Most money managers simply want to outperform the market. The people behind Generation Investment Management have bigger things in mind.
Generation is the investment firm led by Al Gore and Goldman Sachs alum David Blood. They want to deliver market-beating returns, reshape the world of investing and improve the way companies behave.
"By delivering great returns to clients," says Blood, "we hope to make sustainable investing mainstream and in doing so encourage businesses around the world to be more responsible, ethical and sustainable."
"Our whole reason for being in Generation," says Gore, "is to provide thought leadership and prove the case that sustainability is central to the realization of value over the long term."
No one will ever accuse these guys of thinking small.
My friend and FORTUNE colleague Adam Lashinsky and I just finished a 3,420-word FORTUNE story about Gore's decision to become a partner at Silicon Valley venture capital firm Kleiner Perkins Caulfield & Byers. Because Generation'sforming an alliance with Kleiner, we took a close look at the firm. (Adam got to travel to London, and he reported and wrote this posting with me.) While Generation has been less visible than Gore's other business activities--he's a director of Apple, a special advisor to Google and chairman of Current TV--the former vice president told us that it has been and will remain "my principal business identity in the financial markets."
Generation took root several years ago when Gore was casting about for ways to combine his passion for the environment with an investment business. A mutual friend introduced him to Blood, who had retired as CEO of Goldman Sachs Asset Management. Gore knew green and so, in his own way, did Blood--he ran a $325 billion fund at Goldman. Having seen extreme poverty as a child in Brazil, where his father was an executive with Ford Motor, Blood was also looking for a second act where he could make a difference in the world. They started Generation in 2004, and hired Mark Ferguson, a former Goldman exec, as chief investment officer, and Colin LeDuc, a sustainability expert, as head of research.
Generation combines traditional securities analysis, Goldman-style, with thematic research into major social and environmental issues such as climate change, water, global poverty and HIV/AIDS. (You can download a 43-page white paper around these themes, which is quite provocative, from Generation's website.) It then looks for companies that will thrive because they understand the pressures on corporations to become more sustainable. "Sustainability, defined as environment, social, governance and ethics, matters to business," Blood says. "It's not only about risk management or cost, but about revenue, profit and competitive positioning."
Do-good investing is nothing new, of course. Abolitionists refused to finance slave ships in the 18th century. Mutual funds that market themselves as socially responsible have been around since the Vietnam War. Typically, they avoid "sin stocks" that make money from weapons or alcohol products, look for more ethical companies and engage in shareholder advocacy. More recently, investment firms have developed investable indexes such as the Dow Jones Sustainability Indexes (DJSI) and FTSE4Good that consist of companies deemed to be the most sustainable across a range of industries.
Generation takes a different approach. For one thing, unlike most socially responsible funds, it says unabashedly that its aim is to beat the markets. To that end, it takes a concentrated approach, investing in only about 30 to 50 companies, always with a bias toward the long-term. It also doesn't screen out industries on ethical reasons, though it does avoid certain sectors because it doesn't like the economics. Airlines, utilities and tobacco companies fall into this category.
Its holdings, at first glance, appear indistinguishable from a portfolio any other money manager might choose. But Ferguson, the chief investment officer, says that each portfolio company has a deep understanding of social, environmental or workplace issues, and how they impact business. The U.S. auto parts supplier Johnson Controls, for example, has a great battery business as well as products for running buildings efficiently, Ferguson says. Danish drug maker Novo Nordisk, another holding, sells an expensive insulin drug and rewards its sales people for lowering patient blood-sugar level - not for selling more insulin. Other Generation holdings have included AFLAC, General Electric, Greenhill & Co., Northern Trust and Whole Foods Markets, according to SEC filings.
The firm currently manages about $1 billion from institutional investors including CalSTRS and several European pension funds. It is also sells to high net worth individuals. The firm's partners retain a significant stake in the fund.
Generation doesn't release performance data, but insiders say the fund has outpaced its benchmark, the MSCI World Index, particularly during the last few months of market jitters. . "It is working well so far, which is three-plus years," says Mitch Kapor, a technology executive and social activist who was an early investor. "But of course it needs to be judged over longer time spans." Even then, it will be hard, if not impossible, to know whether Generation's success is driven by its overarching thesis or just by good stock-picking.
For a small fund, Generation has assembled a star-studded advisory board, which meets twice a year to hash out big ideas. Its members include Kapor, Mary Robinson, the former president of Ireland and UN High Commissioner for Human Rights; MIT professor Mario Molina, a friend of Gore's who shared the Nobel Prize in chemistry in 1995 for discovering the threat to the earth's ozone layer; and Jonathan Lash, president of the World Resources Institute. John Doerr of Kleiner is the newest addition.
All that brainpower gives Generation an influence far beyond its size. Blood, for example, told us about a meeting with a European banker and advisor to auto companies who wanted his take on carbon regulation. "Everybody understands that I'm a capitalist," Blood says. "If you don't assign a cost of carbon, you're making a mistake. The issue of climate absolutely is a business decision."
Global firms like Deutsche Bank and Citi, meanwhile, have published long research reports on the investment risks and opportunities created by climate change. Are they following Generation? Unlikely. But it's hard to argue with Blood when he says that sustainability is moving from a "sandals and kumbaya" conversation into the mainstream.
Originally posted here.