The Move to Sustainable Capitalism

Generation Investment Management, founded by former Vice President Al Gore and David Blood, has produced a report, in collaboration with a range of industry experts on sustainability and investment. It outlines the problems of our current economic system, ways to improve it, and the steps we need to take. The focus is on Environmental, Social and Governance (ESG) issues.

What is Sustainable Capitalism?

The definition given to Sustainable Capitalism is: “a framework that seeks to maximise long-term economic value creation by reforming markets to address real needs while considering all costs and integrating ESG metrics into the decision-making process.” In layman’s terms, this means that costs to society and the environment will be taken into account when people and companies are making their decisions.

The report criticises the short term attitude of consumers, investors and policy makers, who are all making decisions without thinking about the long term effect on the planet and the population. The solution given is to reform the market to include ‘externalities’, an economist’s term for external costs, such as those to the environment or society. One example of this is introducing a carbon tax, so that the price of emitting carbon dioxide reflects the cost of the damage it may do in the future.

One of the key points raised is for governments to evaluate progress in different ways to just Gross domestic product (GDP). GDP, which is a measure of output made up of the market value of all final goods and services produced, does not contain 'externalities'. The report, and other commentators on this subject[*], explain that the new measure, or measures, will need to track sustainable growth, including the costs to environment and society of growth. Other actions that they propose include longer terms for company chief executives (CEOs), compensation that reflects long term performance, rewards for shareholders who have held stock for a long period of time, increased reporting on ESG data, and further research into how to use these data to value companies.

The transition to “Sustainable Capitalism” will be challenging, particularly convincing investment markets and governments to start taking a much longer term approach. Educating people in sustainable issues and how to use them in investment will also be a challenge and the area requires further research. The report also points out that vested interests represent a significant barrier to change. Many institutions would be damaged by “Sustainable Capitalism”, such as highly polluting industrial companies. Many of these vested interests are putting large amounts of money into fighting these kinds of policy changes, and are funding research against it.

What this means for green investment and IFAs

The report outlines what “Sustainable Capitalism” will mean for different groups such as governments, media, and companies, but it also an interesting marker in the sand for asset managers and investors.

One of the report’s key points is around “stranded assets”, which means assets that companies, or investors may own that will dramatically change in value if certain “Sustainable” policies are implemented. An example is the fossil fuel reserves that are on the balance sheet for Oil and Gas companies, which may dramatically fall in value if a high carbon tax is imposed. The report suggests that investors and asset managers should be considering these ESG risks prior to investing, to protect investors and move money into companies that will benefit from any policy changes.

The rest of the report centres on reducing “short-term” practices, and encouraging both companies, investors and consumers to take a longer term approach. The report makes a convincing case for “Sustainable Capitalism” being a benefit for investors, particularly pension funds who necessarily have much longer time horizons.