive about its results, I couldn’t really do that.
1: *How*, exactly, does the Generation model “shift the incentives of financial and business operations to reduce the environmental, social, political, and long-term economic damage being caused by unsustainable commercial excesses”? Is it basically just by saying to companies “if you behave this way, then we will be more likely to buy your stock”? It seems to me that whether or not Generation has done well for itself and its investors, there’s really no evidence at all that it has shifted any incentives even in the companies it invests in, let alone in the companies that it *doesn’t* invest in.
To take a big example, how, say, are Exxon Mobil’s incentives shifted by the the existence of Generation, and companies like it? The story says that Generation is “reducing the destructive side effects of modern capitalism”, but I don’t see any evidence of that?
2: The benchmark being used here is the MSCI World, which, fine, is as good a benchmark as any, I guess. (Although it ignores the bulk of all investable global assets, in that it includes no fixed-income bonds. Does Generation invest in bonds at all? Or anything other than publicly-listed stocks? From the story I’d guess not, but who knows.)
Still, you have to set your benchmark ex ante, not ex post. Did Generation say, when it was founded, that its benchmark was going to be the MSCI World? Because if it didn’t, this is basically the investment version of p-hacking. [JF note: More on p-hacking here.] The main benchmark that investors tend to use is the S&P 500, which has significantly outperformed the MSCI World over the past 10 years.
3: What is this Mercer “survey” on which the claims of outperformance are based? The piece annoyingly has no hyperlinks, even to things like public Andy Haldane speeches, so I’m unclear on whether the survey is even public. [JF note: I’ll try to restrain myself in general, but this doesn’t have links because it’s an article from the print magazine.] And is the 12.1% figure before or after Generation’s fees? How much is Generation charging for its revolutionary model?
4: More p-hacking: all we’re being told about here is the 10-year return of a single Generation fund, which may or may not be the one which is closed to new investment. Remember that because Generation is highly secretive about its results, it gets to open itself up to Jim Fallows on its own schedule, at exactly the point at which it can claim the best results. What we don’t see in the article is even a simple chart of the value of $1,000 invested in Generation: all we get is a single datapoint of the 10-year annualized return. Which is interesting enough, as far as it goes, but how’s the 5-year return? The 3-year return? And, more importantly, what are the *investor* returns, as opposed to the *investment* returns?
If I could only get one number from Generation, this is the one I’d be most interested in: what is the average annualized return per dollar invested with the company? Here’s my suspicion: that Generation launched with a small amount of seed investment from its founders and maybe a passel of other Davos Man types. (Big institutional investors don’t even tend to consider a fund for investment until it’s at least 3 years old.)
During its first three years, when it was very small, Generation managed to do extremely well — so well, indeed, that it was able to attract billions of dollars in institutional capital. (We’re told Generation has $12 billion in AUM, although investment firms have all manner of ways of exaggerating that number, and I’m not sure I believe it.) But in the years since — in the years in which it has been a multi-billion-dollar investment fund — Generation has not been able to replicate the results it had when it was small, and as a result, none of its institutional investors have seen the 12% returns that you talk about. Has Generation actually managed to prove that it can deliver above-market returns to investors? I’m still unconvinced on that front.
5: Talking of which: Why is the fund closed to new investment? Ambitious investment managers like Blood and Gore don’t tend to do such things unless there’s some kind of problem with the fund in question. Best case scenario is that the fund can’t scale: it works when it’s small, but not when it has real money. Worst case scenario is that the fund is just doing really badly, however well it did in the early years.
For that matter, what’s with the $3m minimum, not being open to normal investors, etc? If this is going to revolutionize capitalism, rather than just being a feel-good diversification play for the ultra-rich, why can’t all of us be part of it? And why is Al Gore, of all people, gating himself off from 99.9% of the population who might be interested in going down this road?
6: The noncommittal quote from David Rubenstein is golden. But isn’t it that case that the likes of Rubenstein have vastly more ability to actually change the way that companies are run than the likes of Blood & Gore? Rubenstein has almost total control of the companies he buys. He can run them as sustainably as he likes, with an eye to as many different bottom lines as he likes. He can change them in deep, far-reaching ways. Whereas all that Generation can do, really, is buy and sell stocks on the secondary market.
Even Larry Fink, with his trillions under management, can’t do much more than that: look how much of his company is iShares, for instance, and other passive investment vehicles which give managers essentially no discretion over what to buy and sell.
7: But also, Rubenstein is right about constraints. Generation is trying to make money by trading in and out of roughly 125 companies, all of which are, to a greater or lesser degree, “sustainable”. That’s great. But what would happen if it then gave itself the *option* to trade in and out of other companies which are *not* sustainable? That option has some value, no? Would it not help if Generation understood Exxon Mobil well enough to be able to short it, rather than just taking long positions in its cleantech competitors?
8: There’s lots of talk in this piece about the problems of short time horizons, with a hinted implication that Generation’s time horizons are long, or at least longer. But some numbers would be really helpful here. Are Generation’s time horizons longer than any other institutional fund manager? How long does Generation hold on to its positions, on average, and how does that number compare to its more conventional competitors? That kind of thing. I’m perfectly willing to believe that Generation’s *analysis* involves a long-term outlook. Almost all stock analysis does. But does its investment behavior reflect that?
9: There’s also a bunch of talk about inequality, and wealth disparity, and that kind of thing — but how does running billions of dollars for major institutional investors, and delivering above-market returns on those billions, *decrease* inequality? Surely the more successful Generation is, the richer rich people like Al Gore become, and the more that inequality goes up.
10. It seems obvious to me that Gore’s job at Generation is the classic chairman job of asset-gathering. He’s not picking stocks, or making buy or sell decisions, or anything like that: he’s a sales guy, trying to persuade huge institutions to give him some of their billions. He’s also had ten years to perfect his sales pitch. When faced with a guy like that, you naturally need to have a certain degree of skepticism about what he’s selling, unless you can independently come to the same conclusions.
But it seems to me that Gore has almost complete control over what he chooses to reveal about Generation’s results, when he chooses to reveal it, and what he keeps secret. No one can do the kind of independent analysis on Generation that Generation does on the companies it invests in. Or if they can, they can only do so under strict NDAs. I’d love to know whether you talked to any of the investors in Generation, to see whether they are actually as happy with Generation’s returns as Gore would like us to think that they are. [JF: OK, I can’t resist on this either. Yes.] Or, better yet, whether he talked to anybody who kicked the tires and decided *not* to invest.
11. How does the actual business of buying and selling work? This is incredibly vague to me. The only example in the article is that of Kingspan, where we’re told that Generation bought 5% of the company in 2007, and then bought more and more stock when it got cheaper. Which implies to me that it should have well over 5% of Kingspan right now — but a quick Google search shows that in fact it only has 3.87%. Did Generation cash out when its investment became profitable? Did it even make money on Kingspan? I’m very unclear on what the Kingspan story is meant to be telling us.
12. There’s a lot of mean stuff written in this article about other firms on both the buy side and the sell side, and how short-termist they are, and how obsessed they are about stock price, and how their live events and conferences are incredibly narrowly focused, and stuff like that. But of course no names are named, at least on the buy side, and I do wonder how much of a straw man this is. The investors I know tend to spend a very great deal of time looking at long-term trends and the like, while it’s obvious to me that Generation, just like any other shop, has traders who are ultimately in charge of buy and sell decisions and who Jim probably didn’t talk to at all. Is Generation really all that different? Isn’t compensation based on 3-year performance, for instance, pretty standard for this kind of company?
13. In any event, even if Generation and investors like it do succeed in getting above-market returns from long-term investments in sustainable companies, how does that change anything? If you’re a long-term investor, after all, then pretty much by definition you’re not a marginal price-setter; that’s always going to be a short-term hedge fund or algobot. The effect on companies’ share prices is going to be de minimis, and the effect of companies’ share prices on the planet is going to be even smaller. I really don’t see how a tweaked investment strategy for rich institutions is going to Reform Capitalism, let alone change the planet, or reduce inequality, or anything like that. I mean, Al Gore is (sorry) no Warren Buffett. And even Warren Buffett hasn’t really changed anything!
Thanks to Felix Salmon for a bracing kickoff to a discussion. Stay tuned for more.
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.
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.”
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Every time the president ramps up his violent rhetoric, every time he fires up Twitter to launch another broadside against me, my family and I see a surge of vicious attacks sent our way.
When I put my hand on the Bible at my inauguration, it did not occur to me that less than two years later, I would have to tell my daughters about a plot against me. But earlier this month, I learned that a multistate terrorist group was planning to kidnap and possibly kill me. Law-enforcement announced charges against 14 people as part of the plot. As jarring as that was, just over a week later, President Donald Trump traveled to Michigan, and when a crowd chanted “Lock her up” after he mentioned me, he said, “Lock them all up.”
I am not surprised. I have watched the president wedge a deeper divide in our country; refuse to denounce white supremacists on a national debate stage; and launch cruel, adolescent attacks on women like Senator Kamala Harris and public-health leaders like Anthony Fauci. And while I won’t let anything distract me from doing my job as governor, I will not stand back and let the president, or anyone else, put my colleagues and fellow Americans in danger without holding him accountable.
States and cities struggling through the pandemic recession are wondering if higher taxes will raise revenue, or cause a mass exodus.
Cities and states across the country are facing a conundrum: They are desperate for cash because of the ravages of the COVID-19 recession. Rich people are pretty much the only ones who have any, because of both the recession and the yawning inequality that long predated it. But if cities and states raise taxes on the 1 percent, they worry that rich families might simply leave, no longer bound to their offices or their children’s schools. The conundrum is real, and the solution is easy enough: Let the federal government help states and cities circumvent the whole issue.
The pandemic recession has battered local coffers, causing revenue losses of an estimated $155 billion in 2020 and $167 billion in 2021, about 6 percent of local revenue. New York alone is projecting a $59 billion shortfall through 2022. The federal government could easily finance those kinds of deficits by issuing bonds. But doing so is harder for local governments, which generally have to keep their budgets balanced and often have limits on their borrowing. When big recessions hit, and the COVID-19 recession is a huge one, many of them have no choice but to raise revenue or cut services.
America won the internet, and now makes us all speak its language.
LONDON—Sharing the internet with America is like sharing your living room with a rhinoceros. It’s huge, it’s right there, and whatever it’s doing now, you sure as hell know about it.
This month, Twitter announced that it would restrict retweets for a few weeks, and prompt its users to reconsider sharing content which has been flagged as misinformation. The reason for this change, of course, is the U.S. presidential election. The restricted features will be restored when its result is clear.
Anything that makes Twitter fractionally less hellish is welcome, as is the recent crackdown by Facebook and YouTube on QAnon conspiracy groups and Holocaust denial. But from anywhere outside the borders of the U.S., it is hard not to feel faintly aggrieved when reading this news. Hey guys! We have elections too!
The Constitution should be the sturdy vessel of our ideals and aspirations, not a derelict sailing ship locked in the ice of a world far from our own.
During her confirmation hearings, Amy Coney Barrett argued that the judicial philosophy known as “originalism” should guide judges in their interpretation and application of constitutional principles. Most famously associated with the late Justice Antonin Scalia (for whom Judge Barrett clerked), this idea sounds simple and sensible: In determining what the Constitution permits, a judge must first look to the plain meaning of the text, and if that isn’t clear, then apply what was in the minds of the 55 men who wrote it in 1787. Period. Anything else is “judicial lawmaking.”
In some cases, interpreting the Constitution with an originalist lens is pretty easy; for example, the Constitution says that the president must be at least 35 years old (“35” means, well, 35), that each state has two senators (not three and not one), and that Congress is authorized to establish and support an Army and a Navy. But wait a minute. What about the Air Force? Is it mentioned in the text? Nope. Is there any ambiguity in the text? Again, no. It doesn’t say “armed forces”; it explicitly says “Army” and “Navy.” Did the Framers have in mind the Air Force 115 years before the Wright brothers? Not likely.
Republicans understand that Barrett’s confirmation is coming just a week before a potential electoral “bloodbath.” They don’t care.
Senate Republicans were always going to confirm Amy Coney Barrett to a lifetime appointment on the Supreme Court. Conservative voters wanted it, and the party united around the concept. Republicans “believe voting on this justice is a constitutional duty. The nomination happened. There was time to get it done. So they got it done,” Steven Duffield, a Republican former senior Senate aide, told me. Even the highest-ranking Republican leaders aren’t shy about admitting that this may be the party’s last gasp before losing political power for a while. “A lot of what we’ve done over the last four years will be undone sooner or later by the next election,” Republican Senate Majority Leader Mitch McConnell said during a speech yesterday. The Democrats “won’t be able to do much about this for a long time to come.”
Our persuasion rate is much higher than that of traditional electioneering efforts.
Last year, before the pandemic, I stood on the front porch of a house near Harrisburg, Pennsylvania, while the homeowner, a former military man, heaved pro-Trump talking points at me. His anger was palpable. He was upset about the state of health care. He blamed immigrants. With a clipboard in my hand, I listened carefully to everything he had to say.
I am the director of People’s Action, an organization of working-class and low-income people. I was in Pennsylvania as part of deep-canvass efforts targeting rural and small-town voters, testing whether patient, nonjudgmental conversations about race, immigration, health care, and the economy can help people reexamine their views, and perhaps even lead them to vote for Joe Biden instead of Donald Trump.
The pandemic has broken Americans’ understanding of what to fear.
On a normal day, the White House is one of the safest buildings in the world. Secret Service snipers stand guard on the roof, their aim tested monthly to ensure their accuracy up to 1,000 feet. Their heavily armed colleagues patrol the ground below and staff security checkpoints. Belgian Malinois guard dogs lie in wait for anyone who manages to jump the property’s massive iron fence.
But safety means something different in a pandemic. Over the past few days, several aides to Vice President Mike Pence, including his chief of staff, have tested positive for the coronavirus. The outbreak is the second in the White House in a month, after dozens of people, including President Donald Trump himself, tested positive following the apparent super-spreader event hosted by the administration to celebrate the Supreme Court nominee Amy Coney Barrett.
“Our boyfriends, our significant others, and our husbands are supposed to be No. 1. Our worlds are backward.”
Kami West had been dating her current boyfriend for a few weeks when she told him that he was outranked by her best friend. West knew her boyfriend had caught snatches of her daily calls with Kate Tillotson, which she often placed on speaker mode. But she figured that he, like the men she’d dated before, didn’t quite grasp the nature of their friendship. West explained to him, “I need you to know that she’s not going anywhere. She is my No. 1.” Tillotson was there before him, and, West told him, “she will be there after you. And if you think at any point that this isn’t going to be my No. 1, you’re wrong.”
If West’s comments sound blunt, it’s because she was determined not to repeat a distressing experience from her mid-20s. Her boyfriend at that time had sensed that he wasn’t her top priority. In what West saw as an attempt to keep her away from her friend, he disparaged Tillotson, calling her a slut and a bad influence. After the relationship ended, West, 31, vowed to never let another man strain her friendship. She decided that any future romantic partners would have to adapt to her friendship with Tillotson, rather than the other way around.
An overlooked corner of the Constitution hints at a right to be protected from infection.
Ever since state governors began implementing stay-at-home orders to contain the coronavirus pandemic, protesters have resisted such safety measures under the belief that they violate constitutionally guaranteed liberties. Proposals to mandate mask wearing have collided with allegations of First Amendment violations. Orders to close gun stores have clashed with concerns about Second Amendment freedoms. But a profound historical counter-vision to these ideas about “individual liberty” can be found in one of the most neglected and underappreciated corners of the Bill of Rights: the Third Amendment.
“No soldier,” the amendment reads, “shall, in time of peace be quartered in any house, without the consent of the owner, nor in time of war, but in a manner to be prescribed by law.” Federal courts have rarely invoked it, and in 2015 even rejected a Third Amendment claim against police officers’ occupation of a house. Now the subject of memes, the amendment, in the words of the legal historian Morton Horwitz, is an “interesting study in constitutional obsolescence.”
If you hate wokeness, you should vote for Joe Biden.
A number of influential commentators who firmly opposed Donald Trump in 2016 recently announced their intention to vote for him in 2020. Nearly all of them, including James Lindsay, Danielle Pletka, and Ben Shapiro, blamed illiberalism on the left. As Shapiro said on his popular show, he is planning to vote for Trump because “Democrats have lost their fucking minds.”