Rethinking Value in Financial Markets with David Blood

“We are now faced with the fact that tomorrow is today. We are confronted with the fierce urgency of now… This is no time for apathy or complacency. This is a time for vigorous and positive action.”

― Martin Luther King Jr.

We have barely nine years to radically address the climate emergency if we have any chance of achieving the Paris Agreement. Entire industries, consumer behaviour, policies and people’s mentalities need to be utterly transformed or we risk failure. Now is the time for vigorous and positive action.

Commitment from the finance and capital markets industry is critical to achieving this mission. The proliferation of sustainable and environmental, social and governance (ESG) pledges in recent years suggests these businesses have embraced the challenge and are doing their part to support the necessary change. But are these efforts really delivering impactful solutions or do they merely scratch the surface of what’s required? And, if this is the case, what does the industry need to do to ensure a just transition and climate change objectives are met?

We invited David Blood, sustainable investment pioneer and one of the co-founders (alongside former U.S. Vice President Al Gore) of Generation Investment Management (GIM), to speak at our latest Laudes Finance Dialogue and share his vision of what it means to invest responsibly and what investors must do  to ensure industrial decarbonisation is achieved.

Drivers of change

Aside from the importance of investing over the long term, one of GIM’s key investment principles is that sustainability is the current and future driver of economies. This statement comes Al Gore’s initial work on establishing the Drivers of Change (2005), which helped the understanding around how economies are evolving and their relationship with the impact of sustainability, whether that be climate change, bio-diversity, health challenges, social justice or sustainable development. David explained, “we recognised that these macro factors were inter-related and were increasingly driving economies. That insight has been a critical component to how we developed our thinking regarding which industries we invest in and, ultimately, how we build our portfolios.”

A third component is the belief that ESG factors help in understanding what a company does and how it does it. David believes that such an investment framework, one that is holistic and recognises that sustainability drives economies, should be considered best practice and has allowed GIM to develop an investment process that delivers differentiated insights and ultimately, strong risk-adjusted investment results. This latter point is a critical component of the business’s mission, as David points out “if we don’t deliver outstanding investment results our mission of promoting sustainability is compromised.”

Embracing risk  

Many organisations across the investment community are making important commitments to sustainability and ESG, but plans and commitments are not enough. The industry needs to prioritise action with a focus on ‘climate positive’ capital deployment. According to David, current commitments only represent incremental change and if the industry doesn’t transform its capital allocation over the next five-to-ten years then the collective objectives of the Paris Agreement, as well as a just transition, will not be met.  

He believes a key hurdle for capital allocators is that their approach to risk is flawed. “Many people in finance are very conservative and rigorous with their analysis as they are trying to manage risk in a prudent way… However, we’ve learned that impact – both social and environmental – doesn’t fit into risk as a checkbox exercise.”  

This means capital allocators can no longer wait for the perfect new innovation when considering sustainable investment opportunities, but must consider what is available now, even if that means taking the type of risk they have not historically been willing to take. David concedes: “I would love to tell you that ESG and sustainability are always a win-win – they are not… for many investment decisions you are making trade-offs, trying to calibrate the holistic assessment of the business you are investing in and very few of them are perfect”.

Tackling the ‘hard stuff’

While innovation is, and will continue to be, an important part of the transition to net zero, capital allocators will also need to find ways to support businesses that are in transition or need to be transitioned. Such industries include steel, cement, the built environment and the power sector and can be ‘uncomfortable’ areas for those looking to offer products with a ‘green’ label due to their association with high carbon emissions.  

GIM is in the process of launching a new climate-led investment business – called Just Climate – whose key focus will be to allocate capital to the highest impact projects and thus disrupt the traditional risk/return analysis for capital allocation.  With this fund, GIM aims to catalyse much needed investment into these more challenging, but vital, areas and concedes that this may make traditional investors uncomfortable, as climate impact will be the primary objective, rather than risk adjusted returns. “It will be very uncomfortable, but we need to do uncomfortable things if we are going to get to net zero. We have to do more”.   

Transformative opportunities

The next five-to-10 years are set to be the most important in the history of the investment industry. The scale and array of opportunities needed to meet climate change objectives and a just transition are immense but also exciting. While the urgency of this action may be daunting, David states, “we believe it’s a moral obligation, frankly, for those of us in finance who see this and feel that we must move towards action”.  

At Laudes Foundation, we couldn’t agree more. Our belief is that the dual crisis of climate change and inequality can only be addressed through practical action and this action needs to start today. GIM is modelling leadership and best practice and we believe the rest of the industry should take inspiration and follow its example.