“In a long-term investing framework, high quality, high conviction, fundamental, mission-driven businesses that provide society with what it really needs will outperform,” says Colin le Duc, a founding partner at Generation Investment Management. Founded in 2004, Generation is a pure-play sustainable investment manager, and according to its website, “It is all we do. It is all we will ever do.” On this episode of the Bloomberg Intelligence ESG Currents podcast, le Duc joins Eric Kane, BI’s director of ESG research to discuss the evolution of sustainable investing, the need to institutionalize impact investing, net-positive companies, his view that sustainable investing is hard, essential and insufficient, and much more.
The episode was recorded on May 15.
ESG has become established as a key business theme as companies and investors seek to navigate the climate crisis, energy transition, social mega trends, mounting regulatory attention and pressure from other stakeholders. The rapidly evolving landscape has become inundated with acronyms, buzzwords, and lingo, and we aim to break these down with industry experts. Welcome to ESG Currents, brought to you by Bloomberg Intelligence, your guide to navigating the evolving ESG space, one topic at a time. I'm Eric Kaine, director of ESG Research for Bloomberg Intelligence, and I'm your host for today's episode. Today we're talking with Colin Leducu, who is a founding partner of Generation Investment Management. He is head of the firm's San Francisco office and focuses primarily on generations, private markets, businesses, and he also serves as vice chair of Just Climate. Colin, Welcome to the podcast, and thank you so much for taking the time to join us.
Eric, thanks so much for having me. I think it's a really interesting time to take stock of where sustainable investing is, so I really appreciate you having me.
On wonderful, and I kind of agree more. It's definitely an important time to take stock. So with that, maybe let's jump right in. On Generation's website, you have a description of the firm that reads, Generation is a pure play sustainable investment manager. It's all we do, It's all we will ever do. I think it's a really simple and beautiful statement, but I do think it could be interpreted by different audiences differently. So I'm wondering if you could walk us through what being a pure place sustainable investment manager means at Generations specifically.
Sure, so Generation has recently celebrated as twentieth o of it, and I think that's quite an important milestone for us, but also an opportunity for us to step back and reflect a little bit on how the sustainable investing movement has evolved as a whole, but specifically for Generation. We founded the business as a dedicated sustainable investor really with a mission to prove the increase for sustainable investing, and that mission remains consistent and persistent, I would say, and we will, I think, come to talking about how that evolves over time. But essentially the core mission of Generation really is that we believe that sustainability is becoming a central organizing principle of the economy, and that investors really from a risk and an opportunity perspective, need to really understand and integrate sustainability. And being a specialist fund manager that focuses on the depth of knowledge and focus around what sustainability means for investors. Institute after the owners of all shapes and sizes, we believe is a differentiator for us and allows us edge in the market. So we do think about sustainability broadly. So we think about long term investing, we think about fundamental investing and high conviction investing, and we do believe that if you integrate an explicit recognition of wider drivers of what is happening in the world, so environmental and social drivers have change, that's going to help you understand what the best businesses are in the world. So I think that interpretation that you talk about in terms of how other folks may interpret what we're doing, the core definition for Generation has very much remained consistent abscolating.
So Generation is actually celebrating its twentieth anniversary this year, So congratulations on that. And you mentioned, of course just now that you've remained consistent in your approach as a sustainable investment manager. I think a lot has obviously changed in the sustainable investing market or the e ISG space, you know, in those twenty years. I'm wondering kind of within that, you know, broader category of you know, taking into account the wider drivers of the market, the environment and the social components, what has kind of changed within that over those twenty years.
You mean specifically for generation or broadly in the market.
For generation specifically, Yeah.
Yeah, fantastic. Well, just so we know where we're coming from. So, as I said before, our mission is ready to deliver outstanding long term financial returns and positive impact by investing sustainably, and we do that across public and private equity markets. We oversee approximately fifty billion dollars of assets today managed by team of about one hundred and eighty people split across London, San Francis into a Paolo, and so our perspective is very much one of an equity investment in both public equity and private equity. So of course there sustainability affects every type of investor in the world. So our lane is very much in public acuity and private equity is the way to think about us. So in some ways are not A lot has changed, but there are some important ways that we have changed. So what has not changed is that our core philosophy has remained the same, so that we believe that sustainable investing is best practice. We believe that in a long term investing framework, high quality, high conviction, fundamental mission driven businesses that provide society with what it really needs will outperform, and so that thesis and core philosophy absolutely remains the same. I think, however, in the spirit of and being highly research driven, I should have mentioned as well, so very focused on very deep primary research that allows us edge to add an ability to be high conviction and run very concentrated strategies. The other thing I think is important though, that we of course have to have a spirit of self reflection self improvement, which is very much built into the generation culture, and so I think we have evolved our approach in some quite important ways. So first of all, we have moved from purely investing in public markets to private markets, so we believe there is very clear opportunity to generate OUTFA in active fund management in public markets. But we also believe that there is an opportunity to exploit our sustainability advantage in private markets as well. So that's not just a reflection of the rising amount of assets in the private markets over the last fifteen years or so, it's also a reflexion of where you can use your sustainability edge to gain advantage. So we have moved across outset types. Another important evolution is the role of engagement in public equity. So we have been we believe that we generate positive impact and great returns by asset selection, so that means very good. You need to be very good at identifying the best companies in the world and understanding what is the right price to pay for their security. But you also need in the context of public equity, to engage with companies to ensure that they are being held to the very highest standards around sustainability. And in a market where increasingly the marginal trade is being done by passive funds and by algorithms, it is incumbent upon active managers who really understand companies to represent not just our own shareholding, but a lot of people's concerns around what are the climate policies of these companies, what are the social policies of these companies? What is the pay structure of these companies? Those kind of topics. So I would say we have evolved, to your question, a very strong focus on engagement and prober. I would also say that in private markets, we have evolved our research to really encompass a system positive perspective. So what I mean by that is that, you know, it's not just about investing in single point solutions to sustainability challenges. It's actually trying to find companies that are net system positive so that they contribute positively, their externalities are positive on the system as a whole, not just in their narrow lane of their product or service. So we ask a lot of questions around what does a company do, but also how does a company do it? And very importantly, this systemic point of view is embedded in our research in some ways it always has been, that we've made it a lot more explicit recently in private markets. And then I think that the final thing I will say, just on your question of how have we have evolved over the last twenty years, we are increasingly seeking ways to integrate impact within our risk return assessment frameworks. So I think this is not just a generation, it is a sustainable investing market wide evolution where we have essentially gone from an era way back in the day of negative screening, through to integration, through to engagement, through to how are we truly integrating impact alongside risk and return optimization? And in some ways we're I believe entering an era of the institutionalization of impact investing as distinct to or as a distinct component of sustainable investing. And that is true within Generation as well. So what does that mean? That means we are focused on the objective of capital allocation? Should the objective include explicit impact goal as well as financial goals? And how what does that mean for incentive structures that we use in terms of making sure that the investment teams are driving their research focus and assets selection to businesses that don't just produce great long term financial returns but actually also deliver on some of the positive impact aspects of what we care about. So those are just a few aspects of how Generation has evolved. And I think it's also I really wanted to make the point that you know, Generation is not the biggest investor in the world. You know, we're a fifty billion dollar manager. We do believe that performance is really the paramount precondition for us to advocate for better sustainable investing in the market. So, you know, often there is a negative correlation between between size and performance, and that is part of the reason why we have tried to remain a boutique while being at scale relevant to both companies and asset owners.
Very interesting, that's great. You mentioned within your answer kind of a little bit of how not only generation has evolved, but a little bit about how the market has evolved to right. You spoke about how it started, you know, two decades ago with the idea of negative screening and then engagement, and now it's evolving towards impact as you suggested. So I think that leads to the next question, which is, you know, given that evolution, how would you characterize the current state of ESG or sustainable investing at this point.
Yeah, so, I think we like to think about this as sustainable investing, and I think we've always used that framing, So if it's okay, I'll focus in.
On that frame absolutely.
But you know, I think sustainable investing is growing up. I would characterize it as a as a teenager, as an adolescent, as a as a bit of a you know, a late adolescent to be fair, but something around that kind of zone where we have gone through plenty of different phases. There is healthy backlash happening now on ESG and on sustainable investment, and some of that is very warranted. You know, we do believe that sustainable investing is hard to do, it is essential to do, and it is also insufficient or not enough. Let me explain what I mean there. Sustainable investing is hard because, for example, there is not full disclosure yet, there is not full agreement on the accounting standards applied to sustainability factors. There is highly inconsistent definitions of what a sustainable investment is. It's very unclear what a very good transition plan to a net zero future looks like. So it is difficult to do. And you know, investing is very difficult to do, but sustainable investing requires a certain level of expertise, specialization focus because you have to apply judgment to highly nuanced situations. So if you're even in the large cap space, to some people, some companies are really not fit to be in a sustainable fund under their definition, to others that they are, and so I think there is a level of clarity that needs to come into these markets because there's a lot of mismanaged expectations about the objectives of sustainable investing and that is causing a lot of confusion. There is also very cynical green washing happening, where you know, a lot of people see this as an opportunity to raise assets or to attract talent to their teams, and as a consequence, you are seeing an enormous amount of green washing. Now, the good news is is that the regulators are responding. So the SEC, or the FCA or the EU, they are they have a lot of anti green washing policies that are being implemented. So all of this means that statement investing is hard, it is. You know, as I said, all investing in hard, but sustainable investing is hard, and there's a recognition of that. So I think we have gone from the era of hey, you know, let's just all jump on this bandwagon. It's a party. You know, we're all going to commit to net zero, We're all going to sign up to ESG principles. Now people are waking up going oh wow, this sustainability challenge and crisis and transition we're going through globally as a society is really complicated and requires a high degree of specialization and sophistication to apply judgment in highly ambiguous situations. The second point is that sustainable investing is essential. So it is essential for investors because it allows because of what is happening in the outside world. So the climate crisis is clearly having a very clear impact, the inequality crisis, and the social fabric disintegration is really affecting the stability of many economies around the world. So ignore the sustainability factors in the world. So it is essential that investors understand the impact of sustainability on their assets, first of all to de risk the sustainability risks, secondly to capture alpha, and third to systemically de risk things like climate which we can come back and talk about. So it is really essential that investors do not ignore what is happening in the world from a sustainability perspective. Equally, sustainable investing has for some people not been enough in terms of the expectation around the impact that sustainable investing would have. So this is what I referred a little bit too earlier that there's so many misaligned expectations about what sustainable investing would deliver. I think some people we have been very focused on saying sustainable investing is a better way to invest to deliver long term final returns, and that needs to be done by investing in system positive companies. Right, So that's clear, so that we're hoping that our companies are on the right side of history and are delivering value to society and to shelves. But there are some people who think that sustainable investing should have delivered a lot more impact, It should have delivered much more decarbonization in the real economy than it has, or should have closed the inequity gap rather than what is. The inequity gap is growing globally very quickly, and so I think there is a sense that, you know, we do have these sustainable development goals, there are seventeen of them, they need to be achieved by twenty thirty. We're going to miss all of them. And so I think there is this impact gap question or some investors. Now not everyone cares about that. Absolutely. It really goes back to your objective as an investor, what are you trying to achieve with your capital? And I think some people hope there would be things would we would have achieved more from an impact perspective from the last twenty years of investing, And that is leading to questions around how do you innovate investment mandate to be able to deliver more explicit impact rather than just just financial recurts.
Absolutely, there's a lot within that answer that I want to get back to, so maybe we'll take it point by point, But overall, I really love the disolation of sustainable investing being hard, essential and insufficient. Maybe going back to the idea of it being essential. I think there's a lot of conversation in the sustainable investing space about this idea of you know, whether or not this is the way to provide returns and whether or not this is you know, part of fiduciary duty or runs counter to fiduciary duty. So I'm wondering, if you know, for that piece of it being a seal, if we could maybe walk through one example such as, you know, pension funds, why might this approach be essential for pension funds specifically?
Yeah, So, so I think this is a great question and one that has has been live for ever since we started generation years. I think it is very clear that acting on the sustainability crisis is our fduciary duty. So if your fiditionary duty is to take care of your of the returns required for your members as a pensioner, as a pension fund to provide for pensioners, if you are not helping those members deliver a livable world when they when they become pensioners, you know you are failing on you your fraditionary duty. Equally, if you are, you are you have financial targets as a pension fund. Let's say you need six percent return or whatever your asset liability matching tells you to do. You know, it is very clear that living in a three degree centigrade increased world is going to be much more expensive and living in the current one degree world that we have. So for example, getting home insurance is going to be more expensive, or getting access to food locally may be more expensive because or getting you know, all of these things. The cost of living in a world where the climate crisis is just left to get worse is going to mean that that pension funds have to generate higher return because their liabilities are higher. So this is a big concern to a lot of pension funds, so if you are the same applies to universal investors. So if you're an asset owner that owns the market and owns the entire economy, basically you are very worried about systemic climate risk because it affects all of your asset. So I think you know, when we think about how essential understanding sustainability is for fiduciary duty, we have done quite a bit of work on the legal framework for impact around finditionary duty, and we think that as a prudent investor, as fiduciaries and trusting, if you are not taking into account these factors, you are in dereliction of that duty. So if you are ignoring environmental and social and governance factors that are clearly misaligned with long term performance, that is you're just not doing a good job as in understanding the risk of your portfolio is running. Why would you not take these things into account? So I think it's very clear from most people that integrating and using frameworks around for sustainability and finduationary duty is your duty. Now, we can't ignore the politicization of ESG, So there is pushback. There are people who are using this as a political tool We think that is a temporary phenomenon because in what I'm seeing amongst other asset managers and asset owners is that even though there is some green hushing going on where people are not talking about what they're doing, they're actually still doing the same thing at the asset allocation level or the capital allocation levels. So, for example, there are some very high profile as managers in the world that used to talk a lot about ESG but are no longer talking about that, but their investment teams are doing exactly the same thing as they did before, absolutely because they just don't want the public backlash and get caught up in political stuff when you know, we're just investors, you know, let's just we're not a political activist fund. We want to generate long term financial returns. That is true for most fiduciary fund managers that just want to do what is best for the long term returns. So hopefully that helps. But pension funds are very very interesting staying asset owners because their members often really really care about the kind of world that they're going to be pension is in, and they they are they they're pushing the capital allocation people to do more around sustainability, rather.
Than like absolutely, yeah, I appreciate the idea of you saying why would you not take these factors into account? I think that that's a great way of phrasing it. You mentioned, of course, the idea of you know, the climate crisis, systemic climate risk. Just maybe thinking back on you know, where you were, you know, maybe twenty years ago when generation started, or more recently, how do you think climate risk? And maybe we can you know, break it down into the two components physical risk and transition risk. How do you think these factors have ultimately played out? Is it you know, as you expected, faster than you expected.
You know, this is such an important question. It's such an important question, and it's a dynamic consideration. I would say so, first of all, I think it's important to recognize that climate finance is growing very quickly, so the amount of finance flowing into climate solutions is increasing dramatically. So I feel we're at a point where I don't think there's a shortage of capital to deal with climate. You know, there's clearly not shortage of capital in the world, it's just in the wrong place. It needs to be shifted to a low carbon focus rather than a high carbon focus, which it is, you know, So I don't think there's necessarily a volume from a flow perspective, that's an issue. What I do worry about is the impact gap with it within climate finance flows, and what I mean by that is that most climate finance is go is has got a financial objective as its north star, which basically means that that capital goes to the path of least resistance to achieve whatever financial goal is is mandated. And as a consequence, many things are overfunded or very easy to fund. So, for example, if you wanted to build renewable energy in a safe geography like the USA, you can click your fingers and raise that money really easily, right. But if you wanted to build some renewables in a tricky g geography, whether there's a lot of FX risk or repetriation risk or political you know risk or whatever, that cost of capital might prohibit you from doing that or that. So even though the tech is de risks around renewables, you know, you may you may have a problem in getting that money. So equally, in the harder to debate sectors of the economy, such as the a or cement you know, which just take the two of them account for sixteen percent of global emissions. There's very very little capital flowing to decarbonize those and that is so climate finance is growing, but it's not spreading. So we need innovation around capital allocation processes and mandates to make sure that that capital is spreading through the hard to debate sectors, geographies and the global self. So I think climate to your question around physical and transition risk, I think there was a lot of focus on transition risk over the last few years, whereas actually what is happening is that the physical climate risk is hitting quicker than the market expected, and the transition is happening slower, at least for the moment, right It sort of our view is that we will get there. It's going to be ups and downs on transition in terms of pace timing. Look at the EV space today. You know this pushback on slow in growth rates and EV adoption, but that's just it's still growing. It is growing slower than it was for and the sector needs to catch up a little bit in terms of particular negg around charging infrastructure. But the fact is that we are electrifying the car fleet. But this is the point going all the way back to the need for specialization in sustainable investing is that you need to make calls as an investor on the nuances of the transition. It's not just a straight line. And so who's going to capture the value? When do you enter a certain part of the value chain? Where do you where do you think the returns on capital are going to be durable? You know, these are all the questions the Generation team is built to answer. But you know, the point I'm trying to make is that physical transit, physical climate risk has hit harder and quicker. I would argue that Generation's chairman, Al Gore has been saying that for a long time, but I think the market expectation around physical climate risk has gone up dramatically in the last six months. Where is the transition is proving to be very difficult, which a lot of people knew, and hence you're getting a lot of backtracking, backsliding. You're getting a lot of strange language around the need for increasing you know, the fossil fuel base, even though it's very clear that at one point five degree pathway would not accommodate that. So I think you're getting into this very messy conversation around and a test of leadership frankly for anyone who cares about climate or sustainability generally, around where do you stand on this transition? Like how ambitious are you being? How transformational are you being? Or are you just businesses usual incrementalism. And I think it's a testing time for leaders of asset owners, asset managers, companies, because it's becoming clear that this is a highly inconvenient thing to transition, and it's really hard, and it's going to cost a lot of money, and it's likely to be very disorderly. You know, there there is no orderly transition here. There is a think are based you know, this is more of a personal point of view rather than necessarily a stated generation, state policy or whatever. I do believe that we're going to see a lot more government intervention and a lot more protectionism and direction of activity from from the public from the private sector, by governments who whose primary job, let's remember, is to protect their citizens and are increasingly realized that realizing that they need to protect their citizens relative and to the face of physical climate risk. And that doesn't just manifest in flooding and all of that. It actually manifests in in supply chains not working anymore, or or in being able to not being able to access food, or being able to access free fresh water. You know this is or the electricity grid going down the whole time. So these are very real fundamental needs in economies that governments are increasingly concerned about that the free market is not solving this for them without that direction. So what you've seen in the US with the Inflation Reduction Act is just the beginning, and you're starting to see things like the Carbon Border Adjustment Mechanism in Europe which is starting to put carbon pricing into global trade pactive, which is very very important. And so these things, on the one hand demonstrate the acuteness of the urgency of the climate crisis and how that's beginning to really worry governments, and it shows you the breakdown of globalization to some extent in terms of there is of course still a level of globalization that'u in paralleled in history that where we are now, but there is a bit of a backtracking from the free market just global open or a thing that we had for a long period of time, a little frameworks. We're now at a point where protectionism is on the rise, and and people are very very worried about physical climate risk in particular.
Absolutely, so you mentioned, of course the idea that you know, there's there's a gap in climate finance, there's a gap in how we're approaching STGs. You mentioned earlier that we're going to miss all the SDGs, right, So I think you know that speaks to the the way you characterize sustainable investing earlier in the conversation about it being currently insufficient. Right, I'm curious to hear ultimately you know, if it isn't insufficient, I think we can certainly agree on that. Where do you ultimately see the need for innovation? What would you like to see kind of happen within the sustainable investing space to be able to close STG impact gap, to close the climate finance impact gap.
Yeah, great question. So we need everything everywhere, all at once on sustainable investing. So we hope we would at a very high level, would hope that the entire market would integrate sustainability into their capital allocation decisions. That is still a journey. We are nowhere near the entire market accepting this as a way to invest. So I think we need that. But at a more sort of granular prosaic level. I would say it's very clear that we need much better transparency in reporting. There is a lot going on there. Those are the nuts and bolts that will then drive different activity in terms of location. We need a conversation around the objective of capital allocation. So this goes back to the original sin of using GDP as a measure of progress, and the founder of GDP said we shouldn't do that. We have adopted that. The green growth mantra has dominated, and growth at all costs has dominated, and we see the costs. So I think there's an increasingly sophisticated conversation going on around what is the measure of progress beyond GDP. Obviously GDP's are part of it, and growth is incredibly important and has produced lots of wonderful outcomes, but it has also produced the world we see today, which is a climate crisis and a frame social fabric, and so let's not forget that. So I think there's a conversation about what is the objective of your capital. Historically it's been let's just make as much money as possible, or let's take the appropriate risk for the returns that we require and we just need to optim around that and all else will be good in the world. Okay, to some extent, I would say that that framework is necessary but not sufficient, which is why the innovation needs to happen around a conversation about the objective of capital a location, which means that mandates need to evolve to include explicit impact goals, or impact needs to be fully integrated into those financial goals. At the moment, a lot of people do not want to talk about the impact their portfolios are having because it is largely negative. And equally, we can't just pretend that the win wind mantra works every time, because it doesn't. It works in certain contexts where you make money and you make positive impact in full lockstep. Absolutely, but unfortunately that is that only goes so far. So what you need to do is say, let's not try and pretend that just if we green traditional mandates or green traditional allocation models, that magically the SDGs will suddenly be achieved because they want they won't, not certainly, not in time. Maybe over time a very long run, but not in time. We're on a clock with Planner. There's a there's an you know, a carbon budget that's disappearing every day. I do feel that innovation is required around how mandates are structured. So what I mean by that is what is the kind of risk that we fund managers are able to take on that is different to traditional risk budgets. So, you know, can we go beyond investing in capital light private companies to also invest in hard assets for example, in can we go beyond just investing in the OECD to also investing in the Global South and in non OVCD countries in a way that is you know, matches the level of future emission liabilities that these countries will have. You know, at the moment, the global SEUTH receives some really pathetic single digit percentage of capital even though pretty much ninety percent of future emissions if you include China, are coming from the emerging markets and the Global South and China and India and Brazil and so there's a massive mismatch and it goes back to the types of mandates that are being created. So we need more public private collaboration to de risk some of the things that prohibit us doing more investing in some of these geographies. So working together with development finance institutions to take out the FXS risk for example, or first lost capital, some stuff that you guys have talked about on your podcast in the past. Actually, and yeah, so I think there's lots of important innovation there. But I do think that every asset class matters, and ambitious, high integrity, transformational sustainable investing frameworks need to be applied across the entire capital spectrum because it is not just about some wizzy new impact fund in the corner. This is about mainstream money being shifted from a high carbon framework into a low carbon framework. And that requires everything from the very big infrastructure allocators, through the large index funds, through to private equity and everything in between. So that's what I would say about the need for innovation and where we can innovate. You know, incentives fall out of a lot of that as well. So there's some very interesting innovation around impact linked incentives that a few fund managers starting to pick up, including ourselves, and just starting to really sort of make baby steps to really try and understand what that means. So that behavior is really driven by incentives that fully encompass both financial returns as well as positive.
Inpact absolutely wonderful. I really appreciate the insights. I think, you know, the idea of everything everywhere, all at once is quite appropriate. It's a term that we've used in some of our research. Also, I think you know the idea of really questioning what the objective of capital allocation is is is you know, quite poignant and a great way to end the conversation. So Colin want to thank you so much for taking the time to join the podcast.
Thanks so much for having me. Eric wonderful.
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