The Case for Sustainable Business

THE CASE FOR SUSTAINABLE BUSINESS

David Blood

Lord Sutherland of Houndwood

Good evening ladies and gentlemen, my name is Sutherland and I am the Provost of Gresham College.  If I can take just a few moments to tell you that Gresham College was founded more than 400 years ago.  It is financed through the will of Sir Thomas Gresham, one of London's great traders and financiers, who saw that there would be huge advantage in having an educated population and workforce in the City of London.  He left in his will provision for this, as well as for other things, which is quite remarkable more than 400 years ago, making provision for free education for those who live and work in the City of London.  That tradition is carried on through Gresham College today, and we try to interpret, in as many reasonable ways as we can, what it would mean to fulfil the spirit of Sir Thomas' will, because of course different kinds of free education are now available through the State, but the spirit of his will is to go beyond general provision and that is what we try to do.  We have a series of professorships, and one of our most distinguished Professors, Michael Mainelli, will be chairing the rest of this lecture.  We have a number of events, seminars; we publish reports; significantly, we go on the web, and if you have not found our website, please do so!  More than 1,000 people a week watch lectures from Gresham College on the web.  It is one way of beginning to interpret the will of Sir Thomas today.

Another way of course, very relevant to this evening's proceedings, is to notice that much of what went on in the City of London in his time and since then is now carried on also down here, in the Docklands.  A decision we took a number of years ago was to begin to establish a foothold in the Docklands so that some of the benefits of the College could be available in this part of the new City of London.  So we have had a series of lectures, next door, hosted by Allen & Overy, and we have the Annual Sir Thomas Gresham Docklands Lecture, which is what we have this evening.

I think that is enough distraction from me.  I am delighted to introduce to you Mr David Blood.  I shan't go through the CV, which is in the supporting papers which you have, because I want to give him the time and opportunity now to address those of you who have happily accepted Gresham College's invitation.

David Blood

Good evening.  It is a real honour to be here this evening.  I truly appreciate everybody braving the horrible weather this evening, to be here.  I hope we don't let you down with the conversation. 

For the most part, tonight will be a conversation, but I want to set the stage with some remarks for about 20-25 minutes.  What I would like to do is introduce myself and what Generation Investment Management is up to.  I would like to define what we mean by sustainability, in both investing as well as business; talk about why we think it is relevant to business; and make the case that, while it is relevant today, it will be even more relevant and important, over the next five to ten years, and give you some examples as to why we think that.

Before I start though, I need to tell you a story.  Last May, Vice-President Gore and I did an interview with McKinsey.  You may know that McKinsey is one of the most important consulting firms in the world, and they have a journal called the McKinsey Journal, which I have come to know over the years and read frequently.  They asked to interview myself and Vice-President Gore, as well as some of our colleagues, and, in some sense, talk about what we are talking about tonight: what sustainability is; why it is becoming more important, and really try to drill into some of the issues associated with it.  Given that Generation had been around for a while, and part of our mission is to promote sustainability in capital markets and sustainability in business, we felt this was an extraordinary opportunity and, in some ways, a great honour, so myself and my colleagues worked very hard to prepare for this interview.

Sure enough, the appointed day came we sat down for what turned out to be a two-plus hour conversation with the three partners from McKinsey plus the Editor of the McKinsey Quarterly.  There was a lot of give and take, some debate, some passionate feelings on our part on what sustainable investing was about, and I must tell you that I thought we did an extraordinary job.  In fact, to be honest with you, I thought I did an extraordinary job in the discussion.

So, the partners stood up and said, 'Al, you did a terrific job.  We really appreciate your insight.  We now understand that your commitment to sustainability is long-felt, it goes beyond just the environment, there are a number of different factors, and we are very impressed on how you have been able to take your views on sustainability and really relate them to business and investing.'  To which Al sort of smiled.

They looked at me, and I was waiting to hear similar sort of comments, in fact, I was almost going to fill it in for them!  But they carried on and they said to Colin le Duc, who is Head of Research at Generation: 'Colin, really your insights and words are extraordinary - they are precise, they are insightful.  It really brings out what sustainable investing is all about, and for the first time, we really understand it.'

They looked back at me, and I was beginning to be troubled by the whole thing.  But then they said to Lila Preston, who is one of our Associates, basically the same thing they said to Colin.  I must tell you I was a little frustrated by this.  It was kind of an awkward silence, and they turned back and looked at me, and they said, 'Well, we have a problem, and the problem is this: at McKinsey, and for the McKinsey Quarterly, we have a policy that we can only have two people quoted in the article.  We do not know what to do about this, but Colin and Lila, do you mind if we ascribe your very thoughtful words to David?'  They did not say it, but what they seemed to be implying was that because my words were not thoughtful or articulate.  However, Michael did not know this story, and so he made the mistake, having read the article, of thinking that those words were mine!  Colin is busy tonight, so you are stuck with me!

In any event, I have been in finance for over 25 years.  I started my career at Goldman Sachs, and left to form Generation almost five years ago.  I mention my experience at Goldman Sachs, because it involved a number of different things, including capital markets, including being Treasurer of Goldman Sachs, but the last job I had was running Asset Management for Goldman Sachs, based here in London, but I ran the business globally.  I tell you all that not to try to impress you but because what I am going to talk about tonight is sustainability, and historically, in many parts of the world, particularly in the United States, when you say the word 'sustainability', people immediately think of the left and they think of socially responsible investing and those sorts of things, and the title very often comes with it an assumption that it is not about investing or it is not about business, but about something else.  I just want to remind you that it is probably fair to say that there are very few communists at Goldman Sachs!  As a Partner at Goldman Sachs, I do not think anybody ever accused us of being Socialists!  So I think I can say that at least I come to this discussion tonight with traditional investment criteria and traditional investment expertise, not from a different perspective.

We founded Generation nearly five years ago, and the principal strategy we have is long-only global equities, where we integrate sustainability into how we think about the quality of the business and quality of management.  We have three basic principles in terms of how we think about investing. 

The first principle, very importantly, is that we take a long-term research horizon.  We very deliberately reject the notion of investing based on next quarter's earnings; the notion of momentum investing where you are turning over your portfolio very quickly.  We think that has caused very bad investment decisions and very bad business decisions over the course of the last five to ten years.  This process is actually pretty bad corporate finance and pretty bad investing because if you think about it, and this is pretty much common knowledge, 60-80% of the value of a business is in its long-term cash flows.  If you are investing with sort of a 90-day or a 180-day horizon, you are actually giving up a very significant percentage of the value of a business.  So our first principle very clearly is to say that is not sensible or very thoughtful; let us invest with a long-term horizon.

Secondly, because we are investing with a long-term horizon, we very systematically include as broad array of issues as we can do in analysing businesses, and that is what we mean by including sustainability into an analysis.  We do that because sustainability factors are relevant to business.  They are particularly relevant if you are going to own a company or own an investment for a long period of time.  If you are only going to trade it, which is really what momentum investing is, or investing with a short-term horizon, then it may not matter what the people strategies are of a business.  It may not matter what their view is on climate change or the price of carbon.  But if you are going to invest in a business, like the executives of the business - if you are going to invest with a long-term horizon - you actually do need to understand those factors.

Thirdly - and we will talk about this more both in my closing remarks and I am sure Michael will want to talk about it - we are seeing, increasingly, that the context of business is changing.  What we see is that the challenges associated with sustainability factors -  like the environment, like poverty, like health, like water - are becoming ever-more important and difficult to think about, and increasingly, civil society and government, all of us, are requiring that businesses consider this in terms of how they are building their business and protecting their licence to operate.  Actually, what we are finding is that the most insightful chief executives understand this and in fact see this as an opportunity to drive revenues and drive competitive position. 

Generation also has a policy that 5% of our profitability is contributed to the Generation Foundation, which is set up to promote sustainability in the capital markets.  So, on the one hand, our primary job is to deliver great investment results for our clients, which will, in some ways, prove the business case or not about our view on sustainability; but secondly, it is to do these sorts of heavy discussions and engage with as many people as we can do to promote this dialogue.

The one thing I forgot to tell you about Generation though, and it has now become a more widely-known secret but it just is kind of an embarrassing part of our founding, is that we actually had a fight over what we were going to call the firm.  Al and I actually wanted to call the firm Blood & Gore!  Our partners were very vehemently against it; they felt that it was just not appropriate to talk about fiduciary responsibility and looking after people's wealth and nest eggs with a firm called Blood & Gore, but I certainly think if we ever get into the hedge fund business, we have the perfect name to carry on the line of what we do!

In any event, I would like to turn to defining what sustainability is.  I want to start by telling you what it is not.  I mentioned a few minutes ago socially responsible investing or ethical investing.  Very often, people think of that and actually they think of it as negative screening.  In fact, that is really how socially responsible investing came about in the first place, and it has a very long and distinguished history in many respects.  It was where investors made a decision that they were going to exclude certain categories of investments because they were uncomfortable with them.  In many cases, these feelings were powerful and important and the right decisions, but from an investment perspective, if you eliminate significant sectors of your opportunity set, you actually make it more difficult to perform.  Therefore, a number of the ethical investment funds who were negative screening - saying, for example, no alcohol or no tobacco - ultimately found that, over time, their performance was not as interesting.  Actually, that is why today a lot of people would say that socially responsible investing is about trading values for values.  We are not here to say that that is necessarily a bad thing - in fact, I have my own personal views and have had portfolios that are ethically-oriented - but the point is that if you are a fiduciary, it is a very difficult decision to make.  So sustainable investing is not negative screening.

Nor is it the next wave of the sort of genre, which is the best in class investing.  So, eight to ten years ago, people said, 'Wait a minute, if you eliminate a sector, then it causes potential performance drag; so what we should do is look for a best in a class approach,' which ultimately is what the Dow Jones Sustainability Index might be, or the FTSE for Good Index, which is an assessment across all industries where analysts are trying to come up with what they think are the best businesses in every sector.  Again, that is a perfectly plausible and thoughtful way to think about investing.  The problem with that though is that there is friction to it, and it makes the assumption, as you are analysing those factors, that sustainability and traditional business are separate subjects.  We do not believe that; we believe that sustainability is integral to business.

So we define sustainable investing, or sustainable business, as the explicit recognition that environmental, social, governance, ethical, and long-term economic factors affect business - factors like how you attract and retain your employees; factors like how you operate in your community, your licence to operate; your company culture.  For financial services businesses, which many of you probably are associated with, the culture and how you attract and retain employees drives the success of businesses.  It includes your corporate governance; it may include how you manage your brand.  These are factors that are difficult to quantify, oftentimes are not on the balance sheet, but if you stop to think about it, they are very critical to the success of businesses.  Increasingly very few businesses today trade at their book value in the public markets; they trade at greater than book.  Why is that?  That is because markets recognise that there are intangible factors, like brand or culture that drive the success of businesses.

Now, very often people will say to me, 'You know what, that is just not precise enough, and what we think that what you are talking about when you talk about sustainable investing is not focusing on really the objective of what business is about - Freedman's doctrine that 'The business of business is business' - and all this other stuff, all this soft stuff, this Socialist/Communist stuff that Goldman Sachs partners are known for, is not relevant to business.'  We do not agree with that, we fundamentally do not agree with that, and I will give you some examples here in a moment that try to bring this to life.

We think there is a continuum of sustainability.  It ranges from reputation and your licence to operate, and that actually was probably the first recognition by a number of CEOs that sustainability had a place in their thinking, how they managed their reputation and brand; and then it progressed - and DuPont was a great purveyor of this, that in fact cost, if you reduced your pollution, as an example, and your waste, you actually could increase the bottom line and so improve profitability, so cost management became a way of thinking about being more sustainable as a business.  But increasingly - and this is to do, again, with what we think is the changing context of business - the best CEOs and business leaders recognise that actually thinking about sustainability, integrating it into business strategy, is about driving profitability, it is about driving revenues, and it is about driving competitive position.

Let me give you a couple of examples, and by the way, my friends in Compliance would always tell me to remind you that this is not a stock recommendation but an example - it may or may not be in our portfolio.

Let me actually start with one that is about, in some ways, taking reputation and leveraging it into a business strategy.  You may recall, about five years ago, in the United States, there were a series of mutual fund trading scandals, unit trusts in UK parlance, where a number of extremely important and famous fund managers of fund management firms were trading after hours against their clients, and in effect trading certain very large clients or high fee paying clients, giving them better pricing, better information, than the average client.  This resulted in a horrible loss of trust and confidence in the US mutual fund industry, and quite rightly so I hasten to say.  As we were thinking about analysing this crisis, what became clear to us is two things: one, that the average investor in the United States still would need someone to manage their money.  Investing is really hard, as you know, and therefore they would not be saying, 'Well, we are just going to have to take our money out of the big investment firms and invest it ourselves.'  What they would be doing is looking for firms that were very strong investment managers but who they could trust and who they felt had special culture and a special commitment to clients. 

So what we began to do is look at both public and private companies to try to identify what those firms would be, with the view that actually over a very short period of time, these firms that were doing poorly and doing the wrong thing would actually lose assets to the handful of investment managers that had great products, a great culture and great people, but they had ethics and a brand that was powerful.  Actually, as we did the analysis, there was really only one public company that we felt that would fit that sort of characteristics, and that company was T. Rowe Price. 

For those who do not know the company, it is based in Baltimore; it is a global firm, but historically, primarily the United States.  It has an extremely powerful culture.  It is very difficult to get people from T. Rowe Price to leave; and they have a passion and a commitment to clients that is exemplified by, for example, closing funds if they think performance might be at risk and the value of their reputation.  In fact, what happened is that, over the course of a couple of years, they dramatically increased their market share, at the expense of these other firms.  The point I am trying to make is, from a strategy of attracting great people, having a great culture, doing the right thing with clients, they were able to benefit quite significantly in this difficult circumstance.  In fact, the mistake we made at Generation was that we assumed that they would increase their market share but that it would actually taper off over time.  We were wrong about that, because as people began to learn more and more about T. Rowe and the confidence that they had in their integrity, they in fact were able to maintain their market share over a much longer period of time.

Another example is a company called Novo Nordisk and, for those of you who do not know the company, it manufactures insulin.  Their strategy and their commitment is to eradicate diabetes, which incidentally does not seem very sensible if you are trying to sell more insulin, because the greater the number of diabetics, the more insulin you can sell, but that is not their strategy, because they recognise that diabetes is a horrible thing, and they want to create a culture, and have created a culture, where they can attract the best scientists, and they can actually go into emerging markets where, sadly, diabetes is on the rise in a very material way.  Actually, diabetes is the only non-transferable disease that is rated a pandemic by the World Health Organisation, and sadly, the growth of diabetes is in places like India and China where, incidentally, Novo Nordisk has a 70% market share, because they are committed to working with the Governments to eradicate and educate people on diabetes. 

In fact, they have a pilot programme up in the North of England where part of the evaluation of their sales force is not on how much more insulin they can sell, but rather whether they are reducing the level or the incidence of diabetes in their sales area.  The point is that they recognise that, by doing the right thing, they can create a great culture and ultimately they can create a more powerful business model.

I want to turn to the conclusion, and give you another example of why we think sustainable investing is going to become even more important.  It is a powerful example that I hope many of you all will be familiar with.

There is a company in the United States, and it is a global company, called Wal-Mart.  For those of you who do not know it, it is one of the largest - in fact, it may be the largest - retailer in the world.  In the United States, they have these very large stores formats, where they sell lots and lots of products, and in fact, five or six years ago, most retail analysts in the United States, and arguably in the world, would say their format was the optimal format.  Again, their strategy was to go into communities with these big box formats, be the low cost provider and producer of product, meaning you will source the products from the cheapest places you can find in the world, and they also made a decision that they would actually compensate their employees in as low way as they could and they certainly did not want any unions in their employee base.  Again, retailing is a tough business, and most retail analysts said this was exactly the way to run a retail firm.

Now, if you want to do an experiment, go back and look at the price of Wal-Mart on January 1st 2003, and plot that against a basket of competitors - plot that against Costco, which is their largest competitor in the United States, who incidentally is unionised, and against Target, which is their second most frequently cited competitor.  What you are going to see when you do that is that Wal-Mart's stock has dramatically and dramatically underperformed.  In the Costco, it is 2.4 times that of Wal-Mart, and the basket is up 1.6 times versus Wal-Mart.  I am not trying to tell you that sustainability was the only factor in this underperformance - that would be wrong - but I am telling you that if you go back and look at what has happened to Wal-Mart, you will notice that they lost their licence to operate.  Investors missed it and the company executives missed it.  What they missed is that, increasingly, people were uncomfortable with the big box retailing concept from an environmental footprint perspective.  They were uncomfortable that these stores were going into neighbourhoods and basically displacing a significant number of smaller retailers.  They were uncomfortable with the fact that Wal-Mart was not providing health insurance.  So what happened was that community after community across the United States and outside the United States began to block Wal-Mart's entry into marketplaces.  In fact, in the state of Maryland, they passed a law that said that certain retailers of certain sizes - and the only one that fit this was Wal-Mart - was not welcome in the state.  It was the same for the City of Chicago, although Mayor Daly vetoed it.  The point is that they were not able to grow at the pace that people thought they would, which is why their stock underperformed.

What Wal-Mart has done in response is interesting.  What they have recognised is that they need to rethink their strategy, and today, they are probably the most progressive, as it relates to environmental footprint, of all retailers in the world.  They are doing some truly remarkable, thoughtful things.  They are doing it because they think they can drive their costs down and they think it is the right thing to do and they believe that climate change is an important subject.  They are beginning to talk about how they might actually provide health insurance to their employees and raise wages, to name two things.  They are trying to regain their licence to operate.

25 years ago when I started in finance, this story would have been impossible - it truly would have been impossible.  But we think it begins to illustrate what Stuart Hart from Cornell University talks about - that capitalism is at a crossroad, and that increasingly these factors will drive how businesses operate, how businesses will be evaluated, and if you were a research analyst or you were an investor in Wal-Mart five years ago, and you did not recognise or see that the context of this business was changing, you would have made a very bad investment decision.  Our point is is that, increasingly, this will be more relevant to business and more relevant to investing.

Now, I want to just make two more points, and then mercifully for you all, I'll be done!

When we founded Generation four or five years ago, we were pretty convinced that sustainable investing and sustainability would become a mainstream subject.  Though we thought it would be five to ten years before it would become a mainstream subject, and we used to say that we thought sustainable business, sustainable investing, would be a key driver for business over the course over the course of the next 25 years.  We now think we were very wrong about that.  We see that already the whole discussion of sustainability is becoming a mainstream subject - you cannot pick up the Financial Times tomorrow without seeing reference to it.

But there are two points that I want to close on, just to try to drill it home a little bit more.  If you have the view that we are going to have a serious problem as relates to climate change, if you believe that we are going to need to begin to change how we live, then you need to start thinking about really what that means.  If you think about what the energy infrastructure is in the world, you begin to realise what the challenge is all about.  We would have to go, over the course of maybe five to six decades, from a high carbon economy to a low carbon economy, because in fact hydrocarbons are finite.  Some, like coal, there is many more years, but on balance, it is finite, and we would have to make that transition.  If you believe what the scientists are telling us from the United Nations' most recent report, and actually if you read it, you will see that they think that they are being conservative, what we believe is likely is that we will have to make the transition from a high carbon economy to a low carbon economy in ten years.  Think of the infrastructure associated with energy.  Just think of these buildings, the products, the packaging that you use, think of your mobility - all of these factors will need to change, very significantly.  Incrementally is not going to make a difference; it will need to change dramatically.  As investors and as business leaders, we need to internalise that, and our view is that, to date, even though it is getting far greater airplay, markets and business do not yet understand the degree of challenge associated with this change.

Secondly, linking sustainable development into climate change is an important and increasingly more poignant linkage to make.  The truth is, on climate change, the groups of people in the world that would be most adversely affected are the poor.  You will see starting this week a greater commitment to bring the green movements and the red movements, or the poverty movements, together, because they are integrally related, and so is health, migration, water and all of resource utilisation.  We will need to start to think about how, over the next 25 years, the 6.5 billion on this Earth are going to develop.

Just to give you a couple of statistics on that to bring this home.  Jared Diamond wrote such books as 'Guns, Germs and Steel' and 'Collapse,' and in the New York Times, on January 2nd, he wrote a very interesting piece on consumption.  In it, he made the observation that there are 6.5 billion people in the world, of which a billion live in the United States, Western Europe, Australia and Japan - and on average, the developed world uses 32 times more resources, more stuff, than a person in the developing world.  Therefore that means that there are 5.5 billion people who are living in a different way than we are tonight.  Of that 5.5, probably a billion live in what is approaching more middle class standards, but 4 billion people live on something in the order of between $4 and $2 a day, and they would like to have a better lifestyle.  They would like to have water.  They would like to have health.  They would like to have education.  They would like to actually share in what we are sharing in this evening.  So there is a huge amount of pressure on resources, and we won't be able to, and nor should we ethically, tell them they canmot develop, but yet, we have a finite amount of resources.  So here are a couple of statistics for you!

For one, some people believe that we will go from 6.5 billion from 9 billion over the course of the next 35 years, but let's just leave that aside!

Let us assume that the people in China, which equals 1.3 billion people, begin to use resources exactly the same way that we do.  That will actually double the resource utilisation of this planet, and we are already running out of things.  And by the way, the Kenyans and the Brazilians and everybody else, they get to use no other resources other than what they are currently using!  If just the Chinese, and the Indians, come to the standards of the United States or Western Europe, we will increase our utilisation of resources by three times.  If all 6.5 billion people live like we do, that will be the equivalent of having 72 billion people on this planet.  Okay, maybe I am being a little aggressive with his numbers - okay - 35 billion, you choose the number!  The point is is that business leaders, investors, civil society and government will need to start to think about what this means to how we operate capital markets, who we operate business, and how we operate the global governance, as well as our own internal laws and businesses.  You cannot escape sustainability any longer.  It is not separate.  It is not a feel-good exercise.  Ultimately, it is directly related to commerce and investing, and it is something that we need to systematically consider.

Thank you very much.

Michael Mainelli

Thank you very much David - that was absolutely excellent!  It was suggested that it would be nice to have questions now, but then we pointed out that there were 300 people in the audience.  So what I have done tonight is collect some of the questions that have actually been posed by members of the audience.

To begin with, David: you stressed the importance of combining fundamental equity analysis and sustainability research at the beginning, middle and end of the investment process.  Could you give us a really hard example or two of a decision that you have made that was very contrary to the rest of the investment management industry because of the process that you use?

David Blood

Well, today, in some respects, our entire portfolio is our perspective on these different challenges, and it represents a fundamental view that sustainability is relevant to business. There are an increasing number of other institutions, starting in Europe, but very importantly, globally, and, in some ways, we are celebrating tonight the combination of Gresham College and the Enhanced Analytics Initiative and what USS has done.  That is an illustration of the increasing prominence of the integration of sustainability into how one analyses.  But our very strong point of view is that these factors are relevant to every one of our portfolio companies, but they are relevant depending upon different industries. 

So for example, if we are thinking about the challenges of climate or water, we are likely to focus those analyses and questions on businesses that use natural resources, or industrial firms, or energy firms.  We are not likely to spend a lot of time thinking about the climate change policies of a software manufacturer; whereas, in a software manufacturer, we will spend a lot of time thinking about how they attract and retain their employees.  So what is different about Generation is that we have a single team of investment professionals and sustainability experts that we have spent the better part of the last five years developing a common language and a common philosophy, and that we systematically view sustainability and business as the same subject, not as two separate disciplines, not as something that you consider as an after-fact, or as a screen, but actually as integral to how business operates.

Michael Mainelli

Thank you.  You said earlier that sustainable investing is the explicit recognition that social, economic, environmental and ethical factors directly affect business strategy, and you went on to talk about how companies attract and retain employees, how they manage risk and create opportunities from climate change, culture, corporate governance standards, stakeholder engagement, reputation, brand management, but is that not a statement of the obvious?  In other words, with such a wide range of activities, can't you just choose what you like, and then when you underperform, you say that you are taking the long-term view?  So is that not just an investment management cover, a great way to get out of a tight spot when you do not achieve the performance you promised?

David Blood

Well, I am always in favour of finding ways to get out of tight spots, as a general principle, but the first part of your question, Michael, I think is quite right, and in some ways, this is why our message has gained so much traction.  To everything we have said, this evening and generally, about sustainability, we get a typical response: 'Well, that's very much common sense - what you've said to us is not special, it's not all that intellectually fascinating or insightful.'  In some ways, we would say that they are right - actually, this is common sense, and that is why we are getting the traction. Then people think about it and they say, 'Well actually, this is common sense, but a lot of our fund managers aren't doing this,' and a lot of the research provided to the investment community does not directly think about some of these challenges.  Very often, research is about next quarter's earnings and it doesn't touch on what really matters.  We talk about the T. Rowe Price example.  Even to this day, I defy you to find a piece written by a research firm that actually talks about culture, and talks about how you attract and retain fund managers.  I have been at the fund management industry for a little while, and that is what is most important.  It is not what the fund's flows are over time.

Now, the second part of your question is a very good one. Notwithstanding the fact that Colin le Duc is very articulate and so is Al Gore, if we do not deliver great investment results, our view on sustainability will begin to ring hollow.  We ultimately think that others will pick up the mantle, incidentally, and whether we execute or not, we will prove the case because it is commonsense, but we recognise very clearly that investment performance, whether we like it or not, long-term investment performance will determine whether what we say gets the recognition and the support versus other perspectives.  I am happy to tell you that our investment performance has been good.  It could be luck, but we think it begins to show skill and that is very important towards the challenge of promoting sustainability in business and capital markets.  It is always best to not hide behind or think of excuses, but in fact deliver great investment results.

Michael Mainelli

Thank you.  David, you closed, I think very interestingly, on population, and I am going to combine three questions that the audience provided.  Really, isn't this sustainability thing just a rich person's plaything?  In this secular world with its new religion of luxury, it assuages our consciences, but it is we in the West who are actually the sustainability problem.  So what is going on here is a tension between growth and anti-growth.  Thus is sustainability not anti-growth because people are not really putting the cost of what it would genuinely mean to be sustainable to people, and is sustainability truly achievable unless we have drastic cuts in future human population growth?

David Blood

There are a couple of ways to think about this challenge.  The first is to make the very obvious statement that unfortunately does not yet have the recognition that it is so obvious.  Pollution is a cost, and today, for the most part, although that is not true in Europe and in the signators of the Kyoto Protocol, but by and large, CO2 is not properly cost, and so putting a price on carbon is an extraordinarily important first step.  People will say, well that is a cost, you are increasing cost; no, that is a recognition that the cost already exists, and if you do not act, and you say, as Sir Nicholas Stern did: 'It may cost 1% of GDP - that's a significant amount of money,' and so gosh, how are we going to do that?  Well, you need to think about that in comparison to what if you do not act and what does that cost!  That may be 5% or more of GDP, so the importance of putting a price on carbon to internalise externalities is actually good capital markets - it is good capitalism - because it will allow us to make better allocation of capital, and ultimately, better business decisions.

Secondly, we do not have to develop in the developing world the same way we did in the United States or Great Britain.  One of my favourite examples is that if you go to Africa, you do not see a lot of telephone poles, because people leapfrogged the technology by having mobile phones.  And by the way, sadly, Jared Diamond points out that the consumption in the United States relative to consumption in Europe is quite dramatically different.  In the United States, the consumption is much higher than average Europeans, but in reality, can we say that the standard of living and the overall quality of life in the United States is better than the standard of living in Europe?  No, you cannot.  In fact, there are plenty of examples that say that in fact it is not.  So maybe there needs to be a better recognition of exactly how we do consume our resources and be more thoughtful in terms of whether it is necessary or not.

We will have to invest in technology.  We will have to be more creative and think about how we are going to go from a high carbon economy to a low carbon economy, but there are examples of human beings and societies who recognise the challenge and rise to the challenge.  The great example of course is what happened here in Europe during the Second World War to address an extraordinary challenge - but it was able to be done.  In many respects, that is the type of challenge that we will have to address over the course of the next 10 to 25 years - it has that sort of magnitude.  But I am highly confident that as a creative people with the proper incentives and the proper economics, we can make those thoughtful decisions.

Michael Mainelli

I am going to squeeze in two quick questions if I might.  You also mentioned climate change, and on people's chairs this evening, we have copies of the London Accord, which is a large project done here in the City, which Gresham College and others supported.  I am kind of curious to know if you believe that people in Europe have been focusing too much on climate change, or is it better that we focus on it and get it under control and move on to other issues?

David Blood

Certainly I think Europeans are ahead of the rest of the world on the broader question of climate change, although Australians are very quickly catching up and so are the Japanese.  But increasingly, people are linking and understanding that sustainability factors are not just different silos.  One of the most important learnings for us at Generation over the last five years has been the recognition that you cannot think about climate change in isolation to poverty or to pandemics or to migration, and you cannot think of poverty in isolation to climate change.  These factors are linked, and they are increasingly linked, given the challenges of sustainable development.  I believe that the Europeans are ahead of the Americans for sure on this, but increasingly, you will see the dialogue on sustainability, and on climate, as I said, shift to a more inclusive, more holistic ways to think about this challenge.  That will be quite a good development, because in fact we have to think of it in a holistic way or else we are not going to be able to address the challenges in a thoughtful way.  So, in response to your question, I think we will have a mid-course correction in how we focus our attention, and urgently, over the course of the next 12-18 months, because we have to.

Michael Mainelli

The final question in the time available is of how we should be looking at Generation five years from now.  How are you going to measure your success?  Should I be looking at you purely as an investment management firm and saying have you or have not you outperformed the average, or are there other measures I should truly be taking into account?

David Blood

Well, I hate to actually talk about Generation when there are so many more important subjects to discuss, but the way we would answer that question in a specific business setting is really in three ways.  The first is our investment performance - that is how clients will judge us, and actually, that is how the broader market will judge us, and I will be candid with you and say that there are some number of people who would like to see Generation fail because of the message.  It can be uncomfortable, the message of sustainability, and some folks are not particularly enthusiastic about what we are trying to do.  So performance is clearly one.

Secondly, we want to have a great sustainable business ourselves.  We want to walk the talk: we want to attract and retain great people; we want our folks to live great lives and create wealth; but we very clearly want to do the right thing and be considered a leading firm from a values perspective.

Thirdly, if a speeches like tonight's become increasingly boring because everybody accepts it as mainstream and commonsense, then we will have accomplished in many respects what Al and I started to do five years ago.  We do want to build a great investment management firm, but we do want to raise awareness on sustainability - or climate change, in the case of Al, and in my case, sustainable development - because we think it is relevant to the planet, we think it is relevant to business, and if we can do that, we can have a better planet, and ultimately, a better quality of life.  That will be probably the most important measure of our success five to ten years from now.

Michael Mainelli

David, thank you very much indeed.

©David Blood, Gresham College, 21 January 2008
©Professor Michael Mainelli, Gresham College, 21 January 2007