Blood, Gore and capitalism

Sustainable capitalism

  by M.B. | NEW YORK

THESE are busy days for Al Gore. In late January, the former vice-president turned climate-change warrior took to the high seas, leading a luxury cruise-cum-fact-finding mission to Antarctica for a bunch of billionaires and policy wonks. They were to see for themselves the melting ice shelf and enjoy what remains of the spectacular views. Then, on February 15th, he was in New York to launch a manifesto (pdf) for what he calls “sustainable capitalism”.


The manifesto is published by the non-profit arm of Generation Investment Management, a fund-management company Mr Gore launched in 2004 with David Blood, an ex-partner at Goldman Sachs. The company focuses on firms with what it calls sustainable business models. Unlike Mr Gore's seafaring adventures, which generated a lively blogging war between Mr Gore, shipmates such as Richard Branson, and their right-wing critics, the manifesto is unlikely to set anyone's pulse racing. Yet its very dullness is a virtue, for it reflects the practical lessons learnt from several years of trying to make a success of the investment business, where the devil lies very much in the boring detail.
The big picture outlined by Messrs Blood and Gore is hardly novel. An obsession with short-term profits rather than sustainable long-term profits led to the apotheosis of unsustainable capitalism—the crash of September 2008—and the subsequent bail-out of the financial system (though in this case, a lack of environmental concern was the least of the unsustainability problems). Like many people, they had expected this crash to be a turning point, after which capitalism would be reorientated towards the long term. In the event, this did not happen. Indeed, says Mr Gore, the “conversation about sustainability has if anything gone backwards”.
To help remedy this, the manifesto suggests several changes to the way the capitalist system works. (It does not go into detail about other farther-reaching reforms for which Mr Gore has long advocated, such as putting a price on carbon.)
The sexiest of these, assuming securities law turns you on, is a proposal—already made elsewhere by organisations such as the Aspen Institute—for “loyalty shares” that pay out more to investors that have owned them continuously for at least three years. The average holding period for a share is now seven months, down from several years in the 1990s.
Rewarding longer ownership would require a lot of new legislation, particularly to apply it to existing firms. Even among those who favour long-termism there is debate about whether longer ownership is necessarily the same as more effective ownership. Still, it is worth discussing.
Lovers of accountancy may be taken more by two other proposals. One, which would probably need legislation though could conceivably be introduced without it by regulators such as America’s Securities and Exchange Commission, is to require all companies to publish “integrated reports” that would include details of their environmental, social and governance (ESG) performance alongside their financial returns.
Making such reporting mandatory would be a big step, especially given opposition from the significant number of firms that say that the science of ESG reporting is too immature to be integrated with financial reports. A better approach, cited in the manifesto, may be South Africa's new requirement that firms either publish an integrated report or explain why not. That should stimulate lively debate in either case.
The Blood and Gore manifesto also wants firms to have to account for assets that might become "stranded" —worth much less—in the event of policy changes such as the imposition of a price on carbon emissions or higher charges for the use of water. This, the pair contend, would reveal many companies to be in much worse shape than they now appear, given plausible scenarios for how policy in these areas might one day develop.
This scenario-planning might seem like a lot of extra work about stuff that is only hypothetical, and thus a burdensome extra cost. But Mr Blood points out that many firms already apply a price of carbon internally, for example when evaluating significant investments, as they increasingly think it likely that governments will impose one. So perhaps it isn't that much more work.
A key issue is whether all this extra information and rewards for loyalty will result in demands for more sustainable performance from those who own companies. As well as calling for company bosses to be paid in ways that incentivise sustainable long-term performance, the manifesto rightly shines a critical light on the pay of fund managers employed by institutional shareholders such as pension funds. Often, these managers are paid for short-term financial results, even though the liabilities of those investors—all of our pensions, for instance—are mostly very long-term.
This prompts the thought that institutional investors that incentivise short-term performance when their liabilities are long-term may be in breach of their fiduciary duty as managers of other people's money. Indeed, maybe this incentive mismatch could provide the basis for a lawsuit. Messrs Blood and Gore say they are intrigued by the possibilities for such litigation to drive change, though they are not inclined to bring it themselves. But they do want to see the definition of what it means to be a fiduciary expanded to include an emphasis on sustainable investing.
To their critics, Messrs Blood and Gore simply want to weigh capitalism down with political correctness. Yet they insist that a focus on firms that deliver sustainable results is actually the best long-term investment strategy. That, after all, is why they created Generation. Unlike earlier "green" and "ethical" investment funds, which screened out "bad" companies, effectively sacrificing financial return for purity, Generation set out to outperform the market by finding firms that it expected to do better than average over the long term.
How has Generation performed? Results are only provided to its investors not the public, though there have been rumours that after a decent start, recent performance has disappointed. Mr Gore checks what he can say without breaching disclosure rules before declaring, "safe to say, our original proposition to investors has been met and exceeded." Assuming this means what it appears to, and acknowledging that it would be premature to say that the business case for this approach has been proven beyond doubt, surely such strong performance is one reason why even traditional unsustainable capitalists should give the manifesto a look.