Climate change has presented investors with the “single biggest investment opportunity in all history,” according to Al Gore, former Vice President of the U.S., and now Chairman of Generation Investment Management.
Gore, who gave the closing keynote speech at this year’s IPE Conference & Awards in Prague, noted the last three years have been the hottest on record, and the accompanying extreme weather events and ecological impact have driven not only politics, but markets also.
“We believe that we are in the early stages of a global sustainability revolution that has the magnitude of the industrial revolution, but the speed of the digital revolution,” he said.
Same return, more utility
For investors looking to navigate this unprecedented set of changes, one of the first questions is: Will I have to sacrifice return?
We looked at 127 ESG-focused global equity managers in the eVestment database, comparing their returns to those of the global world equities universe, and found almost no difference in performance over the long-term. Deeper analysis showed the dispersion of returns among managers was actually lower than the non-ESG managers, albeit with a lower breadth (Figure 1).
Figure 1 – ESG versus Non-ESG World Equities – Growth of $1,000
However, not everything should be measured in traditional economic terms, according to Gore. He highlighted Simon Kuznets’ invention of GDP as an imperfect economic measure, and how Kuznets warned there were four large pools of value that were not adequately included in his scheme – negative externalities (e.g. pollution), positive externalities (e.g. community benefits), depletion of natural resources, and inequality. Gore reminded the IPE audience that after being lauded for his work, Kuznets made a number of speeches in the late ’30s where he said, “Please don’t use this as a guide toward economic policy.”
Similarly, for many investors, risk-adjusted returns are an inadequate guide toward investment policy. The total utility – or fulfilment gained – from owning an ESG-focused portfolio, typically outweighs that of owning a non-ESG portfolio, and if the expected financial return is the same, all the better.
Growing ESG interest
Unsurprisingly, more investors are researching ESG products and strategies using eVestment. Figure 2 shows views have steadily increased of products managed with ESG considerations – albeit with a drop off in the last year. To meet this demand, there are now 4,591 products managed with ESG considerations available to research in the database, enabling positive and exclusionary screening on considerations like clean energy, diversity, firearms and tobacco, among others.
Figure 2 – Increasing Interest in ESG Products and Managers
At eVestment, we don’t endorse individual products or managers, but it is interesting to note that an analysis of Generation Investment Management’s products shows Gore’s firm may know a thing or two about turning inconvenient truths into very convenient investment outcomes.
Figure 3 shows the performance of Generation Investment Management’s Global Equity strategy, plotted against over 1,400 global equity strategies. It shows the strategy has been a consistent top performer in the top percentile over 3, 5 and 10 years.
Figure 3 – Returns at Al Gore’s Generation Investment Management
Source: eVestment, Generational Investment Management outperformance; inter-quartile charts show 5th-95th percentiles
To bring his thesis on sustainable investing to life, Gore cited Generation Investment Management’s divestment of BP shares after spotting safety issues at two North American operations in early 2010. As a result, Generation avoided the Deepwater Horizon disaster which claimed 11 lives, and wiped billions of dollars in value from investors’ portfolios. This year, he noted avoiding one of the largest reinsurance companies, Munich Re, which had all its profits wiped out from the financial damage caused by hurricanes.
Re-thinking fiduciary responsibility
More than just presenting investors with investment opportunities and risks to manage, Gore believes that investors, particularly pension funds, are being presented with new responsibilities to take into account sustainability, something he believes policy makers “have not done very well.”
“The academic research now is voluminous and pretty decisively pointing to the conclusion that if you don’t take ESG seriously, you are violating your fiduciary responsibility,” Gore challenged.
The standing ovation from the audience suggested the challenge was welcome.