The Investment Secrets Of Al Gore
The Atlantic|November 2015
The Investment Secrets Of Al Gore
Al Gore has in mind nothing less than a new version of capitalism - one that reduces environmental and social damage, while still rewarding investors. The record of his 10-year-old firm, Generation Investment Management, suggests he may be onto something.
James Fallows, photographs by Christopher Griffith

 When I left the White House in 2001, I really didn’t know what I was going to do with my life,” Al Gore told me this summer, at his office in the Green Hills district of Nashville. “I’d had a plan”—this with a seemingly genuine chuckle rather than any sign of a grimace— “but … that changed!” After the “change,” via the drawn-out 2000 presidential election in which he won the vote of the populace but not that of the Supreme Court, for the first time in his adult life Gore found himself without an obvious next step. He was 52, two years younger than Barack Obama is now; he hadn’t worked outside the government in decades; and even if he managed to cope personally with a historically bitter disappointment that might have broken many people, he would still face the task of deciding how to spend the upcoming years.

Some of the answers he found are known to everyone. He connected himself with the leading tech firms of the era, Google and Apple. In 2005 he and a partner launched Current TV, which in 2013 was sold to Al Jazeera for several hundred million dollars. Throughout his political life he was poor compared with many senators; now by any standard he is rich. According to his financial-disclosure forms, Gore was worth between $1 million and $2 million when he ran for president. Gore declined to discuss his personal finances with me, but published estimates of his net worth are in the hundreds of millions. He was the most prominent U.S. politician to issue an early warning against the impending invasion of Iraq, which he did in a speech in California in September 2002. His first book about climate change, An Inconvenient Truth, was a No. 1 international best seller. The movie version won two Oscars, the audiobook won a Grammy, and for his climate work Gore was a co-winner of the Nobel Peace Prize in 2007.

Gore is still involved on most of these fronts. He has become a partner in the Silicon Valley venture-capital firm Kleiner Perkins and is a member of the Apple board. He founded and chairs an advocacy group called the Climate Reality Project, travels constantly for speeches, and has published several books since An Inconvenient Truth, including another No. 1 best seller, The Assault on Reason. I asked him how he divided his time among the projects. “Probably a little more than half on Climate Reality,” and then half on some other commitments. “And then probably another half on Generation.”

The object of this final “half” is Generation Investment Management, a company that is rarely mentioned in press coverage of Gore but that he says is as ambitious as his other efforts.

The most sweeping way to describe this undertaking is as a demonstration of a new version of capitalism, one that will shift the incentives of financial and business operations to reduce the environmental, social, political, and long-term economic damage being caused by unsustainable commercial excesses. What this means in practical terms is that Gore and his Generation colleagues have done the theoretically impossible: Over the past decade, they have made more money, in the Darwinian competition of international finance, by applying an environmentally conscious model of “sustainable” investing than have most fund managers who were guided by a straight-ahead pursuit of profit at any environmental or social price.

Their demonstration has its obvious limits: It’s based on the track record of one firm, which through one decade-long period has managed assets that are merely boutique-scale in the industry’s terms. Generation now invests a total of about $12 billion for its clients, which are mainly pension funds and other institutional investors, half U.S.-based and half overseas. For comparison, total assets under management by BlackRock, the world’s largest asset-management firm, are about $5 trillion, or 400 times as much. But for investment strategies, the past decade has been a revealing one, with its bubbles, historic crashes, and dramatic shifts in economic circumstances in China, Europe, and every other part of the globe.

During that tumultuous time, from the summer of 2005 through this past June, the MSCI World Index, a widely accepted measure of global stock-market performance, showed an overall average growth rate of 7 percent a year. According to Mercer, a prominent London-based analytical published estimates of his net worth are in the hundreds of millions. He was the most prominent U.S. politician to issue an early warning against the impending invasion of Iraq, which he did in a speech in California in September 2002. His first book about climate change, An Inconvenient Truth, was a No. 1 international best seller. The movie version won two Oscars, the audiobook won a Grammy, and for his climate work Gore was a co-winner of the Nobel Peace Prize in 2007. Gore is still involved on most of these fronts. He has become a partner in the Silicon Valley venture-capital firm Kleiner Perkins and is a member of the Apple board. He founded and chairs an advocacy group called the Climate Reality Project, travels constantly for speeches, and has published several books since An Inconvenient Truth, including another No. 1 best seller, The Assault on Reason. I asked him how he divided his time among the projects. “Probably a little more than half on Climate Reality,” and then half on some other commitments. “And then probably another half on Generation.” The object of this final “half” is Generation Investment Management, a company that is rarely mentioned in press coverage of Gore but that he says is as ambitious as his other efforts. The most sweeping way to describe this undertaking is as a demonstration of a new version of capitalism, one that will shift the incentives of financial and business operations to reduce the environmental, social, political, and long-term economic damage being caused by unsustainable commercial excesses. What this means in practical terms is that Gore and his Generation colleagues have done the theoretically impossible: Over the past decade, they have made more money, in the Darwinian competition of international finance, by applying an environmentally conscious model of “sustainable” investing than have most fund managers who were guided by a straight-ahead pursuit of profit at any environmental or social price. Their demonstration has its obvious limits: It’s based on the track record of one firm, which through one decade-long period has managed assets that are merely boutique-scale in the industry’s terms. Generation now invests a total of about $12 billion for its clients, which are mainly pension funds and other institutional investors, half U.S.-based and half overseas. For comparison, total assets under management by BlackRock, the world’s largest asset-management firm, are about $5 trillion, or 400 times as much. But for investment strategies, the past decade has been a revealing one, with its bubbles, historic crashes, and dramatic shifts in economic circumstances in China, Europe, and every other part of the globe. During that tumultuous time, from the summer of 2005 through this past June, the MSCI World Index, a widely accepted measure of global stock-market performance, showed an overall average growth rate of 7 percent a year. According to Mercer, a prominent London-based analytical firm, the average pre-fee return for the global-equity managers it surveys was 7.7 percent. This meant that after fees, which average about 70 “basis points” (or seven-tenths of 1 percent), the returns an average professional money manager could produce barely kept up with plain old low-cost, passive index funds. Individual investors have heard this message (“You can’t beat the market, so why try?”) for years, from index-investing firms like Vanguard. The Mercer analysis says that it applies even to the big-endowment pros.

We are making the case for long-term greed. Al Gore and David Blood, in Generations New York City office. August 25, 2015.

But through that same period, according to Mercer, the average return for Generation’s global-equity fund, in which nearly all its assets are invested, was 12.1 percent a year, or more than 500 basis points above the MSCI index’s growth rate. Of the more than 200 global-equity managers in the survey, Generation’s 10-year average ranked as No. 2. In addition to being nearly the highest-returning fund, Generation’s global-equity fund was among the least volatile.

Gore is obviously delighted to discuss the implications of his firm’s success. “I wanted us to start talking when the five-year returns were in, but cooler heads persuaded me that we should wait until now,” he told me. But he says he is not doing so to attract more business. The minimum investment Generation will accept in its main fund is $3 million, and even then individuals must show they have total assets many times that large to be “qualified investors.” And besides, its most successful fund is now closed to new investment. Instead he and his colleagues are aiming at a small audience within the financial world that steers the flow of capital, and at the political authorities that set the rules for the financial system. “It turns out that in capitalism, the people with the real influence are the ones with capital!,” Gore told me during one of our talks this year. The message he hopes Generation’s record will call attention to is one the world’s investors can’t ignore: They can make more money if they change their practices in a way that will, at the same time, also reduce the environmental and social damage modern capitalism can do.

“We are making the case for long-term greed,” David Blood told me in July. Blood is Generation’s senior partner and on scene leader at its headquarters in London. The formal name for the concept he and Gore are advancing is sustainable capitalism, which sounds both more familiar and less hard edged than what I understand to be the real underlying idea. The idea is that if some tenets of “long term” and “value based” investing are extended to include the environmental and social ramifications of corporate activity, the result can be better financial performance, rather than returns that are “nearly as good” or “worth it when you think of the social benefits.”

I asked David Rubenstein, the billionaire co-founder and co-CEO of the Carlyle Group, the private-equity firm, what he thought of Generation’s aspirations and its business model. “The general theory in investing is that the highest returns go to those who are unencumbered by sustainability or other environmental and social constraints,” he said. Generation’s “pitch that the conventional wisdom is wrong may be right; their record would be a good barometer.”

“They are indeed unusual, in applying such a comprehensive sustainability perspective,” Dominic Barton, the global head of McKinsey, said when I asked him about Generation’s approach. “They have created a real demonstration vehicle for the idea that if you are broad-minded and care about externalities, you can actually add shareholder value. Many people have talked about this, but now they have done it.” The economist Laura Tyson, of UCBerkeley, who is part of Generation’s unpaid advisory board, said that Gore and Blood were “genuine pioneers” in showing the practicality of their investment approach. “When they started, very few people believed that a sustainability strategy could offer competitive returns,” she told me. “Their hypothesis has been borne out by their results.”

No single small company is going to change finance by itself, and Generation’s past results are no guarantee of its future. But previous examples of market success—Peter Lynch of Fidelity in the early mutual-fund days, Warren Buffett of Berkshire Hathaway with his emphasis on the long term, David Swensen of Yale with his returns from unconventional investments, John Bogle of Vanguard with his advocacy of low-cost indexing—have shifted behavior. Generation’s goal is to present an example of a less environmentally and socially destructive path toward high returns.

The chain of logic behind this argument starts with the assumption that capitalism has shown its superiority to all other systems—as Gore put it to me, “it has proven to unlock a higher fraction of human potential” than any alternative system for making money—and markets are the most efficient way to allocate resources. But markets often overshoot, creating bubbles and busts like the destructive subprime real-estate disaster of the 2000s, and through its history the global capitalist system as a whole has periodically overshot, causing national or worldwide crises. The financial and industrial crises of the late 19th century led to reforms in the United States (and revolution in Russia) but were never fully resolved in Europe. The more profound crisis of the Great Depression led to the modern welfare state.

The capitalist crisis of our times, to follow this logic, shows up in the recurring booms and busts, the widening gaps between rich and poor, and the intensifying pressures on the natural environment. In many countries, including the United States, overall growth has stagnated through the past decade, and the median income has fallen even while total wealth has gone up.

As a Democratic congressman representing Tennessees Fourth District. September 23, 1981.

In one way or another, all of these problems are related to faulty market signals or destructive incentives within today’s capitalism. Since the 2008 financial crisis, a growing number of economists, managers, and financiers have warned that ever shorter time horizons are destroying businesses and entire economies. For instance, this spring Laurence Fink, the CEO of BlackRock, sent a cautionary letter to hundreds of CEOs. As a group, he said, they were too attentive to short-term profitability and stock values, at the cost of the long-term welfare of their firms. “The average Fortune 500 CEO has a term of only five years,” Fink told me. “If you’re going to build a new factory in a manufacturing company, the break-even point is probably longer than that. In pharmaceuticals, the payoff time may be more than twice that long. There’s an incentive not to reinvest. You see these behaviors, year after year, and it’s a big problem.” Dominic Barton, of McKinsey, has written or co-written three influential articles in the Harvard Business Review on the pernicious effects of short-term pressures. According to a 2012 Harvard Business School study, simply issuing quarterly profit guidance, which most Wall Street analysts demand, led managers to overemphasize immediate returns in a way that reduced long-term profitability.

As Bill Clintons running mate. July 9, 1992.

So far these might sound like lessons from one of Warren Buffett’s annual letters to Berkshire Hathaway shareholders, or the pre-IPO letter from Google’s founders on why they were determined to resist short-term profitability pressures.

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November 2015