David Blood is used to handling large sums of money. As Goldman Sachs Asset Management’s CEO he was in charge of $325bn in assets. But in 2004 he left to co-found Generation Asset Management with former US vice-president—and more recently high-profile environmental campaigner—Al Gore. He may now be handling smaller sums but the impact of his new business, he hopes, will be more significant. The small, London-based asset management firm was launched amid much fanfare and claims that it would generate higher returns through integrating sustainability research into traditional investment analysis. Central to this idea is Blood’s view that there are “inadequacies in traditional approaches to investment”, of which the biggest is the focus on short-term returns.

But rather than just launch a niche finance firm, Blood and Gore (the name Al Gore allegedly wanted to call the firm) opted to combine their skills to achieve something on a larger scale—namely to transform the way financial markets make their decisions, encouraging others to place more emphasis placed on long-term, sustainable investments in mainstream as well as specialist ethical firms.

"When we started Generation a key goal was to take traditional, mainstream financial people and processes, and marry them with sustainability analysis," explains Blood. So what criteria does Generation use to decide on its investments and how does it differ from any other investment firm? The firm is reluctant to divulge information on the funds it manages or their performance. But three quarters of its funds are invested in companies with a market cap of more than $3bn and there is a bias towards European and Asian markets, with only limited success so far in the US. Their approach is to look closely at the management approach within a firm and use things such as executive pay, employee engagement and corporate governance as indicators. They also check that a company’s values match actions, particularly lobbying.

“We’re interested in what the company says and lobby for,” says Blood.  “You cannot approach sustainability in isolation; you have to integrate it into the investment process. Our cashflow analysis is every bit as sophisticated as that of a traditional fund manager—perhaps more so. But sustainability goes beyond balance sheet numbers; there are a lot of factors that are hard to quantify. Understanding these issues allows us to shed a better light on management.”

Controversially, Generation’s desire to bring its message to the mainstream means it refuses to invest only in companies from sectors commonly associated with socially responsible investment. “This is not ethical investment or sustainable and responsible investment; we don’t exclude particular market sectors such as defence, drugs or alcohol. We want to invest in companies that will increase shareholder value by managing the risks and opportunities of the economic, environmental and social challenges facing society.”

James Vaccaro, head of investment banking at ethical bank Triodos—the company that backed fairtrade coffee company Café Direct—is less convinced that Generation is doing as much as it could to help promote sustainability. “If you look at the companies they are investing in, there’s not much that’s different. The interesting thing with Generation is that they are committing to stay in companies for a long time. I suppose that in terms of engagement over the longer term they might get to influence the board more, but there are questions about how big their stakes are in these very large-cap companies. What would be really interesting would be for them to take these long term positions in some of the smaller companies that are doing the really interesting stuff in the sustainable sector. These companies could really use the experience and talents of the people at Generation. These are the firms that will be the significant players in the sustainable economy of the future.”

But Blood clearly thinks that Generation’s sustainability message is starting to get across to the wider business community. “Sustainability has become much more mainstream over the last three years, particularly in the UK and in continental Europe and Australia. We thought this would be a five- or 10-year project. But look at the attention this issue is getting in the financial press and in the educational community, with people like Michael Porter writing about it. The very best businesses are ahead of the investment community on this.

“When the cost of producing goods and services doesn’t accurately reflect the social and environmental ‘costs’, you have a problem. When chemicals leak from an industrial plant into a river and kill fish and plant life, the livelihood of fishermen may be affected. The fishermen bear the cost of this, not the chemical company. We need to find ways of making sure that these companies bear the costs of their activity.”

So how did the straight moneyman from Goldman Sachs turn into a sustainability campaigner? “When I retired from Goldman Sachs Asset Management in 2003 I wanted to find a way to stay in finance and pursue my interests in philanthropy, sustainability and development,” explains Blood. “When I met Al, I discovered that we had similar goals. He was coming at it from an environmental and sustainability angle; I was coming at it from the mainstream finance side, with a strong personal interest in sustainability issues.”

And Blood is quite clear what he thinks sustainable means and why it should be a major factor in all business decisions. “Sustainability means long-term economic, environmental, social and governance risks and opportunities—things that really impact a company’s ability to sustain profitability and deliver returns,” he says. “Society is facing serious global challenges such as HIV/Aids, global warming and water scarcity. There is nothing new about this—what is new is the scale of these challenges. Sustainable development will be the primary driver of industrial and economic change over the next 50 years. More business leaders now agree that you can’t run a great business without responding to these forces. Business has to be part of the solution here: managers need to integrate sustainability values within their businesses.”

Anyone who has seen Al Gore’s celluloid polemic An Inconvenient Truth won’t be surprised to hear that Blood is equally exercised about carbon emissions. “Carbon is a big issue. If you believe that we are living in a world where carbon emissions need to be limited, then not having a price for carbon is bad capitalism, because you allocate capital to inefficient companies. Carbon pricing allows companies to incorporate the real cost to the environment of their economic activity.”

And so to the questions that Blood must get bored of answering. What’s it like working with the man who nearly ruled the free world? And has having as the figurehead a man seen as an environmental crusader helped or hindered the firm? “It’s funny really—we are a mainstream investment firm. But because we talk about sustainability, and because we wear global-warming bracelets, we are often treated as left-of-centre, even socialist. But we are not political—we want to do a good job for our clients and help make the world a better place. It used to annoy us when we were labelled like this, but not any more. Al is chairman of Generation and chairman of our advisory board. He sets our long-term research agenda, and identifies the principal long-term sustainability factors affecting business.”

Blood is equally sanguine about having made the switch from an organisation of 25,000 employees to running a small business. But does he feel small firms get enough praise for their efforts in this area? “The size of a business is irrelevant to practising sustainable business principles. It doesn’t matter whether we are talking about a small company like Generation, or a huge company like Goldman Sachs. It is not size-dependent; it is best practice. What matters is whether the leadership of the business understands that this is the best way to build a business with enduring value. One of our key goals is to build a sustainable business—one that is profitable, with a great team and culture, which can attract and retain the best talent.”

Nevertheless he seems to be enjoying life out of the glare of public reporting and accountability. Three years may be too soon to judge a company that’s so keen on long-term investments, but with the size and success of Generation’s funds not disclosed, only clients will get the chance. For his part, Blood remains upbeat and seems to be relishing the opportunity not to have to report publicly. “The company’s ahead of our most aggressive projections in terms of building a sustainable business, both in terms of funds under management, and investment performance over almost two years. I tell clients that we are very happy with our business philosophy, our processes, and our team, but that two years does not make a long-term track record. It is true that running a private business away from public markets gives you greater flexibility. A lot of the best businesses in the world have been family-oriented or closely held.”
All of which gets back to the over-riding message of Generation, which is that to really make a difference the sustainability issue has to become central to the mainstream and part of the everyday way of doing things. That means engaging consumers across the board—and not just those people already interested in ethical issues such as the fairtrade campaign—and business leaders across all sectors of the economy.

But Vacarro isn’t so sure that the mainstream holds the key to the future. “Everything is always moving. Yesterday’s pioneers quickly become old news and everyday today. Recycling was revolutionary once. When sustainability becomes the mainstream in some ways it ceases to be noticed. Until companies have got a different set of drivers and don’t just live or die by their quarterly numbers we won’t see real progress.”
In some respects Blood agrees. He sees sustainability as a matter of simple business common sense. Those that understand the issue and seek to behave in a sustainable manner will thrive and survive—those that don’t will be beaten by their competitors.

“Over the next five years the word ‘sustainability’ will go out of fashion. These issues will just be part of traditional good business practice. The risk is that managers become focused on short-term market opportunities and miss the broader changes. Companies fail because they make fundamentally bad strategic decisions by ignoring key business trends,” he says. “In Michael Porter’s terms, these are companies that don’t understand the factors that affect the fundamentals of their business, such as sustainable development. Sustainability will become mainstream when managers finally realise it is not just about social responsibility—it is actually a good, long-term strategy to build businesses. We still have some way to go, but I am optimistic. With business leaders talking seriously about sustainability—and actually taking action—it won’t be long before the rest of the business community follows.”

But with so much at stake, how much can a small asset management firm such as Generation really have? Vacarro is keen to point out that any new approach to the sustainable investment field is welcome, although he questions whether the Generation approach is right. “I don’t want to disapprove of what Generation is doing, but I do question what it hopes to achieve,” he says. Here it’s clear that the presence of the man who in his own words “used to be the next president of the United States” plays a part.

“For better or for worse, we have some visibility and influence,” says Blood. “We want to play our part as a catalyst by promoting what we do to other major investors. We have already been able to make a bit of a spark—and if we can continue to show outstanding investment performance, we will be able to influence other investors by convincing them that we are on the right track. That’s the key—if we deliver investment results, then what we are trying to do will become better accepted, more mainstream.”

In fairness, Generation has also set up a foundation, which receives five per cent of the company’s profits to educate and help increase awareness about sustainability in capital markets. “We have been doing this for three years now. Integrating sustainability into mainstream long-term investing is just common sense: I would not want a single dollar of my own money invested in any other way. I am confident that the approach and philosophy we have developed is correct. I also know that it has taken us three years to learn to work together and bring these different perspectives together. But once you get it, it really works.”