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Al Gore and David Blood - In Conversation with John Elkington
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Hello! Here is a brief look into In Conversation: Al Gore and David Blood.Thinkers from Max Weber and Edmund Burke have reflected not only on the morality of marketplace but on the wider issue of the kind of the society gives rise to and is able to sustain a market economy.
In an increasingly globalizing world where markets are converging and integrating at a faster pace than societies, local societal issues need to be addressed not only by the governments but by the firms as well in order to ensure sustainability of the process.
Blood & Gore
Al Gore (former Vice President of the USA) and David Blood (former CEO of Gldman Sachs Asset Management Company) have been involved in Generation Investment Management LLP, an investment fund with an emphasis on sustainability in the capital market by valuing the intangibles into the price of the firm. Arguably, Generation LLP is the first firm to do so and take a long term view on the firms it invests in.
The context
The conversation started with a discussion on the importance of such an analysis and the need of such a firm in today’s environment. John Elkington (who coined the term triple bottom line, and is the CEO of SustainAbility) talked about fundamental landscape altering change. There are two ways of achieving that objective: by rebelling against the system and the second is to work with and within the system.
Such an investment firm is important in today’s scenario for the following reason:
- Most of the social entrepreneur (SE) work that goes on in the present world is below the radar of the media, public and most importantly the financial markets. The SE firms on the growth trajectory will need financing at intermittent stages to achieve economic scales
- The challenges facing the world are going to be multifaceted from abrupt climate change to endemics and poverty. Even at the recent World Economic Forum these topics found their way right up in the priority list. The number one issue at this stage is sustainable development in countries like China and India.
Al Gore on sustainable investing
There have been efforts over the years to integrate value of sustainaibility (environment, employees, mgmt quality, social, economic environ value) into the pricing of the firms. (*Indeed the equity researchers have been for the past five years now placing great emphasis on the governance of a firm to factor that in the valuation*).
The efforts could be classified into two waves. The first of which was seen 35 years ago, which involved trying to bring down the apartheid and involved companies refusing to do business in countries which promoted apartheid. This then moved in to the environmental movement and an ethical investment viewpoint rose which involved not investing in certain sectors (e.g. Tobacco) of the economy altogether on the basis of ethics. However, this approach to investment was unsatisfactory to fiduciaries/ financial institutions who accounted for 95% of investment flow and were under legal obligation to get the best financial returns. They took the view that if you took whole sectors of economy then you would suffer higher risk and over time a lower rate of return as well (very much in the line of the Capital Asset Pricing Model)
The second wave, which came recently proposed to take a holistic view of the investment. It proposed to tale the whole economy in consideration but invest only in the most responsible companies within the sector by undertaking deep research. However, the research was not so deep and the portfolios ended up looking replicas of the market portfolios.
There have been hurdles in a seamless integration of this facet of equity research in the mainstream, the main cause being the difficulty in measuring the value of the social value. As the market only sees value and understands prices it has ignored important factors in the business.
Here a useful analogy (as given by Al Gore) is to think of an electromagnetic spectrum and although there is a wide spectrum we can only see a tiny portion of it which is visible light. As we relate mostly to the things we can see we assume that it is only what it matters.
Similarly monetization can be thought of as a lens through which we perceive value, it is a narrow lens and it recognizes something very well, others are very fuzzy if they are visible at all! Hence, if the only tool is monetization, then if there is no monetary figure attached to an attribute then it might not be given value.
Therefore the challenge is to find a way to integrate sustainability analysis into equity research that adds value and does not incur a penalty. Towards this end, ‘Generations’ holds a concentrated portfolio of companies with a long term view and a three years (wow!) span of calculating returns. In an era where the average mutual fund turns over its entire portfolio in eleven months that is impressive.
Then the discussion moved to a conversation moderated by John. The talk amongst other things centred on working together where both Blood and Gore acted modest and heaped credit on their team.
Talking on their investment framework, David moved back to the spectrum analogy and the factoring in of all dimensions (market and sustainability) in the pricing of a company. An example for this was measuring the carbon intensity of profits for valuing the automobile companies.
David hopes to encourage the business and the investing community in looking at these factors by responsible lobbying with other investors for internalization of externalities. He however cautioned that the change is not as widespread as it seems to be as most of the corporations are playing lip-service to it either in search of publicity or due to the short term focused financial community (who are the majority owners).
Al Gore spoke on length about externality (for those who want to understand more about externality click here). He argued that since the national accounting was put together mainly by JM Keynes at the time when colonial era was just coming to an end and natural resources were considered to be limitless. It means that a country can hypothetically clear all forest cover without showing any effect on the national accounts. He argued that this could be internalized either through government action or through positive action by the companies.
The discussion was then opened to the floor with some interesting questions. The interesting ones were on the alternative approaches like private placement for the non profit organisations and the IPOs of social enterprises.
Hopefully this approach will be adopted by more investment firms driving change to avoid dealing with Planet Earth as if it is Business in liquidation.
Signing off from the Skoll forum!!
