Allocating Capital for Long-Term Returns

THE STRENGTHENED CASE FOR SUSTAINABLE CAPITALISM

May 2015
Copyright © 2015 The Generation Foundation. All rights reserved.
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

About us
The Generation Foundation (‘The Foundation’) is the advocacy initiative of
Generation Investment Management (‘Generation’) and the author (‘we’ and ‘our’)
of this white paper.

Founded in 2004, Generation is a boutique investment manager with three investment

strategies: public equity, growth equity and global credit. Generation takes a long-term view,
fully integrating sustainability research and insights into a rigorous framework of traditional
financial analysis while aligning incentives with the interests of clients.

The Foundation was established alongside Generation in order to strengthen the case for
Sustainable Capitalism. Our strategy in pursuit of this vision is to mobilise asset owners,
asset managers, companies and other key participants in financial markets in support of the
business case for Sustainable Capitalism and to persuade them to allocate
capital accordingly.

In our effort to accelerate the transition to a more sustainable form of capitalism, we

primarily use a partnership model to collaborate with individuals, organisations and
institutions across sectors and geographies and provide catalytic capital when appropriate.
In addition, The Foundation publishes in-house research such as this white paper, gives
select grants related to the field of Sustainable Capitalism, engages with the local
communities where we operate and supports a gift-matching programme for the
employees of Generation.

All of the activities of The Foundation, a not-for-profit entity, are funded by a distribution of
Generation’s annual profitability. For more information about The Foundation, or to obtain
additional copies of this report, please visit www.genfound.org or contact:

Daniela Saltzman, Director at [email protected]

London Office New York Office

20 Air Street, 7th Floor One Bryant Park, 48th Floor
London W1B 5AN New York NY 10036
Main: +44 (0) 207 534 4700 Main: +1 (212) 584 3650
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

Important information
This report is for information purposes only. It is for the sole use of its intended recipients.
It is intended solely as a discussion piece focused on the topic of Allocating Capital for
Long-Term Returns. Under no circumstances is it to be considered as a financial promotion.
It is not an offer to sell or a solicitation to buy any investment referred to in this document;
nor is it an offer to provide any form of investment service.

This report is not meant as a general guide to investing nor as a source of any specific
investment recommendation. While the information contained in this report is from
sources believed to be reliable, we do not represent that it is accurate or complete and it
should not be relied upon as such. Unless attributed to others, any opinions expressed are
our current opinions only.

Certain information presented may have been provided by third parties. The Generation
Foundation believes that such third-party information is reliable, but does not guarantee
its accuracy, timeliness or completeness; and it is subject to change without notice.

Copyright © 2015 The Generation Foundation. All rights reserved.

iv
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

Contents

Preface 1

Executive summary 8

The current context of business 9

New research 11

Allocating capital for long-term returns 13

Conclusion 20

References 21
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

Preface

Since we published our initial white paper entitled Sustainable Capitalism1 in 2012, the new
model of capitalism we proposed has gained significant momentum and support, albeit at
times referred to by other names, such as: Long-Term Capitalism,2 Inclusive Capitalism,3
Inclusive Prosperity4 and Shared Value.5 Over the last three years, our definition of
Sustainable Capitalism has evolved to reflect new understandings of how it is currently
impacting the global landscape of business and finance, and has been shaped by new
insights into how it is likely to continue driving change. Our current definition of
Sustainable Capitalism is as follows:

Sustainable Capitalism is an economic system within which business and capital seek to
maximise long-term value creation, accounting for all material ESG (environmental, social
and governance) metrics.

Integral to this framework is the consideration of all costs and benefits, regardless of
whether they are currently attributed with an economic “price tag” by society.

While this framework is designed with a long-term horizon, it also has meaningful
short-term implications, providing a process for identifying current risks and opportunities.

Sustainable Capitalism aims to address real needs in all economic, business and policy
decisions.

It transcends borders, industries, forms of ownership, asset classes and stakeholders.

Indeed, it exists at the intersection of business, science, politics and market forces.
Consequently, it is necessary to coordinate across disciplines and sectors in order to
inspire and catalyse the innovation and lasting change that we believe is urgently needed.

For examples of the ESG factors that collectively form the key pillars of a sustainability
analysis, see Figure 1. Note that the terms “sustainability” and “ESG” are used
interchangeably throughout this report.

1 Al Gore and David Blood, “A Manifesto for Sustainable Capitalism,” The Wall Street Journal (14 December 2011); The Generation Foundation,
Sustainable Capitalism (2012).
2 McKinsey & Company, Perspectives on the Long-Term: Building a Stronger Foundation for Tomorrow (March 2015).
3 Mark Carney, “Inclusive capitalism: creating a sense of the systemic,” Speech at the Conference on Inclusive Capitalism: London (27 May 2014).
4 Lawrence Summers and Ed Balls, Report of the Commission on Inclusive Prosperity, (Washington, DC: Center for American Progress, 2015).
5 Shared Value, “What is Shared Value,” (30 March 2015).

1
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

Figure 1 Key ESG factors defined

Environmental Social Governance

• Air quality output • Access and affordability of • Accounting and audit process
• Biodiversity impacts product or service • Board composition
• Carbon footprint • Consumer rights • Business ethics
• Climate change resiliency • Corporate philanthropy • Compliance
• Energy consumption • Customer relations • Executive remuneration
• Environmental policy • Data security and customer • Lobbying and political
privacy contributions
• Fresh water use
• Diversity issues • Ownership structure
• Ground water depletion
• Employee engagement • Reporting and disclosure
• Impacts on the cryosphere
• Fair disclosure and labelling • Shareholder rights
• Impacts on the food supply
• Health and safety of • Succession planning
• Land use communities
• Natural resource management • Transparency
• Human capital management
• Ocean productivity and • Voting procedures
• Human rights
acidification
• Labour relations Additional considerations for funds…
• Regulatory & legal risks
• Product quality and safety • Advisory committee powers and
• Supply chain management
• Responsible R&D composition
• Vulnerability to extreme weather
• Stakeholder and community • Client alignment & fee structure
• Waste & hazardous materials relations
management • Fund governance
• Supply chain management

Source: Analysis by The Generation Foundation

The progressive transformation of the incentives and behaviours that will ultimately reshape
the global economy in accord with the paradigm of Sustainable Capitalism will require a
broadly shared commitment to making businesses sustainable and to allocating capital in a
manner consistent with the principles outlined in this framework. We propose the following
definitions as building blocks for the transition towards Sustainable Capitalism:

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.

Sustainable Investing is an investment philosophy and approach which allocates capital to

companies aligned with these principles, using an analysis which integrates both financial and
ESG metrics to rigorously evaluate the business quality and management quality of a company.
Sustainable Investing seeks competitive, market-rate returns. It does not compromise financial
returns for sustainability outcomes, or the reverse. It applies to the entire investment value
chain from entrepreneurial ventures to publicly traded large-cap companies, from institutional
investors to high net worth individuals, from investors providing seed-capital to those focused
on late-stage growth-oriented opportunities, from company employees to CEOs, from activists
to policy-makers and standard-setters.

2
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

In addition to defining Sustainable Capitalism and outlining the economic rationale for its
adoption, our 2012 white paper provided a series of recommendations for how the
investment community could accelerate the transition to a more sustainable form of
capitalism. The five key recommendations were to: identify and incorporate risks from
stranded assets;7 mandate integrated reporting;7 end the default practice of issuing
quarterly earnings guidance; align compensation structures with long-term sustainable
performance; and encourage long-term investing with loyalty-driven securities.8

These five recommendations, taken together, represented what we believed were the first
steps in the development of a strategy for facilitating change. We not only offered them for
consideration, but also provided catalytic capital in the hope that further, more detailed
work might be undertaken by subject matter experts in each of these five areas. And since
2012, there has been notable progress in the further development of these ideas—not only
through research and discourse, but also, in some cases, as a result of compelling actions by
market participants—though it comes as no surprise that not all of these ideas have
advanced at the same pace.

For example, much work remains to be done to further our recommendation to align
compensation structures with long-term sustainable performance.9 The investment
community has yet to adopt the changes that are necessary to align compensation
structures with long-term sustainable performance, though there are mounting pressures
on the financial services industry to rethink its approach to remuneration. Not only does it
make economic sense to anchor rewards in comprehensive long-term performance
metrics, grassroots movements (like “Occupy Wall Street”) and other global calls to address
untenable levels of wealth inequality10 have highlighted the need to revise compensation
structures. (While inequality is a necessary condition for capitalism, and is not undesirable
in and of itself, hyper-inequality is corrosive to both capitalism and democracy and is simply
not sustainable over time.) The investment community must urgently reconsider the need
for this recommendation and the pace appropriate for its implementation. For our part, we
will continue to seek ways in which we can catalyse sustained positive change on this topic.

Similarly, although our recommendation to consider loyalty-driven securities was met with
enthusiasm by some who share our desire for new ways to provide incentives for engaged
long-term ownership (including through the potential use of new financial instruments), we
have since reconsidered the feasibility of loyalty-driven securities after detailed research we
conducted with Mercer into this issue,11 which revealed concerns shared by many about the
potential market distortions involved in any significant departure from the ‘one share, one

6 A stranded asset is an asset that loses significant economic value well ahead of its anticipated useful life, as a result of changes in
legislation, regulation, market forces, disruptive innovation, societal norms, or environmental shocks. The Generation Foundation,
Stranded Carbon Assets (2013).
7 Integrated reporting is a framework whereby companies combine their most salient financial and sustainability performance metrics into one
report. The Generation Foundation, Sustainable Capitalism (2012).
8 Loyalty-driven securities offer investors financial rewards for holding a company’s shares for a certain number of years. The Generation
Foundation, Sustainable Capitalism (2012).
9 IRRC Institute, The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design (2014).
10 Wealth inequality has continued to rise in recent years. Credit Suisse, Global Wealth Report 2014 (2014).
11 Mercer, Stikeman Elliott LLP, and The Generation Foundation, Building a Long-Term Shareholder Base (2013).

3
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

vote’ model. Nevertheless, although the recommendation to consider loyalty-driven

securities did not emerge as a viable solution to decrease short-termism in stock ownership,
it did serve to raise the profile of the problem we set out to solve. It has inspired new ideas
to provide incentives for long-term holding periods, along with a recently renewed proposal
to reform the capital gains tax code to align better with long-term investing.12

With regard to our recommendation for integrated reporting (which others have also put
forward), there have been significant advances over the last three years as the field of
sustainability disclosure has matured.13 An increasing number of companies are practising
integrated reporting or are in the process of making a transition to integrated reporting,
suggesting that the market acknowledges the value of integrated reporting. This change has
occurred as the range of benefits from integrated reporting have been shown to include
“a more holistic view of performance and better insight into risk, strategy, the business
model, the operating context and governance.”14 In particular, the focus on identifying and
emphasising only the most material ESG issues, selected carefully on an industry-specific
basis, is now changing companies’ and investors’ attitudes towards the relevance of
sustainability data. Indeed, studies now find that firms practising integrated reporting are
able to attract more long-term investors to their ownership base.15

Our contribution to this development included providing seed funding to the Sustainability
Accounting Standards Board (‘SASB’) as well as contributing to industry knowledge through
various working groups and consultations. SASB, a not-for-profit organisation based in
California, was founded in 2012 to establish a much clearer understanding of material
sustainability risks and opportunities facing companies, and to create industry-based key
performance indicators suitable for disclosure in standard filings with the SEC.16 To date,
SASB has issued reviews on seven of its ten specified sectors and has launched both a
corporate pilot programme and a software provider partnership programme to help
companies integrate SASB standards into their disclosure processes. Likewise, The
International Integrated Reporting Council (‘IIRC’) saw commitments from 140 businesses
and 26 investors worldwide for its pilot programme, which concluded in September 2014
and sought to establish a framework for integrated reporting.17 Indeed, a focus on the long
term through integrated reporting is especially important in a modern market with shifting
macroeconomic values, wherein an average of 84 percent of the market value of
companies18 now lies in intangible assets but accounting practices and processes remain
outdated, with a myopic focus on the short-term.19

12 Laurence Fink, “Our Gambling Culture,” Perspectives on the Long-Term: Building a Stronger Foundation for Tomorrow (March 2015), p. 10.
13 Various initiatives promoting integrated reporting continue to gain traction. Chris Bryant, “A corporate balance sheet with a little added love,”
Financial Times (19 November 2014).
14 Grant Thornton, “How integrated reporting helps mid-sized businesses,” FDIntelligence (2 April 2014).
15 George Serafeim, Integrated Reporting and Investor Clientele (14 January 2014). Journal of Applied Corporate Finance (forthcoming).
16 Jeffrey Ball, “The Environment and the Bottom Line: Jean Rogers of the SASB says investors need better information,”
Wall Street Journal (30 March 2015).
17 The IIRC framework offered a set of guidelines to more deeply integrate sustainability into corporate objectives. IIRC,
The International Framework (2013).
18 Kristi Stathis, “Ocean Tomo Releases 2015 Annual Study of Intangible Asset Market Value,” Ocean Tomo Insights Blog (5 March 2015).
19 Charles Tilley, “Perspectives on the long term,” Book Excerpt from McKinsey Quarterly, Dominic Barton and Mark Wiseman (March 2015).

4
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

On the theme of improving disclosure and communication, our recommendation to

reconsider the usefulness of issuing quarterly earnings guidance has been well received, as
the many problems and distortions associated with short-term guidance has come under
review in recent years.20 In order to catalyse a thoughtful discussion on ending the default
practice of issuing quarterly earnings guidance, we partnered with the Aspen Institute and
subsequently KKS Advisors, with whom we published a robust report that firmly established
the economic case for companies to adopt communication practices oriented towards the
long term.21 That report clearly articulated the costs associated with issuing regular
earnings guidance; proposed an alternative to providing regular earnings guidance; and
created a framework for action by companies wishing to change their behaviour. With more
companies moving away from regular earnings guidance while adopting alternative forms of
communication that allow market participants to analyse and understand the value of
a business, we see significant progress being made on this front too.

Lastly, given the increasing importance and urgency for the financial community to “identify
and incorporate risks from stranded assets” (see Figure 2), this recommendation received
prioritised focus after publication of the 2012 report; since then, happily, there have been
great strides in financial markets generally towards broad recognition of why this change
is necessary and urgent. In October 2013, we released a paper entitled Stranded Carbon
Assets – Why and How Carbon Risks Should Be Incorporated in Investment Analysis,22 which
outlined the business case for addressing stranded carbon risks and provided a guideline on
how investment frameworks can be adjusted accordingly. We also collaborated with other
groups that share our concern about this topic, including the Carbon Tracker Initiative, the
Smith School of Enterprise and the Environment at the University of Oxford, ShareAction
and Resources for the Future.

Encouragingly, as mounting scientific evidence underscores the urgent need to enforce a

carbon budget (see Figure 2), the grave risks associated with stranded carbon assets have
now become a mainstream issue in financial markets. This welcome development has
further catalysed actions by organisations and individuals around the world who are now
advocating steps to protect against the damage that is widely anticipated as a result of the
forthcoming stranding of carbon-intensive assets.

20 See, e.g. Francois Brochet, Maria Loumioti and George Serafeim, “Speaking of the Short-Term: Disclosure Horizon and Managerial Myopia,”
Harvard Business School Accounting & Management Unit Working Paper No. 12 – 072 (12 March 2015).
21 The Generation Foundation & KKS Advisors, Earnings Guidance – Part of the Future of the Past (2014).
22 The Generation Foundation, Stranded Carbon Assets (2013); Al Gore and David Blood, “The Coming Carbon Asset Bubble,” The Wall Street
Journal (30 October 2013); Al Gore and David Blood, “Strong Economic Case for Coal Divestment,” Financial Times (6 August 2014).

5
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

Figure 2 Enforcing a 2° carbon budget 23

2/3rds of proven fossil fuel reserves
will be stranded carbon assets …
… 2 /3rds of the carbon budget compatible
with a 2°C goal has already been used
R VES
SE
RE
L TH
E
E
FU

C
L

AR
OBAL FOSSI

BO
Amount used Amount
Stranded

N BUDGET
Burnable from years Remaining
Carbon
Carbon 1870–2011
Assets 1000 GtCO 2
1900 GtCO 2
GL

Source: International Energy Agency, World Energy Outlook (2012); IPCC, “IPCC Fifth Assessment Report,”
Lima Climate Action High Level Session (2014); analysis by The Generation Foundation.

Ongoing research by academic institutions and other organisations on the risks posed by
carbon-intensive assets to the global financial system, grave warnings voiced by central
bankers about these risks,24 highly publicised fossil-fuel divestment campaigns and growing
calls by shareholders for companies to disclose their carbon risk,25 have all combined to
catapult this topic onto the global stage. Concurrently, the cost-down curves for
low-carbon alternatives have plummeted steeply due to technological advances and the
economies of scale being reached as companies expand production to meet exploding
demand. As a result, the economic case for investing in low-carbon assets has
dramatically improved.

Although their exact contribution to mainstreaming Sustainable Capitalism cannot be

known, the collective impact of the progress achieved on these topics to date is meaningful.
There are significant indicators of this change. A 2014 Nielsen study showed that a majority
of consumers surveyed globally demonstrate a preference for products and services from
companies committed to positive social and environmental impact a dramatic reversal of
opinion compared to the same survey conducted just three years earlier.26 This shift in the
expectations of businesses is also especially observable in the Millennial demographic,
defined as those born in or after 1983. According to the 2015 Deloitte Millennial survey,
which questions almost 8,000 people across 29 countries in full-time employment, this
cohort is much more inclined to work for businesses that focus on purpose, not just
profit.27 Given this dynamic, the surge in demand for sustainability education does not come

23 Carbon Tracker Initiative, Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble? (2014).
24 Mark Carney, “Letter from Mark Carney on Stranded Assets,” Bank of England, Supervisory Activities – Climate Change Adaptation
Reporting (30 October 2014).
25 See, e.g. BP Global, “Shareholder Resolution 25,” Annual General Meeting (21 April 2015); Ceres, “Shareholders File Resolutions to Press Fossil
Fuel Companies on Low-Carbon Strategies, Carbon Asset Risk,” Press Release (12 February 2014).
26 Nielsen Holdings N.V., “Doing Well by Doing Good,” Global Corporate Social Responsibility Report (2014).
27 Deloitte, “Mind the Gaps,” The 2015 Deloitte Millennial Survey (2015).

6
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

as a surprise. Net Impact, a non-profit devoted to “empowering a new generation to drive

social and environmental change,” has a local chapter in 98 percent of the top 50 MBA
programmes worldwide.28 Deans of business schools report that students are flocking to
courses that emphasise sustainability.29 Not surprisingly, CEOs report that sustainability has
become central to recruiting and retention strategies.30 In addition, the rapid expansion of
the “shared economy,” promoting new business models that maximise resource efficiency
and asset utilisation, is part of the rise of Sustainable Capitalism.

The implications of these developments for finance and policy are significant and are
reflected in the increasing demand for sustainable investment products – including, for
example, fossil-fuel free indices31 and green bonds.32 They are also reflected in the growing
vanguard of leaders across the public and private sectors who are vocally promoting
long-term sustainability goals.

28 Net Impact, (30 March 2015).

29 Caroline Holtum, “Expert views: sustainability and business education,” The Guardian (13 May 2014).
30 Ibid.
31 Mike Scott, “Fossil Fuel-Free Index will help Investors Manage Climate Risks,” Forbes (5 January 2014).
32 Climate Bonds Initiative, “Swedish bank SEB tops annual Green Bond Underwriters League Table,” Media release (15 January 2015).

7
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

Executive Summary

This report expands on our previous work, specifically our 2012 Sustainable Capitalism white
paper, building on the insights gained over the three years following its publication. It is
intended for an audience of mainstream investors and corporate executives.

The recommendations for how to mainstream Sustainable Capitalism introduced in our

2012 paper still merit attention as their development and implementation are ongoing. This
report is intended to reassert and update the ever-stronger business case for Sustainable
Capitalism and outline an updated approach to allocating capital for long-term returns. We
propose a series of interconnected ideas that we believe will help evolve investment
frameworks in ways that will align with Sustainable Capitalism. Specifically, these ideas call
on key actors in the global economy to:

Assess carbon risk Use sustainability

and price carbon analysis to Uphold the full remit
in all capital enhance investment of fiduciary duty
allocation decisions frameworks

The importance of sustainability to business and investing is intensifying as financial

markets are increasingly forced to address challenges posed by the realities of natural
resource scarcity, the effects of unabated carbon-emissions, rapid urbanisation and
widening wealth inequality, to name just a few. As the context of business and investing shifts,
understanding the economic benefits of a sustainable form of capitalism and the best ways to
navigate the transition have become even more critical. This has significant implications for
asset owners, asset managers, corporate executives and other market participants seeking to
develop successful businesses and deploy capital today and in the future.

The inertia that has kept capital allocation decisions anchored in traditional investment
frameworks must give way to a new paradigm of capitalism – one which has evolved in
parallel with the emerging opportunities and challenges driving the modern global
economy. This new paradigm is Sustainable Capitalism.

8
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

The current context of business

The time horizon relevant to sustainability-related risks and opportunities is neither

uniformly long term nor short term. Some of these risks and opportunities are upon us right
now, powerfully shaping the current business environment, and must be dealt with in the
short term. Indeed, even though several of these trends seem new, they actually have the
profound potential to disrupt financial markets in a non-linear progression. And investors
who rely principally on historical data in analysing the relevance and time-urgency of these
themes are at risk of being misled, even in the short term.

However, the most important implications of other risks and opportunities will emerge
over the longer term. In order to understand better these risks and opportunities related to
Sustainable Capitalism, we have invested considerable time and effort in researching and
analysing what we believe are the key trends that are driving global change, their associated
risks and investment opportunities and how they are likely to affect the adoption of
Sustainable Capitalism.

Figure 3 Key drivers of global change in 2015 and beyond

Earth Inc. – deeply interdependent global economy

• Global financial integration to a much • Untenable levels of intra-country wealth and income
greater degree inequality, creating profound social instability and
• Labour market disruption due to simultaneous posing new challenges for self-governance
outsourcing of jobs from industrial economies and • Development of new materials and the impending spread
digitisation of jobs by automation combined with of 3-D printing, which are beginning to revolutionise
ever-more-sophisticated forms of artificial intelligence manufacturing and supply chain management

The Global Mind – the interconnection of billions of people to one another, to a rapidly
growing global network of increasingly intelligent machines, devices and embedded
sensors and to voluminous and exponentially growing databases

• The growing use of the “internet • Erosion of privacy (by governments and corporations)
of things” and “big data” to improve and the nearly ubiquitous risk of cyber-security
resource utilisation
• The democratisation of information
and the struggle by some governments
to restrict access by their citizens

Power in the Balance – uncertainty over the continued primacy of US leadership in

the world and the palpable rise of China’s influence­— and concurrently, growing private
sector influence over decisions formerly made by governments—due to governance
failures and the emergence of Earth Inc.

• Dysfunctional national and global governance • Success by corporate interests in lobbying

• Shift of power from west to east – and from and in dominating political processes
“developed” nations to “emerging” nations • Fervour of market fundamentalism and
• Encroachment of big money into quarterly capitalism
democratic processes

9
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

Outgrowth – collision of consumption patterns with apparent limits in the supply of some
natural resources (like topsoil and ground water) and with limits to the capacity of the
atmosphere and the oceans to absorb growing waste streams

• General population growth compounded by and • Rapid urbanisation

combined with the growing resource-intensity of • Depletion of natural resources, environmental
an expanding global middle class degradation and rising pollution

Life Sciences Revolution – unprecedented advances shaping civilisation

• Significant extensions of the average • Artificial limbs, organs, skin and blood
human life span • Modification of the blueprint of life itself;
• Precision medicine targeting individuals’ genes, artificial life-forms
proteins, microbiomes and pathogens • Devices, sensors and connections to databases
• Genetically engineered animals, plants and embedded in life forms, including humans
humans; crossing of lines separating species

The Climate Crisis – CO2 emissions and other greenhouse gases due to human
activities worsen the climate

• Record high temperatures • Additional stress on natural resources already

• Disruption of the Earth’s hydrological cycle, ocean confronting unsustainable consumption
currents, wind patterns, storm tracks and distribution • Disruption to food and water supplies and the spread
of precipitation of disease stress societal health and wellbeing
• Climate-related extreme weather events, including • Radical loss of biodiversity; the “Sixth Great Extinc-
stronger and more destructive cyclones, hurricanes, tion”
typhoons, downpours, floods and droughts • Unprecedented availability and uptake of solutions,
• Melting of the Cryosphere, rising sea levels particularly cheaper renewable energy generation and
• Potential loss of ocean productivity with ocean storage
acidification and warming alongside unsustainable • Largest business opportunity in world history as global
exploitation of the oceans economy decarbonises and becomes hyper-efficient

Source: The Future - Six Drivers of Global Change by Al Gore & analysis by The Generation Foundation

These dynamics – the tailwinds behind the uptake of Sustainable Capitalism

– highlight the need for a new type of capitalism that is long-term and holistic
in nature in order to take full advantage of the emerging needs associated with
these realities, including:
• The transition to a low carbon economy
• More business models leveraging technology that improves asset utilisation, therefore conserving
resources, in the “sharing economy”
• Maturing field of sustainable finance: increasing demand, changing nature of consumption patterns,
better tools for analysis in both accounting and reporting
• Calls to update the measurement of growth beyond GDP
• A shift in behaviours and attitude towards sustainability between generations with more
enthusiasm and commitment from the Millennial generation and centennials

10
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

New Research

The business case for Sustainable Capitalism is being made more often and more rigorously
by both academics and business leaders. And the sum total of both research and practical
experience is proving that companies can improve their financial performance while
improving performance on ESG dimensions.

New research continues to be published showing how sustainability can drive

outperformance. These reports have come from academia, financial institutions,
consultancies, think-tanks and non-profit organisations. What follows in this section of our
study is by no means a complete picture of all the evidence relevant to this subject. We
encourage readers to dive deeper into the reports referenced here (and in the footnotes
and appendix) for more detail on the voluminous emerging evidence and the methodologies
employed to reach these findings. Rather, our purpose here is to show that the case for
action has been made by a great many credible experts, that it is growing stronger, and then
to point to where some of the most compelling new research can be found.

Many studies have now examined the relation between financial and ESG performance.
We direct the readers to a meta-study conducted by the University of Oxford and released
in September 2014 in partnership with Arabesque Partners.33 Their report investigates and
collates the findings from over 190 of the premier academic papers, industry reports,
newspaper articles and books.

The report reviews the business case for corporate sustainability (across risk, process and
product innovation, operations, reputation and cost of capital) and its link to stock price
performance. The study concludes that “it is in the best economic interest for corporate
managers and investors to incorporate sustainability considerations into decision-making
processes.” Specifically, their findings suggest: 1) companies that lead in sustainability have
better operational performance and are less risky (supported by 88 percent of reviewed
sources); and 2) investment strategies that incorporate ESG issues outperform comparable
non-ESG strategies (supported by 80 percent of reviewed sources).

The report also concludes that it is in the interest of asset owners to influence companies to
produce goods and services in a responsible way because active ownership creates value for
companies and investors. Again, readers are encouraged to review this study’s bibliography
as it provides an extensive reading list on the case for Sustainable Capitalism.

Other groups have also significantly contributed to the research in this field. By using
concrete data from within the investment industry to explore the business case for
Sustainable Capitalism, they have found that it is quite clear that integrating ESG factors
alongside traditional financial analysis makes good economic sense when allocating capital.
There are two pillars of sustainable investing: ESG integration and engagement.

33 Gordan Clark, et al., From the Stockholder to the Stakeholder – How Sustainability Can Drive Financial Outperformance, (Oxford: Smith School
of Enterprise and the Environment at the University of Oxford and Arabesque Asset Management, March 2015).

11
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

On ESG integration, Harvard Business School’s recent investigation into corporate

sustainability shows a tangible link between a firm’s integration of material sustainability
issues and enhanced shareholder-value.34 The authors follow SASB’s guidance
industry-by-industry on materiality and find significant risk-adjusted returns for portfolios
that include companies with superior ESG performance on material sustainability issues.
These conclusions about the materiality to investing are further confirmed in Morgan
Stanley’s effort to map the effect of ESG factors on various value drivers across industries.35
Similarly, AlphaNow’s findings suggest that ESG integration is key to producing stable,
long-term returns.36 This claim is further evidenced in reports like that by Robeco’s
Quantitative Strategies Department, which demonstrates the alpha potential of integrating
sustainability data into traditional financial analysis.37

On engagement, another study finds that after successful efforts by investors to engage
with companies, particularly on environmental and social issues, companies improve their
accounting performance and corporate governance.38 These results are consistent with
industry efforts to empower active ownership that productively engages with
corporate management.

Various other reports have applied these findings to research how best to pursue a strategy
of change management that accelerates the integration of sustainability analysis into the
investment process. For example, a new white paper written by a coalition of institutional
investors (led by the Canadian Pension Plan Investment Board) outlined steps investors can
take towards this goal.39 This work was inspired by an earlier analysis conducted by
McKinsey that highlighted the economic benefits of sustainability.40 The report suggests
that in order to succeed, sustainability considerations need to be an organisational priority,
while clear and strong support should also be received from the organisation’s leadership.
The emphasis on the key role of leadership in accomplishing the transition to sustainability
integration is also conveyed in Deloitte’s research, which focuses on the current potential
for corporate management to capture the value derived from ESG to demonstrate to their
investors how they are getting ahead of risks and building resilience to potential shocks.41

34 Mozaffar Khan, George Serafeim and Aaron Yoon, “Corporate Sustainability: First Evidence on Materiality (Working Paper),”
Harvard Business School (2015).
35 Morgan Stanley, “Embedding Sustainability into Valuation,” Morgan Stanley, (January 2015).
36 Timothy Nixon, “Building a Great Return and a Better World with Your Savings,” AlphaNow: Thomson Reuters (19 February 2015).
37 RobecoSAM SI Research & Development and Robeco Quantitative Strategies, “Alpha from Sustainability,“
RobecoSAM White Paper (June 2014).
38 Elroy Dimson, Oğuzhan Karakaş and Xi Li, Active Ownership (13 August 2014).
39 Perspectives on the Long-Term: Building a Stronger Foundation for Tomorrow (March 2015).
40 Sheila Bonini and Steven Swartz, “Profits with purpose: How organizing for sustainability can benefit the
bottom line,” McKinsey on Sustainability & Resource Productivity (July 2014).
41 Dinah Koehler and Eric Hespenheide, “Finding the Value in Environmental, Social, and Governance Performance,” Deloitte Review, Issue 12 (2013).

12
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

Allocating capital for long-term returns

”The secret of getting ahead is getting started.”

Mark Twain’s observation, which can be misunderstood as a simplistic aphorism, in this case
is actually a key insight for investors and business executives – because inertia and the
gravitational pull of old cultures is perhaps the most important barrier that has prevented
many business leaders from doing what research and common sense would otherwise lead
them to do on a priority basis. The economic case for Sustainable Capitalism is compelling
and the global economy is evolving accordingly. Although we must accelerate the rate of
adoption, the principles of Sustainable Capitalism are taking root in financial markets and
there is only one way to succeed in this new world order: to get started.

Allocating capital for long-term returns in the evolving global economy will require investors,
asset owners, corporate executives and boards to adopt an integrated perspective on three
core ideas (see Figure 4). Understanding the interdependent nature of these concepts is
critical because they share a connection to the themes that form the bedrock of
Sustainable Capitalism: decoupling prosperity from resource-intensive growth, revising
investment time-horizons to target sustained value creation beyond quarterly profits, and
integrating sustainability factors into strategic decisions and asset valuations. The three
concepts presented here have been selected on the basis of their capacity to shift markets
and transform the global economy towards a more sustainable economic model.

Figure 4 The path towards Sustainable Capitalism

Assess Use
carbon risk and sustainability Uphold the
price carbon in all analysis to full remit of
capital allocation enhance investment fiduciary duty
decisions frameworks

SUSTAINABLE CAPITALISM

13
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

Assess carbon risk and price carbon in all capital allocation decisions

The transition to a low-carbon future will revolutionise the global economy and present
significant opportunities for superior investment returns. However, investors must also
acknowledge that carbon risk is real and growing. Moreover, in spite of the impressive
leadership emerging within the business community, it is neither realistic nor fair to expect
that business can do policy work that only governments can do. As such, we strongly support
a regulated carbon price through a global pact or series of regional agreements. Momentum
towards this goal is mounting as governments representing over half of emissions now
support carbon pricing.42 And by 2016, nearly 25 percent of all carbon emissions will be
priced.43 Notably, about half the world’s emissions that will be priced will result from the
national cap-and-trade programme China has announced that it will implement in 2016.44

Furthermore, an increasing number of companies apply a shadow price on carbon when

conducting asset valuations, a practice we encourage in the absence of widespread
regulation. In 2014, 150 companies reported using an internal shadow price on carbon with
prices ranging from $8 to more than $60 per metric ton of carbon.45 The reality, however,
is that carbon largely remains an un-priced externality in financial markets today. Although
it is impossible to know the exact timing of the prospective tipping point when financial
markets will fully internalise carbon risk, it is critical for investors to prepare for its inevitable
impact over the next five years.

To be clear, there are two reasons why investors should proactively include a meaningful
carbon price when allocating capital: to manage risk and identify investment opportunities.
Both of these reasons deserve elaboration.

Risk management

The ongoing transition to a low-carbon economy will continue to leave carbon-intensive

assets stranded. Regulation targeting carbon, the rapid technological improvements of
low-carbon alternatives, the continuing move towards more environmentally conscious and
informed consumer choices and intensifying social campaigns for change are all combining
to make it imperative for investors to apply a meaningful price on carbon in investment
analysis across asset classes. Furthermore, the inclusion of a price on carbon emissions
allows investors to transform what is currently treated as an uncertainty - an undesirable
dynamic for any investor - into a quantifiable, and therefore manageable risk. Investors
must understand the implications of the proactive decision to buy, hold, or sell carbon
intensive assets, given their liabilities. The assessment of risk also requires understanding
the risks to assets in alternative scenarios where collective action does not limit global

42 The World Bank, “73 Countries and Over 1,000 Businesses Speak Out in Support of a Price on Carbon,” News (22 September 2014).
43 Kristin Eberhard, “All the World’s Carbon Pricing Systems in One Animated Map,” Sightline Daily (2014).
44 All the World’s Carbon Pricing Systems in One Animated Map (2014).
45 CDP, Global Corporate Use of Carbon Pricing (2014).

14
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

temperature rise to 2°C - where, in other words, we place too low a price on carbon—
because the consequences in these scenarios would certainly influence asset valuations, for
example, of coastal real estate, agriculture and many other real assets.

The deployment of capital into promising opportunities

Vast industries are being reworked in the transition to a low-carbon economy (see Figure
5), creating new investment opportunities in assets and strategies. Identifying advantaged
assets in a decarbonised economy (those with a low-carbon profile) has already proven to
create significant value through billion-dollar exits in private equity markets and success in
public equity markets, and will only become increasingly attractive from a risk-return-profile
as carbon emissions are widely priced. Investors applying a carbon price to valuations will
be more likely to appropriately allocate resources and capital to this opportunity set.

Figure 5 The transformation of global industries as the economy decarbonises

Industry Low carbon & resource efficient innovations

Energy Solar Wind Geothermal Storage

Insulating
Buildings Lighting Metering Appliances
Materials

Transport Engines Electric vehicles Fleet logistics Biofuels

Water Irrigation Desalination Wastewater Distribution

Materials Biochemical Biodegradable Nanomaterials Plastics

Recycling Reverse logistics Material sorting Sharing goods Waste to energy

Environmental Data centre Local digital

Big Data Remote sensing
Intelligence efficiency platforms

Forestry Precision
Agriculture Meat replacement Urban farming
management agriculture

Source: Analysis by The Generation Foundation

Use sustainability analysis to enhance investment frameworks

Frameworks are critical tools to develop robust investment processes. They help investors
achieve consistency, distinguish between signal and noise and avoid biases. Generation’s
decision in 2004 to use sustainability analysis as the anchor to our investment process was
and is based upon our conviction that long-term investing is best practice and that the
long-term context of business is changing due to unprecedented global sustainability

15
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

challenges such as climate change, water, health and poverty. And at the company level,
sustainability factors are drivers of business and management success.

Not surprisingly then, the Generation investment philosophy begins with an understanding of
the long-term context of business. For company-specific factors, sustainability as a
framework considers risk management and reputation; resource efficiency—particularly in
light of limited natural resources—and delivering products and services to address global
sustainability challenges in ways that drive revenues, profitability and competitive position.
Critically, as illustrated in the previous sections of this paper, the academic and real-world
evidence, including Generation’s investment performance over the past decade, clearly
demonstrate how the full inclusion of sustainability factors in economic decisions translates
into better outcomes. In essence, sustainability is a lens to help the investor make better
investment decisions.

Integration

Best practice sustainable investing starts with understanding the drivers of return for the
portfolio, asset class or specific asset. Rather than bifurcating investment analysis into
financial valuation and sustainability valuation, we encourage an approach that integrates
sustainability within a rigorous investment process. At the highest level, this means
forward-looking analyses of the long-term drivers of growth that will likely shape returns on
financial and real assets. At a more micro level, we have found that this means integration
of sustainability considerations into investment policy, asset allocation, portfolio manage-
ment and securities analysis.

Comprehensive knowledge

Sustainable investing is not easy and there are no short cuts. One can never forget the
fundamentals of finance and business including, importantly, valuation analysis. It is also
critical to identify and focus on factors which are material and relevant within the
appropriate investment time horizon.46

This approach to investing – asking questions that integrate sustainability at their

core – yields information for analysts to review that is both quantitative and qualitative in
nature. For company research, an investment process that weaves sustainability
considerations throughout its analysis reveals critical information about the quality of a
company’s business and management team, including: how sustainability can drive product
innovation; whether executives are compensated for the company’s long-term success; and
the potential financial and reputational implications unrecognised or mismanaged ESG risks
might create. Other lines of inquiry include culture, human capital management, governance,

46 The definition of an appropriately long-term time horizon is determined by variables including the type of industry into which capital is being
invested and the asset class. For example “long-term investing” will be different for publicly traded equity in a technology company compared
to investment grade debt in a pharmaceuticals company, given the contrasts in product life cycle, industry dynamics and
ownership structure.

16
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

supply chains, selling practices, product life cycles, carbon exposure and resource utilisation,
health and safety, to identify but a few. In short, analysing the answers to these questions
can provide insights into a company’s long-term vision, its strategy for implementing that
vision, and the probability of its success.

Engaged ownership

Responsible and engaged ownership is another critical step to sustainable investing. Asset
managers have an unambiguous responsibility to vote shareholder ballots and make clear
their expectations to management. Areas for particular focus should include governance,
remuneration, risk and reputation, capital allocation and investor communication.

Uphold the full remit of fiduciary duty

Sustainability is an important factor in the long-term success of a business. Therefore, as

with any other issue related to the prudent management of capital, investors and
companies have a fiduciary duty to include sustainability in decisions.47

The commonly held interpretation of fiduciary duty must be updated beyond the mistaken
view that its scope is limited to a narrow definition of financial responsibility that excludes
sustainability. Principally, there exists a robust business case for incorporating sustainability in
investment decisions to maximise long-term financial performance. Moreover, new
regulation and broader legal reform are also compelling reasons for doing so. In July 2014,
the UK Law Commission’s report found that “it is right that trustees should state their policy
on how they evaluate risks to a company’s long-term sustainability (including risks relating
to governance or to the firm’s environment or social impact).”48 The report concluded that
trustees should expand their analysis to include ESG issues.

This marked shift in policy is further evidenced by the European Union’s (‘EU’) directive on
disclosure of non-financial and diversity information (‘The Directive’) that came into effect
in December 2014.49 Requiring sustainability disclosure by large companies (defined as those
with more than 500 employees) based in the EU, The Directive signals the relevance of
sustainability to prudent capital management and, therefore, fiduciary duty. This directive
affects not only European companies but also many US and Asian companies with large
operations or cross-listings in the EU. Moreover, similar directives exist in other jurisdictions,
including important emerging markets such as China, Malaysia and South Africa.50

47 We advocated for reform in our 2012 white paper as well as in a report we published in 2005. Jed Emerson and Tim Little, “The Prudent
Trustee – The Evolution of the Long-Term Investor” The Generation Foundation (2005).
48 Law Commission, Fiduciary Duties of Investment Intermediaries (2014), p.8, §1:35.
49 European Union, Directive of The European Parliament and of the Council amending Directive 2013/34/eu as regards disclosure of non-financial
and diversity information by certain large undertakings and groups (Brussels, 2014).
50 Ioannis Ioannou, George Serafeim, “The Consequences of Mandatory Corporate Sustainability Reporting: Evidence from Four Countries,”
Harvard Business School Research Working Paper No. 11 –100 (20 August 2014).

17
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

Notable developments are taking place in the United States as well. In 2013, Delaware, the
legal home of 64 percent of Fortune 500 companies,51 became the nineteenth state to enact
legislation establishing the public benefit corporation known as B Corporations or B Corps.
B Corps require fiduciaries to balance the interests of shareholders with employees, society
and the environment. To date, 27 states have passed Benefit Corporation legislation,52 and
there are already over 1,550 known registered Benefit Corporations.53 Outside of the United
States, B Corps are also gaining traction globally with registered B Corps in 38 countries.54

Addressing the myths

Fiduciaries are tasked with the decision to buy, sell, or hold assets. There is no passive
behaviour as a fiduciary; there is no “do nothing” task. Those who defend the traditionally
held interpretation of fiduciary duty justify the active omission of sustainability considerations
by asserting that sustainability dynamics do not impact financial assets.

However, this reasoning is deeply flawed for three reasons: first, fiduciaries have a number
of distinct duties, not a single duty to maximise profits, and within the reach of these duties,
fiduciaries are by no means barred from considering factors other than financial return.55
Second, if fiduciary duty is indeed understood as an obligation to optimize financial
performance, the failure to integrate sustainability considerations into investment strategies
would also conflict with the performance of that duty, by neglecting to factor in the risk-ad-
justed performance of these assets over the medium to long term.56 The definition of fiduciary
duty in terms of a narrow financial metric is truly based on an absurdly narrow understanding
of return – one that focuses primarily on short-term prices and dividends while ignoring rele-
vant externalities that remain mispriced. Finally, this reasoning suggests that the consideration
of ESG issues only means applying exclusionary screening to the investment process, when in
reality, sustainable investing strategies can be sophisticated and nuanced in range and scope.

Breach of fiduciary duty

Incorporating sustainability considerations into the capital allocation process is not only
permissible for fiduciaries; we would argue that the active decision to ignore sustainability
factors may in fact be a breach of fiduciary duty. This is especially true when assessing the
impact of ESG considerations on the financial performance of investments.

51 State of Delaware, “About Agency,” Division of Corporations (30 March 2015).

52 Benefit Corp, “State by State Status,” Information Center (30 March 2015).
53 Benefit Corp, “Search,” Information Center (30 March 2015).
54 B Lab, Launch Event of B Corp in Europe (21 April 2015).
55 Freshfields Bruckhaus Deringer, “A legal framework for the integration of environmental, social and governance issues into institutional
investment,” Asset Management Working Group of the UNEP Finance Initiative (October 2005); FairPensions, The Enlightened Shareholder:
Clarifying investors’ fiduciary duties (2012); William Ransome and Charles Sampford, Ethics and Socially Responsible Investment: A Philosophical
Approach (Australia: Ashgate, 2011), 125-129.
56 United Nations Environment Programme Finance Initiative, Fiduciary Responsibility (2009); From the Stockholder to the Stakeholder – How
Sustainability Can Drive Financial Outperformance (2015).

18
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

The University of Oxford and Arabesque Partners meta-study referred to earlier in this paper
asserts that it is possible to generate better returns by incorporating sustainability factors
into investment decisions. In addition to enhanced operational performance, companies
with “solid ESG practices” also exhibited a lower cost of capital, while good sustainability
practices positively influenced stock price performance.57

Furthermore, other studies showed above-market average return for companies with strong
sustainability policies and practices.58 Failure to consider ESG factors in asset holdings may
constitute a breach in fiduciary duty by intentionally overlooking the possibility of
maximising long-term risk-adjusted returns. This was the conclusion of the Freshfields
report in 2005,59 and we strongly believe that this interpretation of fiduciary duty holds
even truer today.60

57 Keith Johnson, “Introduction to Institutional Investor Fiduciary Duties,” International Institute for Sustainable Development Report
(February 2014), p. 44.
58 Peter Ellsworth and Kirsten Snow Spalding, “The 21st Century Investor: CERES Blueprint for Sustainable Investing,”
Summary Report (June 2013).
59 A legal framework for the integration of environmental, social and governance issues into institutional investment (2005).
60 Fiduciary Responsibility (2009).

19
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

Conclusion

If we redefine societal wealth to mean “the range of human problems it has solved and how
available it has made those solutions to its people”61 then we must not only continue the
journey towards a more sustainable form of capitalism, but we must also quicken our pace.
Implementing the recommendations outlined in this report could radically transform the
global economy by 2020. Financial markets would incorporate the price of externalities like
unabated carbon emissions that are currently treated as nearly free resources and allocate
capital accordingly.

Furthermore, asset owners, asset managers and companies would, in the process, adopt a
more holistic definition of fiduciary duty - one which incorporates sustainability and shapes
investment frameworks as a result. In so doing, investors would help mobilise action
towards successfully addressing urgent sustainability issues like enforcing the carbon budget
while simultaneously building profitable investment positions for long-term gain.

Thoughtful questions that ignite a dialogue around change will be powerful tools for reform.
How can I mobilise capital in order to price carbon? How does my fund manager integrate
sustainability analysis into the investment process? Does my pension plan incorporate
sustainability as a key consideration? Will my company’s operational viability be challenged
by natural resource scarcity? How do I help more consumers to become aware of the global
effects of their purchasing decisions? Investors and business executives alike are now
equipped with the economic case for action. However, as Goethe observed, “Knowing is not
enough; we must apply. Willing is not enough; we must do.”

 We have the knowledge; now we must do.

61 Eric Beinhocker and Nick Hanauer, “Redefining Capitalism,” McKinsey Quarterly (September 2014), No. 3.

20
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

References

B Lab, Launch Event of B Corp in Europe Carbon Tracker Initiative, Unburnable Carbon – Are
(21 April 2015), http://bcorporation.eu/launch-b-corp- the world’s financial markets carrying a carbon bubble?
in-europe. (2014), www.carbontracker.org/wp-content/
uploads/2014/09/Unburnable-Carbon-Full-rev2-1.pdf.
Jeffrey Ball, “The Environment and the Bottom Line:
Jean Rogers of the SASB says investors need better Mark Carney, “Inclusive capitalism: creating a sense of
information,” Wall Street Journal (30 March 2015), the systemic,” Speech at the Conference on Inclusive
www.wsj.com/articles/the-environment-and-the-bot- Capitalism: London (27 May 2014),
tom-line-1427773182. www.bankofengland.co.uk/publications/
Documents/speeches/2014/speech731.pdf.
Eric Beinhocker and Nick Hanauer, “Redefining Capi-
talism,” McKinsey Quarterly (September 2014), No. 3, Mark Carney, “Letter from Mark Carney on Stranded
www.mckinsey.com/insights/corporate_ Assets,” Bank of England, Supervisory Activities – Cli-
social_responsibility/redefining_capitalism. mate Change Adaptation Reporting (30 October 2014),
www.bankofengland.co.uk/pra/Pages/
Benefit Corp, “State by State Status,” Information supervision/activities/climatechange.aspx.
Center, http://benefitcorp.net (30 March 2015).
Damian Carrington, “Bank of England warns of
Benefit Corp, “Search,” Information Center, huge financial risk from fossil fuel investments,”
http://benefitcorp.net/find-a-benefit-corp/search The Guardian (3 March 2015),
(30 March 2015). www.theguardian.com/environment/2015/mar/03/
bank-of-england-warns-of-financial-risk-from-fossil-
Sheila Bonini and Steven Swartz, “Profits with fuel-investments.
purpose: How organizing for sustainability can
benefit the bottom line,” McKinsey on Sustainability CDP, Global Corporate Use of Carbon Pricing (2014),
& Resource Productivity (July 2014). https://www.cdp.net/CDPResults/global-price-on-
carbon-report-2014.pdf.
BP Global, “Shareholder Resolution 25,” Annual
General Meeting (21 April 2015), www.bp.com/en/ Ceres, “Shareholders File Resolutions to Press Fossil
global/corporate/investors/annual-general-meeting/ Fuel Companies on Low-Carbon Strategies, Carbon
notice-of-meeting/shareholder-resolution.html. Asset Risk,” Press Release (12 February 2014),
www.ceres.org/press/press-releases/shareholders-
Francois Brochet, Maria Loumioti and George file-resolutions-to-press-fossil-fuel-companies-on-low-
Serafeim, “Speaking of the Short-Term: Disclosure carbon-strategies-carbon-asset-risk.
Horizon and Managerial Myopia,” Harvard Business
School Accounting & Management Unit Working Gordan Clark, et al., From the Stockholder to the
Paper No. 12-072 (12 March 2015), Stakeholder – How Sustainability Can Drive Financial
http://ssrn.com/abstract=1999484. Outperformance, (Oxford: Smith School of Enterprise
and the Environment at the University of Oxford and
Chris Bryant, “A corporate balance sheet with a little Arabesque Asset Management, March 2015),
added love,” Financial Times (19 November 2014), https://yoursri.com/news/arabesque-partners-and-ox-
www.ft.com/cms/s/0/20b4fe80-6b19-11e4-be68- ford-university-update-sustainability-meta-study.
00144feabdc0.html#axzz3XvaQ2sEx.

21
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

References continued

Climate Bonds Initiative, “Swedish bank SEB tops FairPensions, The Enlightened Shareholder:
annual Green Bond Underwriters League Table,” Clarifying investors’ fiduciary duties (2012),
Media release (15 January 2015), www.climatebonds. www.nuffieldfoundation.org/sites/default/files/files/
net/files/files/Media%20release%20-%20 EnlightenedFiduciaryReport.pdf.
Underwriters%20League%20Table%202014.pdf.
Freshfields Bruckhaus Deringer, “A legal framework
Credit Suisse, Global Wealth Report 2014 (2014), for the integration of environmental, social and gov-
https://publications.credit-suisse.com/tasks/render/ ernance issues into institutional investment,” Asset
file/?fileID=60931FDE-A2D2-F568-B041B58C5EA591A4. Management Working Group of the UNEP Finance
Initiative (October 2005), www.unepfi.org/fileadmin/
Deloitte, “Mind the Gaps,” The 2015 Deloitte Mil- documents/freshfields_legal_resp_20051123.pdf.
lennial Survey (2015), www2.deloitte.com/content/
dam/Deloitte/global/Documents/About-Deloitte/ Laurence Fink, “Our Gambling Culture,” Perspectives
gx-wef-2015-millennial-survey-executivesummary.pdf. on the Long-Term: Building a Stronger Foundation for
Tomorrow (2015), http://viewer.zmags.com/
Elroy Dimson, Oğuzhan Karakaş and Xi Li, publication/a1b195ee#/a1b195ee/10.
Active Ownership (13 August 2014).
The Generation Foundation, Stranded Carbon Assets
Kristin Eberhard, “All the World’s Carbon Pricing (2013), http://genfound.org/media/pdf-generation-
Systems in One Animated Map,” Sightline Daily (2014), foundation-stranded-carbon-assets-v1.pdf.
http://daily.sightline.org/2014/11/17/all-the-worlds-
carbon-pricing-systems-in-one-animated-map/ The Generation Foundation, Sustainable Capitalism
(30 March 2015). (2012), http://genfound.org/media/pdf-generation-
sustainable-capitalism-v1.pdf.
Peter Ellsworth and Kirsten Snow Spalding, “The
21st Century Investor: CERES Blueprint for Sustainable The Generation Foundation & KKS Advisors, Earn-
Investing,” Summary Report (June 2013), ings Guidance – Part of the Future of the Past (2014),
www.ceres.org/resources/reports/the-21st-century- http://genfound.org/media/pdf-earnings-guidance-
investor-ceres-blueprint-for-sustainable-investing- kks-30-01-14.pdf.
summary.
Al Gore, The Future – Six Drivers of Global Change,
Jed Emerson and Tim Little, “The Prudent Trustee – (New York: Random House, 2013).
The Evolution of the Long-Term Investor,” The Gener-
ation Foundation (2005), http://genfound.org/media/ Al Gore and David Blood, “A Manifesto for Sustainable
pdf-the-prudent-trustee.pdf. Capitalism,” The Wall Street Journal (14 December
2011), www.wsj.com/articles/SB100014240529702034
European Union, Directive of The European Parlia- 30404577092682864215896.
ment and of the Council amending Directive 2013/34/
eu as regards disclosure of non-financial and diversity Al Gore and David Blood, “Strong Economic Case for
information by certain large undertakings and groups Coal Divestment,” Financial Times (6 August 2014),
(Brussels, 2014), http://register.consilium.europa.eu/ www.ft.com/cms/s/0/46ff6e44-0cd8-11e4-90fa-
doc/srv?l=EN&f=PE%2047%202014%20INIT. 00144feabdc0.html.

22
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

References continued

Al Gore and David Blood, “The Coming Carbon Asset Keith Johnson, “Introduction to Institutional Investor
Bubble,” The Wall Street Journal (30 October 2013), Fiduciary Duties,” International Institute for Sustaina-
www.wsj.com/articles/SB10001424052702304655104 ble Development Report (February 2014),
579163663464339836. www.reinhartlaw.com/Documents/
art140402%20RIIS.pdf.
Caroline Holtum, “Expert views: sustainability and
business education,” The Guardian (13 May 2014), Mozaffar Khan, George Serafeim and Aaron Yoon,
www.theguardian.com/sustainable-business/ “Corporate Sustainability: First Evidence on Mate-
sustainable-business-education-expert-views. riality (Working Paper),” Harvard Business School
(2015), www.hbs.edu/faculty/Publication%20Files/15-
IIRC, The International Framework (2013), 073_8a7e13e5-68c5-4cc3-a9a0-a132bbef3bc7.pdf.
www.theiirc.org/wp-content/uploads/2013/12/13-
12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf. Dinah Koehler and Eric Hespenheide, “Finding the
Value in Environmental, Social, and Governance Per-
International Energy Agency, World Energy Outlook formance,” Deloitte Review, Issue 12 (2013),
(2012), www.iea.org/publications/freepublications/ https://www2.deloitte.com/content/dam/Deloitte/
publication/WEO2012_free.pdf. global/Documents/About-Deloitte/dttl_deloittereview_
finding_the_value_in.pdf.
Ioannis Ioannou and George Serafeim, “The Con-
sequences of Mandatory Corporate Sustainability Law Commission, Fiduciary Duties of Investment
Reporting: Evidence from Four Countries,” Harvard Intermediaries (2014), http://lawcommission.justice.
Business School Research Working Paper No. 11-100 gov.uk/docs/lc350_fiduciary_duties_summary.pdf.
(20 August 2014), http://ssrn.com/abstract=1799589.
McKinsey & Company, Perspectives on the Long-
IPCC, 2014: Climate Change 2014: Synthesis Report. Term: Building a Stronger Foundation for Tomorrow
Contribution of Working Groups I, II and III to the Fifth (March 2015), http://viewer.zmags.com/publication/
Assessment Report of the Intergovernmental Panel on a1b195ee#/a1b195ee/10.
Climate Change [Core Writing Team, R.K. Pachauri and
L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, Malte Meinshausen, et al., Greenhouse-gas emissions
www.ipcc.ch/pdf/assessment-report/ar5/syr/SYR_ targets for limiting global warming to 2°C (London:
AR5_FINAL_full.pdf. Macmillan Publishers Limited, 2009),
https://www1.ethz.ch/iac/people/knuttir/papers/
IPCC, “IPCC Fifth Assessment Report,” Lima Climate meinshausen09nat.pdf.
Action High Level Session (2014), www.ipcc.ch/news_
and_events/docs/COP20/LCAHLD.pdf. Mercer, Stikeman Elliott LLP, and The Generation
Foundation, Building a Long-Term Shareholder Base
IRRC Institute, The Alignment Gap Between Creating (2013), http://genfound.org/media/pdf-long-term-
Value, Performance Measurement, and Long-Term shareholder-base-17-12-13.pdf.
Incentive Design (2014), http://irrcinstitute.org/pdf/
alignment-gap-study.pdf. Morgan Stanley, “Embedding Sustainability into
Valuation,” Morgan Stanley, (January 2015).

Net Impact, https://netimpact.org (30 March 2015).

23
 ALLOCATING CAPITAL FOR LONG-TERM RETURNS | May 2015

References continued

New Economics Foundation, Reducing economic State of Delaware, “About Agency,” Division of Corpo-
inequality as a Sustainable Development Goal (2014), rations, http://corp.delaware.gov/aboutagency.shtml
http://b.3cdn.net/nefoundation/226c9ea56ee0c9e (30 March 2015).
510_gqm6b9zpz.pdf.
Kristi Stathis, “Ocean Tomo Releases 2015
Nielsen Holdings N.V., “Doing Well by Doing Good,” Annual Study of Intangible Asset Market Value,”
Global Corporate Social Responsibility Report (2014), Ocean Tomo Insights Blog (5 March 2015),
www.nielsen.com/content/dam/nielsenglobal/apac/ www.oceantomo.com/blog/2015/03-05-ocean-tomo-
docs/reports/2014/Nielsen-Global-Corporate-So- 2015-intangible-asset-market-value.
cial-Responsibility-Report-June-2014.pdf.
Lawrence Summers and Ed Balls, Report of the
Timothy Nixon, “Building a Great Return and a Commission on Inclusive Prosperity, (Washington, DC:
Better World with Your Savings,” AlphaNow: Center for American Progress, 2015),
Thomson Reuters (19 February 2015), http://alphanow. www.americanprogress.org/issues/economy/report/
thomsonreuters.com/2015/02/building-great-return- 2015/01/15/104266/report-of-the-commission-on-
better-world-savings/. inclusive-prosperity.

William Ransome and Charles Sampford, Ethics Grant Thornton, “How integrated reporting helps mid-
and Socially Responsible Investment: A Philosophical sized businesses,” FDIntelligence (2 April 2014),
Approach, (Australia: Ashgate, 2011). www.grant-thornton.co.uk/en/Thinking/FD-Intelli-
gence/Issues/Integrated-reporting/.
RobecoSAM SI Research & Development and
Robeco Quantitative Strategies, “Alpha from Charles Tilley, “Perspectives on the long term,”
Sustainability,“ RobecoSAM White Paper (June 2014), Book Excerpt from McKinsey Quarterly, Dominic
www.robecosam.com/images/Alpha_from_ Barton and Mark Wiseman (March 2015),
Sustainability_06_2014.pdf. www.mckinsey.com/insights/leading_in_the_21st_
century/perspectives_on_the_long_term.
Mike Scott, “Fossil Fuel-Free Index will help Investors
Manage Climate Risks,” Forbes (5 January 2014), United Nations Environment Programme Finance
www.forbes.com/sites/mikescott/2014/05/01/ Initiative, Fiduciary Responsibility (2009),
fossil-fuel-free-index-will-help-investors-manage- www.unepfi.org/fileadmin/documents/fiduciaryII.pdf.
climate-risks/.
U.S. Securities and Exchange Commission,
George Serafeim, Integrated Reporting and Investor “Mutual Fund Investing: Look at More Than a
Clientele (14 January 2014). Journal of Applied Fund’s Past Performance,” Investor Publications,
Corporate Finance (forthcoming). Available at SSRN: www.sec.gov/investor/pubs/mfperform.htm
http://ssrn.com/abstract=2378899. (24 April 2014).

Shared Value, “What is Shared Value,” The World Bank, “73 Countries and Over 1,000
http://sharedvalue.org/about-shared-value Businesses Speak Out in Support of a Price on
(30 March 2015). Carbon,” News (22 September 2014),
www.worldbank.org/en/news/feature/2014/09/22/
governments-businesses-support-carbon-pricing
(30 March 2015).

24