Are Big Investors Abandoning Climate Progress? Ep195: David Blood

Transcript

David Blood

When people say, ‘Oh, well, sustainable investing is woke capitalism and it has nothing to do with returns,’ we say, ‘no, actually, how could you say that climate change isn't relevant to the long term success of business? If we are going to, in the next five to 10 years, deliver to our stakeholders a 3°C warmer world with our ecosystems degraded and significant inequality, that will absolutely impact capitalism as well as democracy, then we have failed. We failed as financers. Financiers and capital allocators.

Michael Liebreich

Hello, I'm Michael Liebreich, and this is Cleaning Up. Just a few short years ago, sustainable finance and sustainable investing were all the rage. The Glasgow Financial Alliance for Net Zero boasted financial players controlling $140 trillion. Things have not been quite as smooth since. There's been extensive pushback, starting from the red states in the US, but spreading from there against ESG. And of course, sustainable finance and sustainable investing are firmly in the crosshairs of the new Trump administration. My guest today is one of the pioneers in sustainable finance and sustainable investing. He's built a very substantial asset management firm around the concept that sustainable investing will not just do the right thing for the planet and its people, but also provide superior returns. David Blood is the senior partner at Generation Investment Management, and he's been a driver behind a number of the most substantial sustainable finance initiatives. Please welcome David Blood to Cleaning Up.

David, welcome to Cleaning Up. It's a great pleasure to have you here on the show.

Well, thank you, Michael, thank you for having us. We've known each other for a long time, and I am looking forward to our conversation.

So let's start the way we always do. Could you explain who you are and what you do in your own words? But we're going to need the short version.

Well, yeah, I think folks would prefer the short version for sure. So I am in some ways, an entrepreneur like you. We started Generation 21 years ago. It's a firm that is mission driven. It's an investment firm in a traditional way, in a way that you know very, very well. But in addition to being focused on delivering strong investment results, our mission is to promote sustainability in the capital markets, and we hoped, 21 years ago, to help establish sustainable investing as mainstream. And we — and many others — over the course of the last couple of decades, I think have done that pretty well. So I would count myself as a finance person, a mission driven entrepreneur, and hopefully a nice person.

Very good. And now you've used the word ‘we’. You went straight in there with ‘we’. And ‘we’ includes Al Gore, right? So he was a founding partner of yours 21 years ago, when you set up Generation, and is still involved today.

Yes he is, yes he is. So I met Al for the first time, actually, at Harvard. We both have that in common as well. And so I had been a partner at Goldman Sachs for 18 years. Well, I worked at Goldman Sachs for 18 years. I was a partner for eight or nine years, and I had announced that I was retiring. I actually had been one of the partners who voted to stay private, and after a few years, I felt that it was appropriate to go off and do something different. So I had announced to my partners that I was going to retire and help establish a sustainable investing firm. And this, again, this was 21 years ago. The term ESG did not exist, incidentally, and folks basically laughed and said, ‘Well, this confirms what we knew about you all along. You're nuts. Why would you go ahead and do something like that?’ But in any event, my boss at the time was a guy by the name of Phil Murphy, who is now the governor of New Jersey. And Phil had been involved in democratic politics, and Al had approached Goldman Sachs about representing him to buy a firm called Sustainable Asset Management — or buy the US part of Sustainable Asset Management. And it was a $40 million merger, or something like that, and it was way too small for Goldman Sachs. But Goldman Sachs didn't want to say no to the former vice president. So they said, ‘Well, we, we have just the guy to help you.’ And so Murphy called me up and said, ‘Would you please fly to Boston to meet the former Vice President?’ And I said, ‘Sure.’ You know, you don't get to meet the vice president of the United States every day. And so off I went. By the way, they thought I knew something about asset management, and they suspected I was interested in sustainability. They weren't sure, and that's kind of how I got the assignment, but I brought our business plan that Mark Ferguson and Colin Le Duc and I had written around that time. Not because I wanted him to be our partner, but because it was a good example of how you either build a company or buy a company. And so off to Boston I went, and that first day, we established two things that have been critical to how we've developed Generation over the years. The first was that we recognized, so my interest was in poverty and sustainable development and the developing world, and Al's was obviously climate. And we realized that first day that they were the same coin, just different sides. So from the very beginning, Generation has focused on both the people side as well as the climate side, and now, more recently, nature. And we also realized that if we could bring together a knowledge of finance — in theory, that's what I had — with the knowledge of sustainability and integrate it into our approach and our thinking, that we would be able to to generate differentiated insights and that that would allow us to deliver better investment results at the same time delivering on our broader mission.

Sio there are so many touch points here. You said that we've been in this a long time, and Sustainable Asset Management, as it was then, I believe… So we had Gina Domanig and Gina Domanig’s company, Emerald Investment Management, on the show. Emerald came out of, or was the successor, in some way, to Sustainable Asset Management.

They were terrific. They were absolutely cutting edge. I think they're part of Robeco today.

And another name that you mentioned, Colin Le Duc, I was talking to him when I started New Energy Finance and was looking for investors. And I think it's one of his regrets that he didn't actually invest in.

I bet it is a regret. Actually, me too.

Look, to cut to the chase. You got into business with Al Gore, and I have the question, which I know the audience wants me to ask: Did you think about and why did you not call it Blood and Gore?

Well, we did think about calling it Blood and Gore, but our partners said that would be a dumb idea. And probably it was a dumb idea, but it has been a very good joke over the years. And for the first three or four years, we used it all the time. Then we retired it because most folks had heard it, but we bring it back from time to time. May do again.

I think it probably was wise. You want to be a very serious investment manager, a serious financial services player. You don't want to have the name being something that attracts the wrong sort of attention. But it would be so apposite.

Well Colin Le Duc was the person who helped to establish the name Generation. It was his idea. And Generation means really three things. It means first generating returns. It means investing for the next generation and actually building a firm that will transition to the next generation?

I think Generation is an absolutely brilliant name, there's no question. Can you just complete the biographical thumbnail with the corporate thumbnail? How much have you got under management exactly? You do public equity investment, you do private equity investment, you do a few things. How much of it do you do? And just give the thumbnail.

So today, Generation has approximately $50 billion worth of assets under management or supervision. So we do have some assets that we manage on behalf of clients, specifically with fiduciary duty, and some that we've helped establish, if you will. And it's about two thirds public and a third private. I would say our private strategies are growing more than our public strategies, and I could imagine over the course of the next five years that it'd be 60-40, or 50-50, something along those lines. But we've never aspired to be a large asset management firm. We've always wanted to be a boutique. And the reason for that is that we want to be extremely focused on our research and how we deploy capital, and we know that firms that get too big actually struggle with performance, and I'm sure we're going to come back to investment performance and the importance and how that links into our mission. But we know that being focused will allow us — we hope — to deliver better investment results, and so we have no desire to be a big asset management firm. We don't measure ourselves by assets under management. We measure ourselves by the excellence of our research and our investment results.

Now there'll be some out there that would say, ‘Well, hang on, you just said %50 billion,’ but you don't want to be big… So we need to just put in some triangulation points.

Well, it turns out you've got BlackRock, I think is about $11 trillion. That's what we consider to be big.

That's just for clarity, then. $50 billion is, of course, a lot of money.

Yes, that’s a fair point, thank you.

Obviously not if you're attending the inauguration of President Trump. $50 billion is sort of small change. But for us people, you know, it's big, but it's not, to put it in context, into the trillions, which a number of asset managers are. And in fact, we had the Norwegian Oil Fund head of sustainability, Carine Smith Ihenacho, and they've got a trillion and a half dollars. So that's just to put it in context. But it is a huge success. Just how many people have you got? And there's something very interesting, you are a B Corp, right? So talk about the organization if you could.

Yeah. So the Generation group includes Generation Investment Management, which is our global equity strategy, our Asia equity strategy, our growth equity strategy and our private equity strategy. Just Climate is a business that we established nearly five years ago now that is focused on climate-led investing.

That's Shaun Kingsbury's outfit?

Shaun and Clara Barby and Eduardo Mufarej, who we recently partnered with. There's 42 people there, and it’s quite an important initiative, and I'm sure we'll talk a little bit more about that. And then there’s the Generation Foundation. And Generation Foundation, we invest in initiatives that are going to promote sustainability in the capital markets, or sustainability in economies. And today, we invest about £10 million pounds per year, and that's seven people. And there's quite a few people from Generation who also lend their time to the foundation.

On that, when you say you invest through the foundation, do you mean invest as in the money comes back in, or is this a grant giving.

Sorry, exactly, it's grant giving. It's not social investing or impact investing in that respect. We think of it as investing because we're trying to drive change. I think philanthropy is also investing is maybe the punchline.

And the B Corp, what does that do for you?

Well, it goes back to the purpose of Generation. So when I say that we're mission driven, mission driven also is consistent with being a B Corp. And that's in effect, why we wanted to be a B Corp, is to affirm very clearly that we are mission driven. And in fact, the mission proposition is part of our partnership agreement. So we're a B Corp, but even more importantly, we set out in our articles of organization that we intend to be mission driven. But it's based on two things. The first is we want to deliver, hopefully, strong investment results for our clients, strong risk adjusted investment results with impact. And we want to promote sustainability in our economies. And we know very well that if we are poor investors, then our ability to be influential as advocates for sustainability is impaired. And so we know that everything we do depends upon excellence in investing and excellence in research. Excellence in research at the foundation, for that matter, Just Climate. And so our mission is reinforced by the excellence of our investment results. So we've never thought that sustainable investing was creating values for value. We've never thought that we were asking our clients to take lower returns for our commitment to sustainability. In fact, just the opposite. We believe that sustainability is part of your fiduciary duty, and that over the long term, it results in better investment returns.

And so the B Corp status allows you, as a company, not to just chase every profit, and it's a framework that enables you to value other deliverables, social and so on. But it doesn't refer to… within the funds that you raise and you manage, there's still scrutiny about the mission and the returns, and we're starting to get this — we're not starting, ee are in the midst of a huge pushback in the US, where asset managers who’ve said that they want to do sustainable investing are coming under incredible pressure, because some of those asset owners are saying, ‘well, we don't pay you for that stuff, and in fact, the law doesn't allow you to do that stuff. It only allows you to optimize on a risk adjusted basis your returns.’ So let's talk about the mission, because it goes beyond the organization, it goes into the way you manage the funds. So how does the way you manage funds differ from somebody who's not doing sustainable investing?

This is absolutely the subject that I want to spend some time on, because it confuses a number of folks. So a number of folks believe that sustainable investing has nothing to do with fiduciary duty. That is incorrect. It is fundamentally incorrect. In fact, when we established Generation 20 some years ago, one of the first things we did is a piece of work to answer this question — in the United States and around the world — is it possible, or is it permitted, to consider a broad series of facts and issues as you're deploying capital? And the answer is yes, if it's relevant to the success of business, if it's relevant to the success of companies and industries, then you can include it. And more recently, it became very clear that if it's relevant, you must include it. And so the difference when people say, ‘Sustainable investing is woke capitalism and it has nothing to do with returns,’ we say, ‘No, actually. How could you say that climate change isn't relevant to the long term success of business, or how you treat your employees, or your governance?’ We've always said that… It’s important to take one step back and say, one of the reasons why we established Generation 21 years ago is very pure finance, which is the markets where we're in are very short term oriented. Actually, the CEO of Norgesbank had a piece in the FT yesterday talking about the importance of long term investing and moving away from short term sort of quarterly earnings. That was our premise many years ago. We know that long term investing is best practice, so once you make that statement, as opposed to trading, then you need to be, as a fiduciary, as an investor, you need to be as holistic as you possibly can to understand the long-term drivers of businesses. And our second premise is that sustainability over the long term drives the success of economies and businesses. And for that reason, you have to include it.

But I guess the question is, why not just capture that in a risk framework or an opportunity framework?

We think it’s the same, we agree.

Is it the same? I guess that's the question. Because now that there's pushback on ESG, one approach is to look at it and say ‘Forget what it's called. We’ll just rename it 360 risk management and opportunity seeking, and then everything is covered.’ Or is everything covered?

Well, it's a very fair question. And the answer is, we think it is covered. We remember when we started Generation in 2003-2004 the term ESG didn't exist. We seldom use it, really.

It was called triple bottom line, and the assumption was that you trade off some returns. I think when I started New Energy Finance.

Yeah, but it’s interesting. So the journey that we saw is that the original sort of ethical investing was exclusions, and we knew that exclusions were likely to result in reducing your opportunity set as an investor, your choices. And so that actually is what Sustainable Asset Management saw in the end of 1990s, and so they created the indices, and they created a series of questions to figure out, what are the best businesses in each of the industries, so you weren't excluding them. So the Dow Jones Sustainability Index, or the FTSE4Good, was driven often by Sustainable Asset Management research to try to find the best businesses across sectors so that you weren't excluding it. And our view was that really didn't, you weren't investing as an active manager, you really weren't getting into the nuts and bolts of the success or not of a business. And so therefore you needed to go very deep in understanding those businesses.

Okay, so you're not just screening things out, and it's not conceding anything on returns, and it's research heavy. I'm just summarizing some of the things you've already said. And so you have a research process. I looked at your portfolio, and there's two things that jumped out at me… actually three things. One is, you don't have any fossil fuel, at least in the public equities. We don't have access to all the other things but the public equities, big portfolio, $20 billion plus, you don't have oil and gas companies. But you haven't screened them out. The second thing is, you don't really have any energy companies, even some of the names that you would expect, or clean energy companies, you could say that Tesla is not an energy company, but that's not there. Iberdrola is not there. Vestas is not there. There's all sorts of companies that could be there, at least optically, you might expect to be there. But they're not. What is there is a lot of Microsoft and Amazon. So can you talk us through the process that ended up there? Because that's not obvious.

Well, so what we've sought to do is, using our sustainability lens, to identify what we think are the very best long term business models across the industries globally.

And no clean energy companies made that screen?

Well Vestas is in our portfolio.

I certainly missed that in the end of 2024 filing.

Well, what you saw is just the US names.

Oh, I see. So look, I'm not going to probe you on performance of individual funds, because I know you'll just push back. But if I look at your big holdings, they are very heavily weighted towards tech and healthcare and real estate, and a small amount of industrials. But they don't look like a climate transition portfolio.

So, it's a really thoughtful question. We are not a climate fund. Absolutely positively, we are not. We are a global, a broad based global equity fund that happens to be concentrated. We have 42 positions, and our mandate from our clients is to choose a small number of businesses that we have done a lot of research on, that we have high conviction that will be successful over a period of time. And remember, we'll actually have our 20-year track record on February 1, so three weeks, or actually 10 days from now, I think it is. So we'll have been deploying capital for 20 years. And so to really get a sense of what this journey is, you need to look at the portfolio over a 20 year period. And so there's ebbs and flows of what we own and what we don't own over those periods, depending upon market opportunity, how these businesses have grown, and the robustness of their models, which change as you well know. Now the one thing I do want to be clear about: we have a process to identify what we think are our strong long-term businesses. So we don't exclude, but we have not owned a hydrocarbon security for over a decade, and the reason being is that we don't believe that the risks associated with those industries are properly priced in the market. So everything we do, we try to be as rigorous and financially oriented as we possibly can, but from a long-term perspective.

So the Danish oil and gas company DONG transitioned to become Orsted, and I'm sure at various points you've held some Orsted and so on. But do you think that other oil companies, or oil and gas companies, can make that transition? And if so, is there a risk that by taking this long term view? Aren't you going to miss out on the value creation if they do so?

It's a fair question. We would be open minded to firms that are truly committed to making that transition. We have not found one yet.

And do you think they are becoming less committed? I mean, it's sort of an obvious question, and a pretty obvious answer.

Yes is the answer.

So whilst you might have been considering it harder, probably two, three years ago, around maybe 2021, now it does look like they've given up?

And I think it's challenging for this reason. This goes back to corporate finance 101. In some respects, it's very difficult for an incumbent to change. The reason why technology and growth businesses are so interesting, and we do have a very large growth investment business on our private side, is that these are businesses that see an ability to disrupt and are able to move more quickly than the larger businesses. Now, sometimes large businesses are unbelievably innovative and build great franchises and businesses, and we see that in the public markets, for sure. But often it's the smaller firms that can move quickly, that change, and that's what we're interested in.

So I think it's partly a question of inertia of the incumbents and nimbleness of the attackers advantage — Clayton Christensen — but it's also, I think, the cost of capital. You've got investors who want oil and gas type returns — high, but volatile — and then you try and do renewable energy projects, and I think that's just an insuperable problem. Maybe if they spun out the clean energy activities and had a sort of partly owned but separately quoted company, that might be the right structure.

We agree with you. So it's both the inertia for sure, but the the blending of capital and who their investors are. And I know that a number of the oil majors felt very clear pressure to continue to develop their hydrocarbon energy business, as opposed to drive towards clean energy alternatives. The problem is that it will result in stranded assets. And so those investors are probably too short-term oriented in terms of what they're really thinking about. And I think that will prove to be money poorly spent.

So for the longest time, I thought that the right corporate structure would be for the oil and gas companies to put their clean energy assets into a separate vehicle. And we saw some of that starting to happen around Beyond Petroleum, back in 2007-8. But to spin those out, or partly spin those out, so to retain an ownership of maybe 40%-60%, but to have a vehicle with its own capital structure, so investors can then say, ‘right, we like oil and gas, we'll be over here.’ But if we like clean energy and we really want to lean into that, we can invest over here. You still get the synergies of the big group, but we've never really seen that, other than maybe Equinor taking a piece of Orsted, going in that direction.

Yeah, and, well, you're right. Iberdrola tried to do something along those lines with their wind assets. But we may see that. It's interesting, I think Lord Brown was right and I wish that we had BP as an example to show that you can make a transition from hydrocarbons to clean energy. He wasn't able to execute it in the end, but his vision was very thoughtful. He was way ahead of his time. And now I think it's too late. We'll have to do some kind of corporate finance magic, as you were describing.

And indeed, at the time, he got BP Alternative Energy into a separate vehicle, but then stepped back from floating it, from spinning it out, or partially spinning it out. I didn't follow exactly why at the time.

Equity investors can be short-term oriented, we’ve discovered over the years.

Somebody should start an asset manager to do something about that.

Yes, I agree.

MLI think this is very important, and we're going to open up a conversation about this pushback that is coming. Pushback that started in the red states, in the US, and that really spread from there. You did not ban your investment team… So your policy is not to ban fossil fuel equities. Was that because you just felt that your process would pick them up and it would be robust, or was it also out of legal considerations?

Oh, it's completely investment driven. So we haven't banned, but we haven't made investments. Early on, actually, when we established Generation, we had an investment in BP, and we had investment in British Gas. So we've invested in hydrocarbons over the years. But we stopped, as I said, 10-15 years ago, because we felt that they were not good investments. So everything we do, we try to drive towards rigor, investment, financial, business case. So we're not a partisan organization. We are a pure investment firm that happens to also believe that sustainability drives economies.

I have to ask you this, because you've talked a number of times about how pure investment drives the economy, and you said something in your senior partner letter last year, you said, ‘we also strive to generate strong investment performance for our clients, this provides the fundamental proof point that allows us to exist.’ But can we just reflect back? In February you're going to do the 20 year official analysis. How have you been doing in investment returns? Has your strategy been outperforming the markets or not?

Yes, it has. And there are many sources of information that you can go see, but what you'll find is that Generation, and I'm sure we've been lucky in some respects. We were certainly the right place at the right time, but we've been able to demonstrate that the rigor of our investment process results in very strong risk-adjusted investment results for our clients, which has allowed us to go from being a very small investment firm to, as we discussed, a very robust investment firm. And it's allowed us to have a voice around sustainability as well as actually to have a voice with the entrepreneurs as well as the C-Suite. So what we're trying to deliver to our clients and our broader stakeholders is investment excellence and expertise on sustainability, and we think that they're linked, and that allows us to have a voice on how we think our economy should ultimately be developed.

If I was cynical, could I say: Well, you've got these big holdings in Amazon and Microsoft and that's essentially provided fabulous returns, but they're not obviously sustainable businesses, potentially the opposite, with what we see now with data centers and the dash for electricity at all costs. They may actually manage to secure clean electricity, nuclear or otherwise, but they may be starving other parts of the economy of clean electricity as a result. So are they really clean? Have you, in some sense, I don’t want to say ‘been lucky,’ because you have a process behind it, but is this really a sustainability story in your results?

Well, it is, for sure. But I think what you're also identifying is that this is really hard work, and as we've evolved our process over the years, and as we've learned — and we've made plenty of mistakes, but hopefully we're learning from these mistakes — our ability to assess the issues and the trade-offs has become clear to us. So, for example, we were an early investor in Facebook, and we don't invest in Facebook today because we don't think that their business model is ultimately sustainable in terms of how they're operating their business. And as I mentioned, we were investors in BP a long, long time ago. So what we think is a good long-term business that’s sustainable today, may evolve over time. But our framework is what is important, and the framework holistically understands, or holistically tries to incorporate how we're driving our planet, and we know that from a sustainability perspective, if we ultimately run out of resources, it stops — whether that be climate, people or nature. And we know that these issues are relevant to the long-term success of business, which is why we have never worried about the pushback. There are issues for sustainable investing, and we can talk about them, and we probably over-promised and under-delivered in some respects. But the core fundamentals of what we're trying to do in our investment framework is based on finance and science, and so this is not political and this is not wokeness. This is actually, how do you build long term, robust businesses across economies? Now our private businesses would probably be pure, if you will, in terms of how we're driving very specific impacts, because smaller businesses allow you to have that focus. But certainly we think that our broader portfolio has enabled investors to invest in a way that is thoughtful, long-term and consistent with the sustainability objectives of our economies and our society.

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There is this pushback. And maybe we can tease it out. Is this just a pushback? Is it justified? Is any element of it justified? And you know, I look at your partner's letter from last year: you proudly noted the firm's involvement in the Sustainable Accounting Standards Board, the Task Force for Climate Related Financial Disclosures (TCFD), the United Nations Environment Program Finance Initiative, the B-Corp Movement, the Impact Management Project, the Net-Zero Asset Managers Initiative, which is now under a lot of pressure, the Glasgow Financial Alliance for Net-Zero (GFANZ). And most recently you’ve become involved in the Task Force on Inequality and Financial Disclosures. Now, back at the time of Glasgow, I put together, and we'll put a copy of this into the show notes, a schematic of 60 global organizations working on sustainable finance. You've said you've been involved in about 8 or 10 in that letter,

Oh probably more than that, I think it’s about 25.

Let's go with 30, let's go with half. And I also have touch points with many of them, but I haven't joined them, and I haven't had quite as much culpability in their creation. But this was the high point. It all came together with the Glasgow Financial Alliance for Net-Zero. Some people now want to call it the Global Alliance, changing the initial G from Glasgow to Global so it can have its headquarters in the US and so on. But wasn't this just the most extraordinary overreach, to be honest?

So I'm not sure GFANZ was an overreach.

Oh, I mean the whole thing. I don't mean specifically GFANZ.

I think that's a fair push back, if you will, or a fair challenge. So there's no question that there are challenges around sustainability and ESG. The term ESG, for example, the definitions are all over the show. There is very poor data. The reporting regimes are often counterintuitive and counter to each other. It takes a huge amount of effort to try to understand them. A number of organizations promised that sustainability would suddenly provide great returns no matter what. That's clearly not true. There are trade offs. They say, ‘Oh, it's always win, win.’ It's not. There are trade offs. And I think people probably got a bit clumsy with some of the terms and what they promised. And so we were not surprised two or three years ago to see the pushback. So for example, one of the things that always makes me smile is when an investment professional says, ‘well, here's our sustainability strategy, but if you don't like that, we'll give you our regular strategy.’ So the fact that you have two strategies tells you all you need to know about how they're thinking.

Did you ever commit to 1.5 degrees? Did you

Absolutely, and we are.

But that raises a really interesting question, because the world is not on track for 1.5°C and I think I first publicly said that I don't buy it, and, you know, I think we should still try to get as close as possible. But what happened with all of these 60 organizations was that the financial sector suddenly adopted 1.5, yourselves as well. 1.5 is not what's happening, but it’s created a liability. You have two problems. Number one, you're following a 1.5 degree strategy in a 2.5 or 2.7 degree world, which means some kind of disconnect, but also does it not create a liability? Because when it becomes clear that what you're following is not really a 1.5 degree strategy, and there's all these statements in the public domain and in regulatory filings and so on. And ‘you’ here is obviously Generation, but it's more broadly the financial sector. Is this not just a huge issue that's going to take a lot of unwinding?

No, I don't think so. The commitments that people have made are to transition our economy as close as possible to a 1.5 degree increase in temperature. And I think that is a worthy goal, and I agree with you, it's going to be challenging to achieve it, but if we achieve 1.7 that's a heck of a lot better than 2.3 degree rise, or 3°C degrees or whatever. I also think that understanding nature and the impacts on people is equally credible and responsible. So we'll come back to this in one second, but our fundamental premise is, as fiduciaries, if we are going to in the next five to 10 years, deliver to our our stakeholders, our clients, our investors and their stakeholders, a 3°C warmer world with our ecosystems degraded and significant inequality — that will absolutely impact capitalism as well as democracy — then we have failed. We failed as financers. Financiers and capital allocators. And so we need to do things differently. It it okay, as far as I'm concerned, to try to drive businesses to invest in their businesses and to position their businesses to have as small a carbon footprint as possible. Absolutely, no question about that. Because, and you know better than I, because of your expertise, the clean energy revolution is transformational in the opportunities associated with that, and the cost down curves and the elegance of these business models are really interesting. We're driving to a more robust economic circumstance, as opposed to what we have today.

My big concern is that, yes, clearly we can have a clean energy system which is higher performing than the old and almost entirely fossil-based system. The problem with it is that the value capture comes from removing the externality of pollution and climate is captured by society, rather than necessarily captured by the companies or their investors, which I think is possibly why you don't have major holdings in those companies. We could have a transformational clean energy system that actually doesn't create value for investors. That's my worry.

Well, you're very right. I think that the most critical thing we could do as capital allocators, and should do as capital allocators is internalize externalities, to bring in these non quantitative or these difficult to price challenges, because they are relevant to society, and by extension, they should be relevant to business.

So this is fascinating, and it goes back to my conversation with the head of sustainability from the Norwegian Oil Fund, and you mentioned the CEO saying we need to take long-term perspectives. In that episode with Carine Smith Ihenacho, she described all of the things that NBIN, I'm not sure what NBIN stands for, but it's the oil fund, a trillion and a half dollars, she described all of the things that they do on climate, all the analysis, all the engagement. Why do they engage? Because they're so big, they can't just screen out. They have to engage. But what emerged in the conversation was that they really don't invest in the global south. They invest in large quoted companies, which means relatively little new technology and a tiny allocation to infrastructure. So you've mentioned asset allocators, if we want to deal with climate change, surely the three most important things we need to invest in are new technologies, it's infrastructure, and it's the global south. And those are excluded from NBIN’s portfolio by their mandate from the finance ministry. And everything that they talk about, everything the CEO talks about with that asset allocation is fundamentally shooting us at three degrees. It's absolutely locking in three degrees. It's irrelevant from a climate action perspective.

Well, you're right, and we would say categorically that the most important thing that we as capital allocators are going to have to get to is, how are we going to catalyze capital to the global south? We need something in the order of $3-5 trillion per year over the next 20 to 30 years. Probably 80 to 90% of that needs to go to the global south. So it is about innovation. It's about catalyzing capital to the global south. And it's not just the Norwegians. It's across the developed world. So the major pension funds in Canada, the US, are not allocating capital in the way that we need to.

For sure, and it's also across Generation. So how much of your assets are global south? We can leave aside new technology, because you've got your private funds doing a lot of new technologies. I don't know how much infrastructure you do, but global south, what proportion of your assets would be global south at this point?

part of why established Generation, sorry, Just Climate, is to develop the capabilities to invest in the global south. And so we now have an office in Sao Paulo. So we are very focused on catalyzing capital there. COP30 will be a critical opportunity for the world. It's also important for us to establish credentials in South America, and ultimately in India and elsewhere. So we're developing that capability, and we are working with our large asset owner clients, to help them develop that capability too.

Now, isn't this an equivalent to a micro prudential macro prudential problem, because at the macro prudential level, we need to allocate assets to the global south to avoid this impending catastrophic climate change occurrence. But from a macroprudential perspective of you having to provide returns to your investors, which, as you said, gives you the license to do all this other stuff at that level. Can you justify taking those risks? Because these are countries that have got higher sovereign risk, therefore they require much bigger returns, and those returns are, in some cases, many cases, just simply not on offer.

Well, so perhaps, but there are other tools to help you get there. So one of the things that we've been working on that we wanted to see change was with the World Bank. The World Bank is clearly working to address this question. So are the other global development banks, if you will, and so is philanthropy, for that matter. So people are on this problem. I would say that we're not solving it as quickly as we could or should. Our capital deployment, though, is absolutely consistent with the risk and return parameters that our clients have. And so we've not been forced to subsidize returns or take higher risk for the returns. We think that we can do both. Now, whether that's in the trillions of dollars, we'll see about that.

One other issue that seems critical is the extent to which we can expect the financial system to lead on climate action or on other sustainability issues. My worry is that in the real economy, we're not really regulating energy appropriately or transport or building codes or trade. We've stepped back from almost any initiatives on trade, and so the real economy is going off, doing what it does, pursuing opportunities, data centers powered by gas. And there are so many investors that, how can I put it, don't really care. There's money flowing to that real economy. And then over here, you've got a bunch of investors and banks and financial centers and so on, all trying to sort of direct money only to the things that are 1.5 degree consistent, whilst the real economy goes off and does something different. Isn't there a chance that those who care about this in the financial sector have got the wrong theory of change, and they're just going to become irrelevant?

Well, it's a fair question, and there's no question that finance relies on policy, regulation and the broader will of the real economy. So we can't divorce ourselves from what's going on, for sure. The issue I have is really threefold. The first is that climate change is real, and so there's real risks, and the same for nature challenges, same for people challenges. So there are real risks and there are real opportunities. And so deploying capital with the knowledge of those risks and opportunities — particularly if you're a long-term investor — is just smart. And so yes, I see what's happening in the short term, but if I was to join that, I would be neglecting what I see as an amazing opportunity as well as risk. So that's one thing: the facts are on the ground, is what I would say. Secondly, things change, and we know in finance that evolves over a short period of time, and the broader context of business can change very quickly. And so yes, I see that in the short term, the incentives are not right, and we were deploying capital in a way that is inconsistent with our worldview. But again, I don't worry about that over time. Lastly, I don't believe that we as capital allocators, who know what the outcomes could be, that we don't have a responsibility to be thoughtful about how we allocate capital.

I accept all of that, but let me get, let me get very concrete with an example. If you look at somebody who might invest in a data center in Northern Virginia — gas fired because that's the quickest thing to build — and we see these wildfires in California, or we see the drought in West Africa, or we see whatever climate impacts that are coming through already and are going to get worse. That investor in Northern Virginia in a data center and its power supply is not going to be hit by those risks, and whether they invest or not is immaterial in scale to those specific risks. I think we would both want that not to happen, so take that as read. My question is, to what extent is financial regulation the place to intervene.

It is for sure. And we need policy. There's no question about it. And I would say that the urgency of policy is way more important today than 20 years ago when we first got started.

But finance? Financial policy?

Yes, and regulation associated with that for sure. But even without it, the risk of deploying capital, because, as you know, a data center is a long-term asset. And so, if you're investing with a 20-year return horizon in gas fired power plants or gas data centers in Northern Virginia, in five years time, that could be a really bad idea. So the science, the facts on the ground, are still clear. And so yes, I see the short termism, and I see why you might do that, and gas actually might be better than coal, and all the things that we know very well. But just because it's true today doesn't mean it won't be true in five years time or 10 years time. Not because you and I will it, it's because chemistry, biology and physics are going to drive the answer to that question.

But the risk to that gas fired power station in Northern Virginia is probably not asymmetrically higher than a real estate company operating in Northern Virginia, or a healthcare company or something that would pass all of your screens you see. So it's the question of that investor's risk versus the global macro impact to that investment. And it was fascinating. I had Dr Ma Jun, former member of the policy committee of the Central the People's Bank of China, and one of the architects of green finance in China. What China did was not just financial regulations, but also regulation throughout the economy, in energy, transport and so on. So it was kind of a whole package. Now, China's emissions continue to grow, I think they're about to peak. And so I'm not holding China up as a great example, but it was the joined-up policy response across the real economy and the financial economy that was striking. And we have not got the right balance.

No, I agree with that, and we clearly need joined-up policy, and we don't have it.

And are you optimistic that we're about to see that from the administration incoming in the United States?

Less so. But I am an optimist. I can easily see that evolving over the course of the next three, five, 10 years.

Four to eight years, I could probably concede. Three to three to five, I think you're on the short end.

Well, we'll see. Yeah, Hope springs eternal.

So now you've been very clear that despite the pushback, you're going to continue, I don't want to call it plowing on, because you're really on the front foot. Your Partner's Letter, you said ‘We are not conceding the definitions of sustainable investing to politically motivated detractors.’ And it reminded me, actually, of Bill Pullman, the actor who played President Thomas Whitmore in Independence Day, who said, ‘We can't be consumed by our petty differences anymore. We will be united in our common interests. We will not go quietly into the night. We will not vanish without a fight. We're going to live on. We're going to survive.’ So you know, your partner letter and the Independence Day speech, it’s Shakespearian stuff. But others are not doing that. Others are pulling back, and they are pulling back on a grand scale, and they are the trillion dollar asset managers and players and the banks. So we've seen people pulling out of GFANZ, I think the six biggest banks have pulled out of the Net-Zero Banking Initiative. Are we actually just losing?

Well, we're certainly pausing, and that's deeply unfortunate, because we both know that action is more valuable today than five years from now, or 10 years from now, given how carbon works in our atmosphere. So that's disappointing. It's not surprising in some respects, for the reasons we were talking about earlier, that we probably got out in front of ourselves. I know you're a great skier, and so we're over our skis in some respects. But it doesn't take away from going back to what we've been talking about. This is the business case. What is the business case for sustainable investing? It's still there. It's still robust. What's the business case for nature and climate? Well, turns out, it's science, it's biology, it's chemistry, it's physics. And so that hasn't changed. And to build our economies that are more robust over time and with technologies that are sustainable with a little s is just a better way to build and deploy capital. So will there be setbacks? Absolutely yes. Will the next 6, 12 or maybe 24 months be challenging, for sure. But if you focus on the business case, if you focus on the fundamentals of science and finance, then this will continue, because businesses or economies or anything that is unsustainable stops. And so we're just focused on, ‘well, what can we do now?’ Let's continue to deploy capital, continue to raise expertise. Let's continue to invest with amazing entrepreneurs, and we'll get to a much better place.

So over the first 15 years of Generation, what you've seen is almost Larry Fink starting to converge, you could say parking his tanks on your lawn, but I'm sure you welcomed it, because his annual letter started to converge with your partner's letter.

Yes, it did.

But now it's obviously diverged a bit, and I think it's now going to take a big swerve, it’ll be interesting to see. Is he wrong? And if so, I'm sure you meet him, what do you say to him?

Well, it's an interesting question. We'll see, is the answer. So if you think about it, you have folks like Generation. Are we worried that our clients are going to come back and say, ‘Oh, this is not what we signed up for?’ Everybody knows what Generation does. We're a sustainable investing firm. Our clients are aligned with us. That's why they've mandated us in the first place. So we're in a much easier position than Blackrock or Larry, because that's what our clients have asked us to do, what they want us to do. And if we didn't, we'd be in trouble with them. So we have the luxury, and we have the responsibility, of voicing and acting because we have this luxury. Then we have the state attorney generals of the state of West Virginia, and they have a point of view, and it's clearly different to ours, and they have been very clever with quieting the large asset owners, and asset managers. And I think the question is going to come back to fiduciary duty. Is the notion of not considering climate change fulfilling your fiduciary duty? We think the answer to that is you're not fulfilling your fiduciary duty. If you're an investor in Florida and you don't consider climate change, particularly in a real estate portfolio, you are certainly not fulfilling your fiduciary duty. I think there's also a potential political backlash, because there's ebbs and flows in this conversation, and no doubt people will begin to say, ‘you had a chance, you knew that climate change was relevant, and you knew that it was going to drive the success of our economies, and you chose not to do something about it.’ I wonder how customers, society, civil society, and politicians will respond to that in the next five to 10 years. So the jury is out. For sure, we'll see.

I think that's right. The jury is out. We're clearly, at some kind of a pivotal point. And I guess the two potential outcomes is that sustainable finance and sustainable investing, almost gets pushed back to when we started our journeys on this and it becomes, I don't want to say pushed back into the ghetto, but you know, it was a sort of 2 to 3% of assets under management, and then it had this flowering. The peak was GFANZ, where it had $140 trillion that had signed up to those principles. And it's now clearly taking a step back. And the question will be, will it reform around risk and opportunities and analysis and very crunchy stuff, and then it can progress from there? Or will you see that sort of 10 years in the wilderness?

No, it'll definitely reform. It'll reform this year, and we will be part of reforming it.

Very good. That's a fantastic place to end, and it's been an absolute joy speaking with you, David.

Thank you.

So that was David Blood, founder and senior partner at Generation Investment Management. As always, we'll put links in the show notes to resources that we mentioned during our conversation. So that would be, of course, Generation Investment Management's website, as well as episodes that I mentioned, including the episode with Dr Ma Jun, member of the People's Bank of China Policy Committee and Carine Smith Ihenacho, head of sustainability at the Norwegian Oil Fund. As always, I'd like to thank the team behind Cleaning Up and ask you please to join us this time next week for another episode of Cleaning Up.

Are Big Investors Abandoning Climate Progress? Ep195: David Blood

Michael Liebreich

David Blood

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