Few have done more than Al Gore to galvanise public opinion on climate change. The former US vice president’s documentary An Inconvenient Truth won an Oscar. He shared the Nobel Peace Prize for work on climate change. And he’s trained tens of thousands of activists to raise awareness about the threat of a warming planet. Addressing the plutocrats gathered in Davos, Switzerland, last year, Gore thundered with the fervour of a Baptist preacher: “Who cares if our children and grandchildren curse us and ask, ‘What in God’s name were you thinking? You had the ability to stop this hell on Earth!’”
Less known is his effort over the past two decades to prove the compatibility of capitalism and sustainability. On a backstreet in London, behind the giant video screens and tourists swarming Piccadilly Circus, lie the offices of Generation Investment Management. The firm Gore co-founded has quietly minted some of the biggest profits in sustainable investing. Last year was tougher, though. Its biggest fund slumped 28% — similar to competing funds — as markets reeled from Russia’s invasion of Ukraine, supply chain shocks and inflation. (Gore calls it a “little blip” in performance for the sector.)
There’s another, potentially more consequential issue: Despite Generation’s focus on environmental, social and governance — or ESG — factors, companies that make up almost half the holdings of its largest, US$26.4 billion ($35.22 billion) fund have increased their planet-warming greenhouse gas emissions in recent years.
Generation got its start four years after Gore conceded defeat in the 2000 US presidential election, in which he won the popular vote but lost in the Electoral College after the Supreme Court intervened. His six partners, including former Goldman Sachs Group Inc. executive David Blood, settled on the name Generation after joking about calling it “Blood & Gore”. Espousing a mantra of “sustainable capitalism,” Generation says it aims to invest in businesses that support “an equitable, healthy and safe society” and minimise their contribution to global warming.
Over time, it became one of the largest such firms, managing a peak US$39 billion in 2021 before assets dropped to US$30 billion last year.
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A recent report from researcher Morningstar Inc ranked Generation highly among the funds most committed to sustainability. But last year’s losses, along with the growing carbon footprint of some of Generation’s holdings, highlight just how messy sustainable investing can be — and raise an uncomfortable question: If Gore and his partners struggle to deliver on lofty environmental and financial goals, can anyone?
Generation, of course, seeks to invest in successful companies, and growth typically means greater emissions. That underscores the compromises and contradictions that make it tough to measure the effectiveness of ESG investing more broadly. The strategy’s champions say it’s a win-win that can make money while doing good. But getting there will almost certainly require trade-offs. Most companies, in one way or another, impose some costs on people and the planet, be it mining the metals needed for solar panels and batteries or relying on vendors with workers’ rights issues to make, say, organic-cotton clothing.
The ambiguity has spawned growing criticism. Regulators globally have started cracking down on what they call “greenwashing,” Republicans in the US have ridiculed ESG investing as overly “woke,” and some early proponents of the idea have concluded it doesn’t go far enough in addressing the planet’s ills. “It’s becoming too late in the day to maintain the pretense that a voluntary, market-led approach to sustainability can achieve enough change fast enough,” former Generation partner Duncan Austin wrote in a June LinkedIn post.
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Generation employs about 110 people. Its analysts parse data on things that aren’t immediately reflected on corporate balance sheets — carbon emissions, employee training, female board representation — betting that performance on nonfinancial measures can help boost profit in the long term. Generation does deep dives on scores of companies it thinks it might someday want to buy. It once had someone take apart electric vehicles right down to their sensors and connectors so its analysts could better understand the technology. Such analysis is “a surefire formula for getting a more accurate view of reality,” Gore says in Generation’s San Francisco office, sporting a dark suit and black cowboy boots.
Like other sustainable investors, Generation presses companies it owns to move faster or do better on environmental and social matters. One notable example: When real estate services firm Jones Lang LaSalle Inc first set a net-zero emissions goal, it envisioned getting there in 2050. Generation urged it to be more ambitious, and JLL soon moved the target to 2040.
Generation manages eight funds. Its biggest, a global equity fund, typically owns stakes in several dozen public companies and holds them for about five years on average. Its current roster includes Adidas, Charles Schwab Corp and Microsoft Corp. In its public updates, the firm says the companies held by that fund emit roughly 75% less greenhouse gas per dollar of revenue than those in the MSCI World Index, a basket of more than 1,500 companies that Generation uses as a benchmark to measure its financial performance.
But a Bloomberg News analysis of emissions data for Generation’s investments paints a more complex picture. Its Global Equity fund held 42 companies at the end of last year. For each of them, Bloomberg examined the emissions those businesses reported annually from 2015 to 2021. Eighteen of the companies, accounting for 46% of the fund’s assets, showed increases from the first year of available data to the last. That was the highest of a dozen sustainable investment funds studied, but hardly an outlier. Ten of the other funds analysed had allocated at least a quarter of their assets to companies where emissions were rising. That can often be chalked up to growing sales, but even when looking at carbon output per dollar of revenue, about a sixth of Generation’s portfolio is in businesses that have been ramping up emissions.
Generation points out the headline numbers can obscure changes due to, say, acquisitions or new ways of analysing data. Adidas, for example, showed an increase in 2021 because it included emissions from its retail stores for the first time. And Generation says it will only invest in a company whose emissions are growing if it’s convinced the business helps reduce the overall carbon output in society. For instance, cloud computing is more efficient than millions of standalone PCs, but as individuals and companies have shifted to the service, Microsoft’s reported emissions have gone up.
Some companies in Generation’s fund have reported lower emissions by buying renewable energy certificates, which critics say do little to decrease overall carbon output. Generation says it expects companies to move away from such credits and procure renewable energy in other ways. When they do, it can muddy the numbers further. US medical device maker Becton Dickinson & Co — one of Generation’s oldest investments — scaled back its use of those certificates three years ago, and its reported emissions jumped more than 20%.
The biggest emitter in the fund, by far, is Amazon.com. Generation has owned the e-commerce giant off and on since 2010, sparking intense debate within the firm as Amazon only started revealing its carbon footprint in 2019. “We just didn’t really have the data yet, and we were a bit frustrated,” says Miguel Nogales, one of Generation’s founding partners. Amazon pledged that same year to go carbon neutral by 2040, helping persuade Generation to boost its investment. The company began “moving pretty fast and pretty impressively,” Nogales says.
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But Amazon has vigorously fought unionisation efforts, and its emissions jumped by almost a fifth in 2021 as sales surged during the pandemic, tarnishing any do-gooder image it might enjoy (though when adjusting for growth in how much it sold, its carbon footprint shrank 2%). Anne Goodchild, a logistics expert at the University of Washington, says the question isn’t just whether ordering from Amazon results in lower emissions than driving to the mall; also important is whether the ease of online shopping gets people to buy more than they would otherwise, and what people do with the time they save and how much greenhouse gas that creates. “We’re not going to solve the climate problem through online shopping,” she says.
Generation says its research shows that e-commerce can be a lower-carbon way of shopping and that it doesn’t spur overconsumption. Amazon says it’s actively working to meet its carbon-neutral target by using more renewable energy, electric vehicles and alternative fuels.
Generation says it pushes executives to adopt targets to curb emissions aligned with international efforts to limit global temperature rise. About 60% of the companies in its biggest fund are part of an initiative to do so, compared with 42% in its benchmark. The firm wants all the stocks it owns to adopt such goals and says it will start voting against corporate leaders that don’t.
Still, money managers’ embrace of climate targets may not be enough, says Lisa Sachs, director of Columbia University’s sustainable investment centre. Avoiding investments in high-emitting companies and setting net-zero emissions goals, she says, have minimal effect on overall carbon output. “Managers are incentivised to spin off or sell high-carbon assets,” Sachs says, but the companies continue to pollute under new ownership “without any impact on decarbonizing.”
None of Generation’s efforts will be all that persuasive if it can’t turn around its No. 1 metric: making money. Generation serves wealthy people and large investors such as pension plans. Fees for its biggest fund — 1% of assets managed and a 20% cut of profit that exceeds its benchmark’s performance — look more like those of expensive private equity and hedge funds than the mutual funds it compares itself to. But before losses by Generation’s biggest fund last year — which were 10 percentage points worse than its benchmark — its clients prospered despite those fees. Its main fund has returned an annualised 13.7% since its inception in 2005, versus 8.6% for its benchmark, according to investors.
The company’s slipping performance points toward a common pitfall of socially aware investing: It’s easier to do well while doing good when high-growth but comparatively clean industries (read: technology) are in the market lead. That makes it difficult to assess whether an ESG fund’s edge comes from its principles or because it’s simply leaning into the right sectors.
In a January letter to investors, Generation attributed last year’s decline to its refusal to invest in fossil-fuel companies, which surged with the price of oil, and to soft consumer demand that spurred a selloff of Amazon and Adidas. Still, while it forecasts a “significant” recession in many countries, Generation says it expects the companies it owns to increase revenue this year.
In 2021, as Generation produced record profit, its highest-earning partner got a payout of GBP84.7 million ($136.1 million), according to UK regulatory filings — a paycheck seemingly at odds with its stated goal of building an “equitable” society. Although Generation didn’t name the partner, Blood says that when clients make money, well, so does the firm. And he notes that Generation contributes a share of profit to a foundation it created to tackle climate change and inequality. “We’re trying to make a difference,” he says. “And since our clients have been successful, we, too, have been successful.” — Bloomberg Businessweek
