Key considerations to successful ‘long-term’ capital allocation highlighted by Generation Foundation

A white paper published from Generation Foundation (‘Foundation’), the advocacy initiative of Generation Investment Management (‘Generation IM’), a boutique investment firm with public equity, growth equity and global credit investing strategies founded in 2004, reasserted this summer the “ever-stronger business” case for Sustainable Capitalism. It’s not just a nice thing to pursue but fundamental to investment returns, which a raft of research supports.

Building on their previous report on Sustainable Capital in 2012, Foundation’s latest 24-page paper titled ‘Allocating Capital for Long-Term Returns: The Strengthened Case For Sustainable Capitalism’ (May 2015), makes a number of recommendations on how both the business and financial community can “better allocate capital to ensure long-term growth and outperformance”.
The Foundation, which was established alongside Generation IM, has been pursuing a strategy over a many years to “mobilise” asset owners, asset managers, companies and other financial market participants in “support of the business case for Sustainable Capitalism and to persuade them to allocate capital accordingly”.

Al Gore, former US Vice-President under Bill Clinton and Generation IM chairman, commenting at a briefing in London to accompany publication of this latest paper said: “The importance of sustainability to business and investing has intensified as financial markets are forced to address challenges posed by the realities of natural resource scarcity, the effects of unabated carbon emissions, rapid urbanisation and widening wealth inequality - to name just a few.”

The paper sets out to demonstrate how an “evolved model for capitalism”, in which business and capital seek to maximise long-term value creation, has gained significant momentum, and is increasingly supported by new research and performance metrics. Indeed, both the academic and real-world evidence increasingly demonstrates how the full inclusion of sustainability factors in economic decisions translates into better outcomes.

Evidencing this, Harvard Business School’s recent investigation (Corporate Sustainability: First Evidence on Materiality (Working Paper, 2015) has shown a “tangible link” between a firm’s integration of material sustainability issues and enhanced shareholder-value. Elsewhere, a meta-study from the University of Oxford (Sept 2014) in partnership with Arabesque Partners, collated findings in the area from over 190 of the premier academic papers, industry reports, newspaper articles and books.

The paper also highlights three core integrated ideas that investors, asset owners, corporate executives and boards will need to adopt in order to successfully allocate capital for long- term success. These ideas cover: (1) Price carbon in all capital allocation decisions; (2) Use sustainability analysis to enhance investment frameworks; and (3) Upholding the full remit of fiduciary duty whereby investors and companies have a “fiduciary duty to include sustainability into decisions”.

They are also strongly connected to the themes forming the “bedrock of Sustainable Capitalism”, which include decoupling prosperity from resource-intensive growth; revising investment time-horizons to target sustained value creation beyond quarterly profits; and, integrating sustainability factors into strategic decisions and asset valuations.

David Blood, Senior Partner at Generation IM sitting alongside Mr Gore at the briefing said: “Implementing the recommendations outlined in this report could radically transform the global economy by 2020. Financial markets would incorporate the price of externalities that are currently treated as nearly free resources, like unabated carbon emissions and water, and allocate capital accordingly.”

He added: “Asset owners, asset managers and companies would, in the process, adopt a more holistic definition of fiduciary duty - one which incorporates sustainability and shapes investment frameworks as a result. In so doing, investors should successfully build profitable investment positions for long term gain, while helping to mobilise action towards addressing urgent sustainability issues.”