I was in total fangirl mode when I met David Blood.
He is Co-Founder and Senior Partner of Generation Investment Management and an inspiration. I saw him at the 2017 GSG Impact Summit in Chicago last month a conference which brought together 550 impact investing leaders, from 43 countries, across 5 continents - all the big names in impact investing were at this conference so it wasn’t surprising to see Generation represented by none other than Mr. Blood himself.
Generation Investment Management was founded by Mr. Blood and Former Vice President Al Gore in 2004; they currently have more than $17bn in assets under management and are dedicated to investing in sustainable companies that provide goods and services consistent with a low carbon, prosperous, equitable healthy and safe society. Generation Foundation is the advocacy initiative funded by the profits of Generation and its goal is to strengthen the business case for “sustainable capitalism,” a “framework that seeks to maximise long-term economic value creation by reforming markets to address real needs while considering all costs and stakeholders.”
Much of the research Generation and its Foundation have published over the last decade has been influential in my own thinking about sustainable and impact investing. They have played a major role in how I evaluate the companies in the Swell portfolios. Needless to say, I was nervous about meeting him, I mean, he’s kind of a big deal. However, I put on my brave face, and asked him if he would talk to Swell about his firm’s approach to sustainable investing and he agreed.
Below is our conversation edited for clarity and brevity.
How did you get started in sustainable and impact investing?
Well, there are two strands to this actually.
One is personal which dates back to when I was quite young. As I was growing up I spent time in Brazil. Brazil is an amazing country but many suffer terrible poverty. It was there that I developed my interest in social justice, inequality, poverty, and development. In fact, I had hoped to be part of the Peace Corps in the U.S., however, they rejected me...which was troubling because it’s a volunteer organization. I also grew up in the outdoors in Michigan and was interested in the environment. So, while my friends from high school and college who knew me then are not completely surprised about my interest in sustainability, what probably would be a surprise was that my journey took me through Goldman Sachs.
However, second is my experience working in the investment and banking fields which helped me understand the importance of culture, governance and leadership. So sustainability and impact investing have been part of my thinking for many years starting with values, and progressing to business dynamics and what makes a great long term business. These insights helped shape my thinking for Generation. The partners who founded Generation came together with common frameworks, but different journeys, and I think that has made Generation a richer place.
For example, when I met Vice President [Al] Gore for the first time, I explained to him my interest in poverty and development etc., and of course, you probably know that his interest is in climate change. Yet we both realized that what we were talking about was essentially the same issue. We had the insight that the sustainability challenges are interlinked and they need to be thought about holistically. In addition, we believed that if you could bring public policy and sustainability knowledge together with financial and business experience you could create quite an interesting business model.
If you go back to the first 16 people who joined Generation, 13 years ago, you'll see that four came from sustainability backgrounds and 12 came from traditional backgrounds. We worked for two years before we took third party money. Because while we had the same vision, mission and core values, we were speaking a different language, and we were trying to rethink how to develop frameworks for investing. Coming up with a common language around the integration of sustainability into business and management practices took time, and a little trial and error. But those early days of establishing a common language were critical to how we launched Generation.
So you prototyped and tested an investment framework and then iterated and tested it again? You essentially ran an investment Sprint.
Yes, you could say that. There was considerable discussion and ongoing refinement of the investment framework but the core philosophy of integrating sustainability into our investment process has remained the same for all these years.
Socially Responsible (SRI), Sustainable, and Impact Investing are all classified differently. In fact, traditional “impact investing” is usually considered the domain of private equity. How have you made the case for the possibility of making a positive social and environmental impact through investing in public equity (i.e. stock market companies)? How has this been received?
Well, for starters we agree with you that this continuum of investing starts with responsible and sustainable investing and carries on to impact investing and into philanthropy. These are all different forms of impact investing or sustainable investing. One aspect of the GSG Conference in Chicago which was really important was the broad acknowledgement, really for the first time on a major platform, that these are different forms of broadly the same subject. Another important aspect was the unification of social challenges and environmental challenges as historically people have thought it's one or the other – it’s either “green investing” or “social investing” - well, in fact, it's the same concept. Both are attempting to address important challenges using business and capital markets.
How do you approach impact measurement?
In terms of measuring impact, and this is true both in public and private equity, there are some aspects of impact that are easier to measure and some which are much more difficult. For example, in regards to measuring your carbon footprint, while it can be complicated, there are quite a number of methodologies or ideas around how you might measure it.
We have some clients who indeed are measuring carbon exposure, and we get reviewed against that. Measuring social impact can be a little bit trickier, but we're going to have to develop that capability. If you are telling clients your portfolio has a positive impact, you need to be able to measure it because this is increasingly an important reason why some investors are allocating capital to firms like Generation.
What are some of the key challenges facing sustainable and impact investing?
The main challenges we have in impact investing are language, clarity about who is part of which branch of sustainable investing (i.e. SRI vs. ESG vs. Impact), and measurement.
What characteristics do you look for specifically when you’re looking to make an investment in a company, and have your metrics changed over time? Also, what benchmarks are you measuring the investments that you make against?
Well, our assessment of what makes a great company blends both traditional metrics such as, ‘are there barriers to entry for this particular product or company along with sustainability’ specific questions. Our assessment of a business is traditional but we take it a step further to do a more holistic analysis. For example, in a human capital management based business we would be particularly concerned with culture, governance, incentive structures, leadership, recruiting, and development. Essentially, anything to do with people, we would focus on in our assessment. Now, we would argue that all of what we're doing is common sense. Anybody investing in a software or a financial services business, really ought to understand the culture of the organization; how they attract and retain people, how they develop people, etc. but not everybody has worked out the real importance of this, and certainly it's important over a long period of time. Which brings me to another critical factor about Generation’s investment philosophy – we're long term investors. By being very clear that we are committed to long term investing, what we're saying is that we think we'd like to own businesses for three to five years or longer, perhaps even forever. And once you make that statement, it drives you, by default, to be more intensive and more holistic in how you analyze businesses. Ultimately, we think long term investing is best practice and therefore we have developed an investment process that allows us to be holistic in how we analyze businesses and management teams.
How does this short-termism that is predominant in the market affect your ability to engage the companies and maintain this long-term view?
Well, it's a great question! We think short-termism is bad for markets, bad for companies and bad for long-term economics. However, we believe the fact the majority of investors and traders are short-term oriented currently provides Generation with a competitive advantage since we have been granted the gift of time by our clients which allows us to invest in a business and then allow the business case to unfold over the long-term. Most of our competitors do not have that luxury.
What would you like to see change in how the financial markets evaluate companies?
It actually goes back to your last question – we would like to see markets become more long–term oriented. It would be more beneficial to economies, companies and investors. We’d also like investors to integrate environmental, social, and governance factors into their investment processes. We believe this will lead to better long-term economics, better businesses, and by extension, better returns for investors.
Have you seen any movement on this notion of long term evaluation in the financial markets?
Absolutely. We have seen progress in the markets in terms of understanding the value of long-term investing and the importance of sustainability. When we started Generation, sustainability was very much a niche conversation. Indeed, there were other sustainable investors that came before us who I think found this to be an even more frustrating journey. However, over time what has become clear to us is the business case for sustainable investing and for considering ESG (environmental, social, and governance) factors has become increasingly very clear and robust. There are a number of really interesting academic studies and, importantly, case studies of businesses who are proving being sustainable drives their long-term success. That’s what is new. We’re very clearly moving away from this being viewed as a niche or political initiative into a broader understanding that this is actually how to run ‘best practice’ businesses. Now, there will always be some who disagree, but I guess that's what makes markets.
I don’t want to suggest that all businesses are perfect because there are quite a few that I think are not. However, what is clear is that increasingly consumers are demanding businesses be more thoughtful over the long-term and, importantly, businesses are recognizing that if they can use and develop solutions to sustainability challenges with their products and services, they can develop really interesting and robust business models.
Ultimately, Generation integrates sustainability into the investment process because we think it allows us to be better investors. We think it is the best business model and, by extension, the best investment model. We do not think sustainability requires a tradeoff against value creation – in fact, we think it provides us a better chance of delivering outperformance for our clients.
What is your view on online platforms that are trying to bring impact investing into the retail consumer?
Being able to invest with your conviction and in a manner aligned with one’s values is a real necessity. We have been criticized at Generation because we are an institutional firm and do not accept retail clients. We acknowledge our business model leaves a gap in the market since retail consumers can’t invest their savings with us. So we think it’s a great thing that firms like Swell are able to develop and offer retail consumers interesting and important sustainable investment strategies that have impact.
Thank you Mr. Blood, those are really great insights. We’re going to switch gears a bit here and get to know a little bit more about you. So, tell me, what’s the best job you’ve ever had and why?
Well, my job now at Generation. Here's why: when I was at Goldman Sachs I lived my life pretty much in a silo. I had my business life. I had my family life. I had my philanthropic life. I had my belief set. This is true for many folks. You have your silos and you seldom cross over those barriers in how you are running your life. When we were setting up Generation we asked ourselves, is it possible to create an organization that actually might bring all four aspects of one’s life together into one organization? If it is possible, is it desirable? We concluded that yes, it is possible and yes, it is desirable. What we've discovered is building a business that is commercially oriented and about excellence, while also being mission and values led, is a really powerful business model. It also happens to be really fun to work in that kind of a business environment.
What was the last book you read that really made an impression?
Well, right now I'm reading a book that I'm almost finished which is called The Silk Roads: A New History of the World by Peter Frankopan. It's about understanding world history from the Middle East as the focal point. It’s essentially about how history has evolved through that part of the world, which I have to say is extremely interesting. I'm also reading, Wait...What? by James Ryan, it’s a book about asking questions.
What do you do to unwind after work?
For me to truly relax, I will either be spending time with my friends and family usually around a dinner table, or exercising. I try to do a lot of both.
From where do you draw your inspiration?
There are lots of folks who I have great admiration for, but the most important driver for me is the urgency of our challenges; that includes the climate – as the urgency of addressing climate change in the next five or ten years is undeniable - and the United Nations Sustainable Development Goals (SDGs) and the challenges around poverty and inequality. This is a mission, and while it is daunting, it is also a driver for why we do what we do. I'm hoping that over the next 10 years or so we will be a small, but hopefully important, part of transitioning the world to a better place. To me, that's pretty inspirational. Others will be the judge of whether we leave a positive legacy on the world. But we're sure going to give it a go.