Transcriber: Robert Tucker Reviewer: Denise RQ
Sustainability and capitalism:
two concepts that might not necessarily look like they go well together.
Yet, I'm going to show you
that sustainable capitalism is the future of our economic system.
Not because we have to, but because it makes common sense.
But first let's talk about the world today.
Environmental issues, climate change, and extreme weather events
that go unaddressed.
Poverty and inequality, obesity at the same time as malnutrition,
what links these issues together?
We do, our behavior as a species,
overconsumption and disrespect for our planet,
disregard for our fellow humans.
But also, at the same time, our capitalist system is in crisis:
the failure of government,
the global economy in a constant state of flux,
Occupy Wall Street, helicopter money, low growth and negative rates,
and then, of course, this guy.
Are you guys worried?
Because I certainly am.
While government and civil society will certainly play a role
in driving change and finding the solutions to these issues,
I would argue that it will be business, investors, and capital markets
that will drive the capital to address them.
What I'm here to propose
is a framework for action at a systems level.
But why am I in front of you?
After graduating INSEAD about five years ago,
I joined a 12-year-old boutique as a manager
called Generation Investment Management.
Their mission is to see sustainable investing,
sustainable long-term investing, become best practice,
and sustainable capitalism become the enduring economic model.
Our co-founders, including US vice-president Al Gore,
and ex-head of Goldman Sachs Asset Management, David Blood
believe that doing so is the only way forward for our world,
and, as a firm, we are proving that everyday.
But first, what is sustainable capitalism?
It is an economic system
within which business and capital seek to maximize long-term value creation,
accounting for all material environmental, social, and governance factors
to address both risks and opportunities.
Why do these environmental, social, and governance metrics matter?
Because in order to invest for the long term,
we need to think broader,
we need to take into account everything we have in the past,
and then more.
For instance, does it make sense
that water would be a free resource in water-stressed areas of the world
simply because its dollar price happens to be zero?
Is it fair we're treating our atmosphere
like an open free sewer,
when the WHO has warned us
that over 7 million premature deaths every year
are caused by air pollution?
The answer to these things is "no" -
pollution, carbon emissions, these are real costs.
So, let's cut to the chase.
If all of this is common sense, then why isn't our thinking more common?
I know what everyone's thinking right now,
the big elephant in this room:
"How much exactly will this cost us?"
That is myth number one of two myths that I will dispel today.
Myth #1: sustainability requires sacrificing financial performance.
This has long been the running commentary from critics:
sustainability has a cost line.
If we change the way that we do business
to integrate sustainability into our practices,
this will, of course, have a negative impact on the bottom line.
Right?
Wrong!
I call that thinking "misinformed."
Let's talk about businesses that are using sustainability
to drive their revenues and profitability,
and then businesses that are using sustainability
to innovate with novel business models built for the world of the future.
But first, what does make a sustainable business?
A sustainable business does not borrow
its current earnings from its future earnings,
and provides goods and services in a manner that is consistent
with the transition to a low-carbon, prosperous, equitable,
healthy, and safe society.
These are businesses whose sustainability products and services
drive their revenue's profitability and competitive positioning,
businesses whose current earnings do not depend
on uninternalized negative externalities
like free pollution and carbon emissions.
As we say at Generation,
these are businesses on the right side of history.
My first example comes from the world of big business:
Unilever, one of the world's largest, fast-moving, consumer goods companies.
Paul Polman came in as CEO of Unilever in 2009
and redefined the strategic vision of Unilever
around the Unilever sustainable living plan.
At the time, Wall Street was less than excited about this.
The prevailing thought was that strategy is about profit maximization.
Corporate and social responsibility, on the other hand,
was in the realm of charity -
you know, a "nice to have" for public relations purposes.
Polman showed that is not so.
There are four high-level outcomes
that Unilever credits to the Unilever sustainable living plan.
But being pretty data-driven myself, I'd like to just talk about the top one.
600 million euros of cost savings for manufacturing,
all initiating from the impetus
to reduce resource use and carbon emissions -
I would like to hear the argument against this from the critics.
Unilever share performance improved during Polman's tenure,
not in spite of his focus on sustainability,
but precisely because of it.
And Unilever is not the only company to be doing this.
Large firms across all sectors
are increasingly integrating sustainability into their strategy,
and talking about the financial benefits of doing so.
My second example comes from the world of new business
where sustainability can drive innovation.
M-Kopa Solar is the largest provider of solar electricity
in Kenya, Tanzania, and Uganda.
It was founded around the idea that there's a market for solar leasing.
In rural African populations that are not connected to the grid,
and even often unbanked,
their addressable market is a surprising 50 billion dollars
spent annually on kerosene.
Those two dollars a day that each family spends,
goes towards a fuel source for lighting and cooking
that not only damages the environment
but also the health of those in the households that consume it.
Instead, M-Kopa allows customers to use those same two dollars a day
to incrementally pay down a solar system.
After one to one-and-a-half years, the customer owns a system outright,
and, of course, what that means is free electricity thereafter.
To date, M-Kopa has connected over 330,000 homes
in Kenya, Tanzania, and Uganda
to solar electricity,
with over 500 new homes being added every day.
They call that a win, win, win.
A win for the customer, a win for the environment,
and a win for their investors.
So sure, some would say
these are some isolated examples, some companies can make some benefits,
but can we really invest behind this?
This myth extends to sustainability and investment returns.
Here's how this one goes.
Impact and financial return are reversely correlated.
There's a curve that shows
that as you integrate sustainability progressively
into your investment process,
your expected financial return will decline.
Right?
Wrong!
In fact, new academic work has already dispel this myth.
I wish it was my work,
but he's spent much more time than me in this field,
Professor George Serafeim of Harvard Business School.
His analysis shows that if asset managers incorporate
environmental, social, and governance factors
in their investment process,
they can deliver outperformance.
How much outperformance?
Three to four percent annually.
In a world where most hedge funds struggle to deliver any alpha,
I'd say that's pretty good.
But, of course, this is all theoretical, right?
Completely academic?
Well, lucky for us, we do have a live example.
Generation has been managing 11 billion dollars of public equities
on behalf of our clients,
where we've been integrating sustainability
in a bottoms-up way for 12 years now.
And our results?
We don't publish our track record on a regular basis,
but, over the past 10 years, our outcomes for our clients net of fees
have been consistent with George Serafeim's work.
So, sustainability requires sacrificing financial performance?
I'd say we've proven that wrong.
Which brings me to the second myth.
Do we really have to deal with this now?
Myth #2: sustainability is not yet relevant today.
This is a good way to get me a little angry.
If you want to make me angry, just, you know, say this.
Not only because I find it to be a narrow-minded way to look at the future
but also because it is an utterly irresponsible one.
This myth perpetuates the short-term thinking
that has gotten us here.
So, what is the argument here?
Sure, the world will change - eventually;
it just won't happen anytime soon.
And by the time it does, I won't be around anymore.
I'll be gone - definitely, from this job, maybe even from this life.
This is quite relevant when thinking about the trillions of US dollars
that are invested in the fossil fuel ecosystem.
There is currently 3,000 gigatons of carbon
trapped in proven reserves of fossil fuels.
Climate scientists agree
that in order to keep climate temperatures from rising more than 2 ℃,
we can only ever afford to burn one third of those reserves.
At Generation, we call the other two-thirds of those reserves
stranded assets,
assets whose economic value will suffer from premature write-downs.
So why would pension funds and investors keep investing capital
behind assets that are going to lose their economic value,
companies that are looking to own and extract these assets,
and, even more perversely,
companies that are exploring for new reserves,
as if a 3:1 ratio of what we have to what we can use is not enough?
I have an idea about why that's going on:
it's because people are betting this won't blow up on their watch.
It is that thinking exactly
that has led to the biggest financial losses in recent history.
Go back to the mortgage and fuel crises of 2008.
Why were people still allocating capital and markets
that were obviously still a bubble?
As Chuck Prince, ex-CEO of Citigroup, told the Financial Times
referring to the leveraged loan market in 2007,
"As long as the music's playing, you got to get up and dance."
But what happens when the music stops?
I can tell you the finance industry got a very hard dose of reality
not very long after that quote was printed.
So, here's a thought.
Timing the decline of an industry or the enactment of regulatory change
is a very hard thing.
One of out favorite quotes at Generation by Rudiger Dornbusch
is that, in economics, "things take longer to happen than you think they will,
and then they happen faster than you thought they could."
In other words, change is not linear.
Let that sink in a bit.
Here's a chart of what solar installations look like
if you look backwards, in 2005.
I'd say pretty unremarkable.
And here is what happened next.
And this behind me, this is the good news.
This is the pretty picture; the inverse was true for coal.
That industry saw a rapid decline in valuations.
Investors actually lost a lot of money.
So, for those that think
sustainability is something they can deal with in the future
when it becomes more relevant -
boy, are they in for an unpleasant surprise.
So, what have we said today?
Two myths, both busted.
If you take one thing from my presentation today,
it should be that there is no good reason
to not integrate sustainability into the way that we make decisions.
Not in the future, but now, because it is already relevant.
Finally, there is one thing
that I would like to pose as a challenge to everyone here.
When you leave here today,
and the warm feeling in your chest goes away
that you've taken from all of these talks,
try to integrate one thing from what I've just said into your life.
The next time you're working on a consulting project for a client,
or planning your strategy for your business's future,
or drafting investment committee memos,
just try to think a little bit broader,
and maybe think what risks and opportunities
might come from that long-term thinking.
Next time that you're investing your personal savings or your pension,
ask some questions about where that capital is going.
And if you can't think of a business or finance application,
then do one thing for yourselves:
become better informed about these issues and drive the message forward,
because to change the world
and integrate sustainability into our investment and thought process,
first, we need to win the conversation.
Thank you.
(Applause)