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Al Gore outlines key actions for 'sustainable capitalism'

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  • Al Gore outlines key actions for 'sustainable capitalism'

GLOBAL - Al Gore and David Blood, chairman and senior partner, respectively, of Generation Investment Management, have issued a call for "sustainable capitalism" and outlined five recommendations they believe will help with the transition.
 
Gore and Blood were presenting a new white paper in London on Wednesday that examines some of the academic research into economic and market sustainability and puts forward five "key actions for immediate adoption":

Identify and incorporate risks from stranded assets Mandate integrated reporting End the default practice of issuing quarterly earnings guidance Align compensation structures with long-term sustainable performance Encourage long-term investing with loyalty-driven securities

Gore said: "While capitalism is fundamentally superior to any other system for organising economic activity, it is also clear that some of the ways in which it is now practised do not incorporate sufficient regard for its impact on people, society and the planet."
 
The paper calls for businesses and investors to incorporate the risks of "stranded assets" - those with a value that would change dramatically under certain scenarios, such as a reasonable price on carbon or water, or improved regulation of labour standards in emerging economies.

It argues that businesses should integrate both their financial and ESG performance into one report, and move from issuing quarterly earnings guidance towards only issuing guidance as deemed appropriate by the company - "if at all".

Compensation structures in both financial and non-financial businesses should pay out over the period during which results are realised, and be linked to fundamental drivers of long-term value, employing rolling multi-year milestones for performance evaluation, the paper suggests.

And finally, long-term investing should be encouraged by the issuance of loyalty-driven securities, which offer investors financial rewards for holding a company's shares for a certain number of years.
 
"[Long-termism] is in the nature of all investment - except for those who are focused on generating returns from the extreme short term," said Gore.

"The process by which real value is built in companies is a human process: you have to write a business plan, hire employees, find markets, develop supply chains, training, advertising - and all of that naturally takes time.

"Three-quarters of the value of the average firm builds up over a cycle-and-a-half - say 7-8 years. Years ago, the average holding period for US equities was seven years. Now it has fallen to seven months.

"It's a fair question ask if that's really investing, if you are focused on a tiny fraction of the period of time over which real value is built."
 
Addressing pension funds specifically, Gore added: "Pension funds have a fiduciary obligation to maximise the long-term performance of their assets to the long-term maturation of their long-term liabilities.

"If pension funds turn to managers of their assets and compensate them with a structure that gives an incentive to maximise performance on an annual basis, they shouldn't be surprised that that is, in fact, what their managers end up doing. We would like market participants to do what is in their own best interests to do in any case."
 
However, both Gore and Blood were keen to stress that they had nothing against short-termists in themselves, and that short-term strategies had a valid place in healthy capital markets.

In discussing the paper, they were much more concerned than Generation Investment Management is in the paper itself to draw the distinction between identifying the appropriate strategies for various market participants and identifying 'long-termism' as preferable for all market participants.
 
"If your objective is to make a quick buck, go to it - more power to you," said Gore. "But if you are managing a public company and seeking to make decisions to build up long-term value for shareholders, compensation structures with relevant time periods actually matters."
 
From an investor perspective, Blood added: "There's no question that, in a thoughtful asset allocation strategy - whether for an individual or a pension fund - having some assets in short-term exposures makes sense.

"But allocating all of your assets to short-term exposures is not good asset allocation."
 
In terms of market microstructure, Blood also conceded that, as fund managers, Generation had a keen sense of the importance of liquidity in healthy capital markets.
 
"We don't want to introduce incentives that would reduce liquidity or lead to unintended consequences," he said.
 
But both insisted that a large proportion of investors, including pension funds, were allocating capital in a way that was at odds with their real needs and with the needs of a healthy economy, and that the balance between the short term and long term had become skewed.

The fact investors and company managers appear to be acting against their own best interests was cited as a reason for publishing the white paper, titled Sustainable Capitalism, now.
 
"Sustainability is best practice in business, and, as an investor, you'd better understand it," said Blood.

"It's not about tree-hugging and kumbaya. You can tell from the fact that $30trn signed up to the UNPRI that something is resonating.

"But, at the same time, we note that the conversation around sustainability has plateaued or even gone backwards - despite many of the problems of the financial crisis being associated with a lack of sustainability. The reason is that we have failed to make the business case well enough."
 
Generation Investment Management, based in New York, was established in 2004 and is dedicated to long-term investing and integrated sustainability research.

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