Stories
Stories
Of Value and Values
On the Horns of an Investment Dilemma
Financial management firms that focus on sustainable investing have been gaining ground for twenty years now. As an example, Principles for Responsible Investment (PRI), a global association of nearly 500 asset owners and managers, represented approximately $18 trillion in assets in 2008. One such member of PRI is Generation Investment Management, a company founded by David Blood (MBA ’85) and former U.S. Vice President Al Gore, with offices in New York, London, and Sydney. Generation considers nonfinancial factors such as the environment, social issues, economic development, and corporate governance in a rigorous, bottom-up approach employing analysts who integrate sustainability research into fundamental equity analysis.
But what happens when an appealing investment opportunity also pits two of Generation’s sustainability criteria — economic development and the environment — against one another? In a recent case authored by Professor of Management Practice Sandra Sucher, David Lowish, a director in charge of Generation’s global industrial sector, is tracking ABB India, a well-managed subsidiary of a Swedish-Swiss engineering company with a proven track record for delivering power to India. On the one hand, ABB India represents hope for millions of Indians in the form of life-changing electricity. But because that electricity will be generated primarily by coal, Generation will also contribute to increasing the carbon dioxide emissions that cause global warming.
The case, which is taught in the first-year MBA course Leadership and Corporate Accountability, confronts students with the same dilemma. And according to Sucher, the discussion was intense: “Students pulled data from the case to make a strong argument from both sides of the decision,” she says. “There were those who were quite concerned about the environmental impact and others with experience on the ground in rural India who spoke of the need for electricity in reducing poverty and bringing about economic growth.”
Underlying the case is a broader question for students to consider: Is it possible to generate competitive returns through sustainable investing? “Generation Investment’s approach challenges the conventional reasoning of how to achieve financial perfor-mance if you’re an asset manager,” Sucher notes. “There was a fair amount of suspicion on the part of some students — the sense that if Generation is enjoying a good perfor-mance, then the company can’t be doing what it claims. Others were inspired by its approach.”
Some 550 students submitted questions for David Blood when he visited the HBS campus last spring. One student inquired how Generation manages to do the appropriate level of due diligence in emerging markets that lack transparency. Another wondered how Generation’s practice of sometimes holding investments for only a short time meshed with its commitment to sustainability. Blood’s videotaped answers to these and other pointed questions will be incorporated in future teaching of the case.
As a last point, Sucher tells the story of an HBS colleague teaching the case who polled students to ask if they bought into Generation’s investment strategy. Two-thirds said they did not; one-third did. When students were then asked if they thought the firm’s approach was a fad or the wave of the future, the results reversed: one-third thought it was a passing fancy, while two-thirds did not. So, despite their reservations, a majority seemed to feel they were witnessing a significant shift toward sustainable investing in the field of investment management. “I think that vote captured a powerful tension inside the students,” she remarks. “They have plenty of mathematical and financial models to support the point of view that restricting the size of an ‘investable universe’ should limit Generation’s returns. But as a bottom-up stock picker, Generation doesn’t artificially constrain its choices, and the performance of the firm at this time would suggest that its returns can be competitive with traditional global equity funds whose returns are tracked in relation to the benchmark MSCI World Index.” If students learn that they don’t need to trade their values for value (in the words of Generation’s David Blood), however, they also come to understand that this approach has its own difficult decisions.
— Julia Hanna
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