Newsflash: Al Gore invents SRI! (not)
I’ve long been a subscriber to The Atlantic, and particularly enjoy James Fallows’ contributions to their website (incredible on both China and small cities as “American Futures” trailblazers). But golly, this month’s big feature on Al Gore’s investment firm is pretty heavy on hyperbole, starting with the title: The Planet-Saving, Capitalism-Subverting, Surprisingly Lucrative Investment Secrets of Al Gore. Granted, this is par for the course in headline-writing—this post pleads guilty as well!—and Fallows’ intent with the article is mostly to get “sustainable capitalism” onto the wider public radar, and we’re all for that. Still, most of what is presented here as groundbreaking is, to our quarter-century-in-SRI eyes, old news. To wit:
What this means in practical terms is that Gore and his Generation colleagues have done the theoretically impossible: Over the past decade, they have made more money, in the Darwinian competition of international finance, by applying an environmentally conscious model of “sustainable” investing than have most fund managers who were guided by a straight-ahead pursuit of profit at any environmental or social price.
Convincing quotes from three experts all seem to agree this 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 Generations 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.
UPDATE: Fallows generously excerpted this post as part of his ongoing followup thread on the Gore article that features reader feedback. We’re flattered and pleased to be part of that dialogue.
One of Generation’s favorite metaphors also struck us close to home: the idea that looking beyond the narrow question of financial performance to consider a broader “spectrum” of information provides a stronger foundation for making investment decisions. Each of our last two books has explicitly aimed to expand our view of investing, and in so doing, provide readers the tools to make decisions based on an increasingly broad range of practical and personal considerations. Investing With Your Values charted expansion of SRI during the 1990’s, from simple negative screening (avoiding particular industries) to include positive screens (e.g., actively seeking out renewable energy funds) as well as the nascent community investing and shareholder activism movements. The Resilient Investor, published earlier this year, puts all of SRI’s historic and ongoing evolution into perspective as just one piece of a larger approach to investing that seeks to build your personal and tangible assets alongside your financial ones, all while responding to your assessment of society’s likely future challenges and opportunities.
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). Their flagship fund outperformed its relevant international index fund by 5% a year! Of 200 global equity managers surveyed by Mercer, a London-based analytics firm, Generations had the 2nd highest returns, AND it was among the least volatile. It’s this startling out-performance that leads Fallows to ask whether Gore could be the “green Warren Buffet”:
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.
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:
(Gore) and his colleagues are aiming at a small audience within the financial world that steers the flow of capital, and at the political authorities that set the rules for the financial system. “It turns out that in capitalism, the people with the real influence are the ones with capital!,” Gore told me during one of our talks this year. The message he hopes Generation’s record will call attention to is one the world’s investors can’t ignore: They can make more money if they change their practices in a way that will, at the same time, also reduce the environmental and social damage modern capitalism can do.
Let’s keep things in perspective: so far, Generation Investment Management oversees about $12 billion in assets, a number that may widen the eyes of the typical greenie, but which remains only one four-hundredth the size of the world’s largest management firm, BlackRock (can you say “five trillion”?!). Still, Generation is also serving as a leader and role model for other cutting-edge SRI initiatives, including the both shareholder activism and the push to divest from fossil fuels.
Generation’s best-known analysis is its 2013 report asserting that coal and petroleum reserves were “stranded assets” whose theoretical market value would never be realized, because environmental, legal, technological, and market constraints would inevitably prevent much of that carbon from being sold and burned. Generation argued that the bankruptcies, write-downs, and market declines that had battered the coal industry in the past decade would soon extend to oil companies. As a prominent Harvard alumnus, Gore has said that the university’s endowment should divest itself of carbon-based assets. “But I say that not just because it’s the ‘right’ thing to do but because it is the economically smart thing to do,” Gore told me. “Oil companies have assets on the books worth $21 trillion, but that’s based on the fiction that all that carbon is going to be burned.”
While many others have made the same case, there is real value in this and Generation’s other “Road Map” reports, each of which look at big-picture dynamics in the global economy. The Atlantic article fleshes out the ways the Generation team works from there to find companies that can best take advantage of financial trends suggested by these road maps. Of course, this is what SRI management teams have been doing for decades, from the early religious roots at Pax World to Parnassus, Calvert, and all the rest—now even including new branches at big firms like Morgan Stanley. Generation may be better funded than many, and so able to provide the public service of funding these reports and hosting topical “summits” that move the conversation, and the foundation of solid data, forward. Perhaps their manpower allows them dig deeper and find more interesting avenues to explore (though every team finds its pearls). And while this path is not new, Gore’s public profile, as well as the financial industry ties of Blood and others, seems to be able to open some doors that have remained closed until now:
Generation officials meet with board members and managers of companies they invest in, explaining exactly what they like about the business and what kinds of decisions they’re hoping to see. “We talk directly with them about compensation levels, about board structure, about sustainability practices they are considering,” Nogales said. “Typically board members and CEOs will tell us that we’re the first institutional investors ever to talk about these issues. You should not underestimate the influence this can have on CEOs. We are trying to give cover to people who want to do things in a different way.”
This is, of course, the modus operandi of shareholder advocacy as long practiced by our firm and many others, as well as the SRI industry’s primary trade organization, US SIF. While known widely as shareholder activism and often spotlighted by proxy votes on environmental, social, or management issues, the real work is nearly always done in dialogue with corporate management teams; many initiatives never come to a vote, as companies are convinced of the benefit they will gain from adopting sustainability and transparency policies. We’re glad to hear that Generation is introducing more companies to the virtues of engagement with their shareholders.
All in all, we we applaud The Atlantic for taking notice of the promise of sustainable capitalism. We’re certain that this will indeed become the new normal; while it won’t be news at that point, it’s great that Fallows and Gore are bringing the story to a wider audience today.
FYI, a month or so ago, The Atlantic relaunched a blog-ish section called Notes, where their authors can publish interesting little tangents, as well as engage in ongoing followup to major stories. James Fallows is moderating a thread on the Gore article that has already featured several compelling critiques as well as his responses; more is coming, so keep an eye on that link. (P.S., this is the thread that excerpts these thoughts of ours.)