Institutional asset owners who have signed the UN Principles of Responsible Investing were told they must make the effort to help pioneer a sustainable economy, in an address from David Blood, co-founder with Al Gore of Generation Investment Management.
Speaking to a gathering of executives from major Australian pension funds last week, Blood said the financial crisis had showed the perils of shoddy corporate governance, as short-term incentives at many financial institutions contributed to their downfall.
“Short terms and leverage are linked, and are a challenge to sustainability,” he said. “We have to move away from the short-term focus of markets. Asset owners need to not be focused on how X-Y-Z manager did last quarter as this forces fund managers into bad behaviour.”
Blood is senior partner at Generation, a long-only global equity manager whose fundamental
analysis of stocks is guided by sustainability research.
Generation believes the transition from a high-carbon to a low-carbon economy will be a pivotal phase of modern economic history, matching the industrial revolution in scale and the technological revolution in speed.
Echoing a Wall Street Journal editorial he wrote in 2008 with Gore, a former US vice-president, he urged institutional
investors to support industries that contributed to a more sustainable mode of capitalism.
He said a three-to-five-year investment horizon on companies was warranted because about 80 per cent of the value of a business lay in their long-term cashflows.
Given this, the pay structures received by company executives should be changed to reflect long-term incentives.
Blood said three commitments should be made in the next 18 months to kick-start a more sustainable economic system. First, a price must be set for carbon. Second, measurements of gross domestic product (GDP) must be changed to include environmental costs and community health. Third, sustainability should become apolitical and be recognised as a frank business topic.
Sustainability needed to “move beyond environmental policy and into economics,” he said. “The reason why there will be a cap-and-trade system is because the business community accepts it. And there needs to be a cost for carbon because investors can make better decisions if they have certainty of it.”
Drawing on the ideas of Robert F. Kennedy, voiced in the 1960s, he said a new measure of GDP was required for a more sustainable model of capitalism because the current one omitted the integrity of natural environments, the health of communities or the quality of education systems.
“The economic wealth and health of societies go much beyond what we’ve been calculating for the last 100 years,” he said.
“If we can move questions of sustainability out of political discourse and into the fundamentals of economics it would be a great move forward.”
The crisis had given society the opportunity to “seize the economic challenge and move from a high-carbon to low-carbon economy” by investing in cleaner technologies and phasing out heavy-emitting processes, he said.
Institutional asset owners should ask their fund managers whether sustainability is factored into their investment decisions, and if so, why and how these considerations are implemented.
“A lot of asset owners don’t ask these questions, and if they do, their answers are often filed away in some sort of compliance place.”
Some investors paid lip service only to the sustainability theme – “because it seems
to be the flavour of the day” – and did not implement it in the portfolios.
“Sustainability is not a – good to have – discussion; it should be integrated into how we think
about businesses and how we run businesses.”