Al Gore and his investment business partner David Blood talk about the way in which sustainability is shifting fundamental assumptions about how business is managed in the current edition of McKinsey Quarterly (free, but registration required). The pair are partners in the sustainable investment company Generation Investment Management. Gore has a phrase in the interview that sums up the argument: “The market is long on short [term investments], and short on long.”

Gore and Blood

But Blood’s analysis is more interesting. He has an inside track on this, since he was formerly Goldman Sachs’ Head of Asset Management. There are interesting points about corporations’ need to shift to a systems’ view of their markets; the role of pension companies (often sympathetic) in taking a long-term view, for obvious reasons; and the fact that GIM assesses remuneration structures when looking at a company – for perverse and unsustainable incentives.

Click below for a selection of key quotes.

The most profound shift indicated in the interview, for anyone who’s spent any time watching the City of London, or Wall Street, at work is a way of looking at investment – within corporate investment parameters – that is long-term rather than short-term, as David Blood explains:

The first principle, categorically, is that it is best practice to
take a long-term approach to investing. We think that the focus on “short termism” in the marketplace is detrimental to economies, detrimental to value creation, detrimental to capital markets, and a bad investment strategy. It’s common corporate-finance knowledge that 60 to 80 percent of the value of a business lies in its long term cash flows.

Which raises the question of why board directors, or come to that institutional investors, haven’t acted on that common knowledge. Blood’s view is that this is a blindspot – and one which is about to catch out business leaders who aren’t looking in the right place.

In effect what’s happening, unbeknownst to many corporate
leaders, is that the goalposts for their businesses’ license to operate have moved. There are higher expectations and more serious consequences, and the implications go way beyond protecting your reputation or managing costs… In the end, that’s the holy grail of sustainability investing—to seize the opportunities, not just avoid the risks.

All of which leads him on to an interesting and far wider point, which he’s very explicit about: that in effect sustainability turns investment research into systems research.

Sustainability research is complicated because it requires you to think long term and to think about the first- and second-order effects of an issue. We like to describe our approach to sustainability research as taking a systems view. What that means is, if you’re thinking about climate change you first need to understand the physical, regulatory, and behavioral impacts on business. But you also need to understand what a changing climate means for disease migration and public health, what it means for poor populations in developing countries, what it means for water scarcity or demographic and urbanization trends. The most important and challenging research is trying to determine how all these factors interact.

Gore’s part in the interview is more muted, but he offers a data point and a weak signal, both from Europe, which may or may not be significant.

The data point is from a recent conference in Copenhagen, a reprise of an event held a year earlier: As part of an internal survey, attendees were asked how many of them had internalized their “carbon budget” and begun to drive down their internal emissions. A year ago it was 15 percent. This year it was 65 per cent.

The weak signal: “If I were on the board of a company doing business
primarily in the European Union, I would ask questions about how long it will be before my aggressive management of carbon.”