- Since leaving public office, former US Vice President Al Gore has been working on Generation Investment Management, an $US18 billion asset manager that invests in what it considers sustainable companies.
- Generation has performed well. The company’s public-equity vehicle returned about 17.5% after fees since September 2014, compared to the MSCI World index, which returned 6.6% over the same period.
- Gore teamed up with David Blood, former head of Goldman Sachs Asset Management.
For Generation Investment Management, making money and saving the world go hand in hand.
London-based Generation was cofounded by former US Vice President Al Gore and Goldman Sachs Asset Management head David Blood. The $US18 billion firm, which launched in 2004 and takes a sustainable approach to investing, chooses companies it thinks will be successful in the long term.
Among the requirements, the companies must provide products or services that have a low-carbon footprint and, in Generation’s words, lead to a “prosperous, equitable, healthy, and safe society.”
While Generation is a relatively small player in the investing world — the firm employs about 100 people and its competitors manage well into the trillions — its investment picks have performed well. The company’s public-equity vehicle returned about 17.5% after fees since September 2014, according to the McKnight Foundation. That’s a hefty gain compared to the MSCI World index, which returned 6.6% over the same period.
In 2010, the firm closed its stock-focused Global Equity fund to new money over concerns that it would get too big otherwise to deliver returns.
“When a fund manager tells you, ‘Oh, the size of our fund doesn’t matter — we can still deploy capital, et cetera,’ that’s also a good time to not trust them anymore,” Blood said in an interview with Business Insider.
While the bulk of its $US18 billion are invested in public markets, the firm has about $US1 billion dedicated to private equity. The firm plans to build the growth-equity franchise in the years ahead. Generation’s growth-equity investments include bicycle-share operator Motivate, which is behind New York’s Citi Bike; electric-bus startup Proterra; and Taiwanese electric-scooter maker Gogoro. The firm also backed Toast, a digital platform for restaurants that Generation said would help reduce food waste and digitize paper processes.
The company has also invested in mainstream companies like Microsoft and Qualcomm, the leading chipmaker for mobile phones. The firm recently announced it is moving to San Francisco to focus on tech companies and Asia.
Business Insider recently spoke with Gore and Blood, who both founded the firm. Here are some highlights from the conversation.
On the firm’s performance figures.
Al Gore: Our whole mission is to prove the business case that investing according to a model that fully integrates all aspects of sustainability into every part of the investing process can produce better returns. If we continue to succeed in proving that that is in fact the case, then that is a more eloquent and persuasive way to advocate for the importance of sustainability than anything we could actually say to you.
On the firm’s mission.
David Blood: The way we say it on our website is kind of how we recite it, so it’s probably worth just repeating that for you, to say: We’re an investment firm dedicated to investing in sustainable companies that provide goods and services consistent with a low-carbon, prosperous, equitable, and safe society.
Gore: I was just going to add that, in layman’s terms, it’s important to note that sustainability includes, but is certainly not limited to, climate and environment. Human-resources practices, the treatment of communities where companies are active, their employees, their healthcare, the values and ethics in the C-suites — there are many aspects to sustainability. While the environment and climate are extremely important to us, we look first and foremost at the sustainability factors that are most materially important in the particular sector a company finds itself.
On the value of sustainable investing.
Blood: Part of this is what we’ve learned over these years, but, most important, you should think of sustainability in three ways: One, it’s a terrific risk-management tool. If you’re more holistic in terms of how you are analysing management quality and business quality, chances are better — although not guaranteed — that you will be able to identify the types of risk that can hurt a company badly.
For example, if you can avoid investing in a company that is dumping a lot of oil into the Gulf of Mexico, that’s probably a good thing. If you can avoid investing in companies that are price gouging from a healthcare perspective, that’s probably a good thing. If you can avoid companies that are manipulating their mileage statements, and they get found out about that, that’s typically a good thing. If you can avoid corporate-governance challenges, all of those are questions and sustainability sheds lights, no guarantee.
Secondly, we live in a resource-constrained world, whether that be human capital or inputs to manufacturing processes, and we felt that management can understand how minimise the use of assets that often leads to better economics and more robust business models.
Then the most exciting is if we can identify businesses that through their products and services are addressing real needs, whether that be climate change or challenges around poverty, if we can find businesses that are a part of the solution to health challenges, those businesses, assuming they have other good characteristics, are businesses that we like to invest in.
On investing in companies like Microsoft.
Blood: Yes, we do invest in a number of mainstream companies, but all will have a long-term orientation to them. All will be very holistic in how they think about running their businesses, and all, hopefully, will be part of the solution to the long-term sustainability challenges that the world faces.
In fact, actually, one of our clients said this about us, so I can’t claim it ourselves, but they basically noted that the way we think about it is that sustainability is an organising imperative for the global economy. That’s what we believe is happening. That’s what we call the sustainability revolution. Al is much more articulate on this than I am. But that’s our framework, that’s what we’re thinking about in terms of our stock selection and our company selection. We see that this is increasingly the way the world is going.
On a ‘sustainability revolution.’
Gore: We have a conviction, based on our work over the last 15 years, that the world is in the early stages of a sustainability revolution that has the scope and scale of the industrial revolution with the speed of the digital revolution. Engineers and management teams, designers, technologist, are now acquiring an extraordinary ability to manage molecules and atoms with the same precision we’ve come to expect from ICT companies in managing bits of information.
The imperative to use the new digital tools — not least among them the Internet of Things and progressively more efficacious machine learning and artificial intelligence — to achieve much higher levels of efficiency is really sweeping the world and leading to a global retooling in almost every sector of the economy. Emissions, greenhouses gasses, have been decoupled from GDP. We saw that early on in economies like that in California. Now we’re seeing it spread throughout the world.
On why the fund won’t open up to retail investors.
Blood: Well, it’s a really good question and a number of folks have asked us that over the past.
Generation — we closed our global equity fund in 2010 — and the reason why we did so is we had a view that if we allowed the fund to get too large, then the possibility of our not delivering important investment results to our clients would go up. It’s my experience, being in this industry for some time, often times the other rule — I told you that as soon as a fund manager tells you how smart they are, that’s usually a bad sign. The other rule is that when a fund manager tells you “Oh, the size of our fund doesn’t matter — we can still deploy capital, et cetera,” that’s also a good time to not trust them anymore.
We told our clients from the very beginning that we would close our fund when we thought we were reaching capacity. We did that in 2010. We allow new clients if old clients redeem. We really can’t open our fund up to the broader retail marketplace because we don’t have capacity to do so.
On the rise of mission-oriented companies.
Blood: The number of companies who are mission-oriented, that are driving toward being part of the solution to the sustainability revolution, the examples of businesses like that have multiplied and accelerated over the course of the last five years. So we see great entrepreneurs.
Again, this is one of the reasons we’re moving to California. We see great entrepreneurs who are embracing sustainability to drive their ideas and their business models. That’s for sure.
Secondly, the larger companies very often have always embraced long-term sustainable ideas into their business models. Certainly the very best business leaders have done so. They may not have called it “sustainability,” but that’s how they have thought about it over the years.
We see great CEOs who embrace sustainability building really excellent business franchises. Admittedly, we see more of them today than we did 10 or 15 years ago, but sustainability — and we all, with the exception of Richard, have American accents — outside of America sustainability isn’t such a weird concept. It’s how people live their lives and have embraced sustainability for many, many years.
That’s a long way of saying: This is no longer kind of a niche conversation; this is really mainstream and will be certainly for the next couple of years. Why? Because the economics, the business case, is robust, it’s clear, and it’s really driving business decisions and entrepreneurs.
On sustainability being a central part of the conversation:
Gore: During our first decade, it was extremely common for companies and executive teams of companies where we invest or where we are considering an investment to say to our team members, “You know, this is the first time we have been asked that question.” I like that so much, but in the last few years the kinds of questions that have been a central part of our process are now in the public arena.
CEOs themselves are talking more openly about it. Their executive teams are integrating this new way of thinking. It’s important not to just focus on the language of this or that buzz phrase, but to dig truly and deeply into what sustainability means and how it differs in each sector. That’s hard work. You can’t do it with a negative screen or a positive screen or a separate layer that is spread across an older legacy investment process. You really have to integrate it into the entire process. We take great heart from the way these ideas are spreading.
On the impact of sustainable investing.
Blood: We already see it changing. This is somewhat aspirational, but we really think it’s achievable, attainable, and imminent. If we can collectively push capital markets and capitalism to be more long term, more holistic, we will have a more fair society, and we’ll have a low carbon economy. That’s better for the planet and better for people. No question about that.
On staying small.
Blood: There are some very, very large active managers that have had some important success, but most of them have had pedestrian results because ultimately their strategy has not been able to consistently outperform the market.
What we’ve discovered is that the very best way to outperform the market is to stay very research-focused and concentrated in the stocks that you select. That allows you to basically run with your best ideas, and we think that that — with differentiated insight, in our case, sustainability — facilitates an opportunity to outperform.
If you look at the very best equity managers, most of them are boutiques, and most of them are closed like we are. Sustainability isn’t the constraint. The constraint is a passion around ensuring outsized results for our clients.
With assistance from Graham Rapier.
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