During his long career, Al Gore has sported many labels: American vice-president; Clinton sidekick; environmental activist; and documentary film producer.
Now he has a new label: boundary-busting investor. Yes, you read that right. Fourteen years ago, Mr Gore joined forces with David Blood, a Goldman Sachs alumnus, to create a London-based investment group for sustainable investing called Generation.
Challenges of responsible investing
Although Mr Gore is its titular head, the investment strategy is driven by conventional asset managers. Away from the public gaze, Generation has quietly gathered almost $20bn in assets and notched up annualised returns in the low teens net of fees. And some Mercer (MERC) consultants recently told their pension clients that Generation is one of the top performers among 400-odd long-only global equity funds of this vintage. This means it has beaten numerous mainstream funds.
This is startling. But it is also highly symbolic. When the idea of “sustainable” or “green” investing emerged a couple of decades ago, it was associated with a warm moral glow — but low returns. In 2012, for example, academics at Missouri University studied 131 green mutual funds and concluded that these “underperformed on a risk-adjusted basis” compared to traditional funds.
But since then, performance has improved. Not many green funds have delivered on the scale that Generation has, but several have achieved decent returns.
And while so-called “green bonds” used to offer double-digit yields, since they seemed wildly risky, yields are now dropping. Last month, for example, the International Finance Corporation and Amundi, the French investment group, closed a $2bn green-bond fund, the largest to date.
As a result, as Philippe Le Houérou, chief executive of the IFC, pointed out at a climate meeting in Washington this week, there is now “a change in investor mentality”. Previously, investors and financiers divided the financial universe into two mental buckets: “normal” investments, which were expected to produce returns, and “sustainable” or “green” investments, which were created on non-commercial terms. Now there is a third category: green investments that are expected to produce commercially acceptable returns.
“We are now telling investors that they don’t always have to sacrifice returns” to be green, Brian Deese, head of sustainable investment at BlackRock, told the IFC meeting. “We are seeing a big increase in investor demand.”
'Green' funds and the correction
A cynic might argue that some of this just reflects lucky timing: in the past decade, as the green sector has boomed, most bond and equity markets have risen. A cynic might also point out that those “green” and “sustainable” labels are now being interpreted very creatively.
A decade ago, green investing usually meant putting money directly into climate improving technology (like solar panels), while also shunning climate destroying activities (like coal). That second piece of the equation is still widely upheld. But there is growing variation around the first.
Take the IFC-Amundi fund. IFC holds a “first loss tranche”, which means it will absorb any initial losses. In addition, the fund is not going to invest directly in green projects but is instead going to buy green bonds issued by emerging markets banks, which will select the projects.
Or consider Generation. When the fund was launched, in 2004, it focused on environmental aims. But it now targets investments that are “sustainable” in a much wider, social, sense, and the asset managers are ruthlessly disciplined about only picking undervalued stocks from companies with credible long-term business plans. They shun some green ventures (such as solar or electric cars) and focus on sectors such as healthcare, green construction and e-commerce.
This may dismay hardcore environmental activists. It may also leave ordinary investors confused about what “sustainable” really means. But Generation’s founders argue that sustainability needs to be seen as a way of looking at all the externalities investors often ignore, even though they can affect share prices; this means that “sustainable” focus could boost returns.
Maybe so: since green investment is still quite young, nobody really knows how scaleable it will be. But the one thing that is clear is that innovation and demand is growing. And that is something we should all celebrate — particularly in a week when the weather on both sides of the Atlantic has been delivering a fresh set of surprises too.
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