ImpactAlpha, Mar. 25 – Health and well-being. Remote work and collaboration. Resilient food systems. Long-term sustainable investment theses once relegated to the fringes of the capital markets are suddenly fundamental to the global economy.
“People being forced to stay in place is revealing a lot of the futility of a lot of our activities” says Colin le Duc, a co-founder and partner of Generation Investment Management, the $25 billion asset manager also co-founded by Al Gore and David Blood. “A silver lining may just be the fact that people realize that having a more humble approach to life may actually be beneficial to everyone.”
Generation has been waving the sustainability flag since 2004. The COVID-19 outbreak has revealed the fragility of our system as it’s currently organized and is making a strong case for the principles of sustainable investment, said le Duc in a conversation with ImpactAlpha. “Fundamentally, sustainable businesses are better long-term businesses, and as a consequence should be better long term investments.”
Based in San Francisco, le Duc oversees Generation’s multi-billion private equity portfolio. One sustainability trend accelerated by the pandemic: Remote collaboration. Generation’s portfolio includes electronic-agreements company DocuSign, project management software Asana, and Remitly, which enables digital remittances.
The current crisis may be strengthening the case for sustainable investing, but “the ball was already rolling pretty quickly thanks to cultural changes and citizen activism in particular around climate,” he says. “This is just an accelerant for a short period of time on a trajectory that is inevitable. Sustainability is imperative.”
ImpactAlpha: What does the pandemic mean for Generation Investment Management’s sustainability thesis?
Colin le Duc: It strengthens it, fundamentally. It strengthens the case for long term thinking and for long term investing. It strengthens the case for public policy and the need for intervention and the importance of governance, broadly speaking at a system level and the importance of public intervention in times of crisis.
It strengthens the case for resiliency, which is demonstrated by distributed systems and networks and through supply chains and systems that are fundamentally resilient to a lot of different things. Resilient not just to a virus, but also to climate change and the rest of it.
This has basically revealed the fragility of our system as it’s currently organized and is making a very very strong case for the principles of sustainability. We believe there is opportunity to exploit a research-driven, long-term investing approach, where these considerations are fully integrated into long-term thinking. Fundamentally sustainable businesses are better long term businesses, and as a consequence should be better long term investments.
ImpactAlpha: How did your understanding of the fragility of the system shape your investment approach?
le Duc: We like to invest in what we refer to as the real needs of the economy, focusing on long-term food supply, or access to healthcare, or jobs that are meaningful and widespread and a living wage. All of these types of things are propagating a way of thinking that is driven by a much more sustainable system. That’s what our research has been pointing to since we founded the firm 16 years ago.
I don’t think we’re pretending that our investments are de-risking the system at a high level. What Generation is doing is really using a sustainability lens to make better long term investments. By the nature of focusing on the long term you’re looking inherently at the durability and resilience of that advantage. Having a system point of view has always been core to our research in terms of working out which companies are best positioned.
ImpactAlpha: What sort of long term, durable companies ended up in your portfolio? How are they faring over the medium and longer term, if not immediately during the crisis?
le Duc: We do both public and private equity. Trends like remote collaboration, have been part of our portfolio for a while. If you look at companies like DocuSign, for example, or companies like Asana, or remote financial services like companies like Remitly, that are enabling digital remittances, all of those types of companies are very much on the right side of history when it comes to the impact of this thing.
ImpactAlpha: That makes sense in a pandemic. But why does remote collaboration make sense as a long term thesis?
le Duc: Remote collaboration has always been part of our thesis of a less impactful lifestyle, from a resource perspective, and also a recognition of the long-term future of work. Both of those things have dovetailed together. If you look at the case around something like DocuSign, it is in large part due to the resource intensity of moving legal documents around and stopping having to do that by sending every single legal document FedEx around the world. You don’t have to do that anymore. Those would fit into a worldview that basically just says that the future of work is going to be increasingly remote and require a lot more collaboration and a lot less travel.
ImpactAlpha: How are your motivations for founding Generation Management relevant in the current moment?
le Duc: The mission that we founded the business on, which was to prove the investment case for sustainable investing, remains as relevant today as it did in 2004. We still have work to do to persuade all capital that sustainable investing is best practice. Generation is a dedicated to sustainable investment. It’s all we do and all we’ll ever do is sustainable investing. The challenge for a lot of incumbent asset managers is how to integrate ESG, sustainability, and impact, across legacy assets and portfolios and strategies.
[The coronavirus crisis] accelerates the need to focus on ESG integration if you’re a mainstream manager. The risk management dimension of ESG is really being demonstrated at the moment. Typically sustainable investing portfolios do better in difficult times because there is a switch to quality and sustainable businesses are typically higher quality businesses. That proved out ’08-’09, where the relative performance of a lot of sustainable portfolios, ourselves included, did very well in those markets. A lot of the short term superfluous types of businesses that are out there and get revealed for what they are, which is, maybe a way of making money in the short term but not a good way of making money in the long term, or in a capital constrained environment.
Look at the oil price. You can look at the level of bankruptcies in the oil and gas complex that are going on today and all of the companies that are out of the money at $25 oil. It’s really quite an epic wipeout of a lot of the fossil fuel complex. Not only are these companies challenged from an oil price perspective but they’re also on the wrong side of history when it comes to carbon emissions. That’s just not a good long term investment.
ImpactAlpha: Will there be a shakeout among legacy investment firms that weren’t in those kind of long-term quality investments, even if they were trying to position themselves that way?
le Duc: I think there’s no doubt about that. It’s actually a healthy thing. We’ve seen this up and down before, where sometimes sustainability is perceived as a bit of a luxury good when times are good and people get interested in it. It’s often perceived as a self actualization type of thing, where actually it’s a very fundamental thing. Sustainability is about providing to the base of the pyramid just as much as it is about providing to the peak of the pyramid. For some firms that have been professing their commitment to sustainability, this will be a true test of that commitment.
Can they follow through on all the statements they made when the markets were good? That will be a true test of what they really stand for. It’s a bit like when you look at the oil and gas companies putting out great adverts and press and media about their commitments to limit their emissions. All you’ve actually got to do is look at their capital expenditure and you can see that it’s still very focused on continuing the exploration and production and refining of fossil fuels.
What’s the truth? I think the truth will be revealed as the tide has gone out. There’s an authenticity advantage to people who are committed and that’ll play through, at the company level as well. Truly trusted brands around sustainability will gain even more value. That’s not just at the investment management level, I mean at the company level.
ImpactAlpha: Is there an area of your portfolio that is under threat in this moment?
le Duc: An area that we are concerned about is businesses that are reliant on small and medium sized businesses. The SMB [small and medium-sized businesses] space is very challenged, obviously. That’s an issue. There are two companies, and again this is public knowledge, that are in our portfolio. One is Gusto and the other is Toast. Gusto provides payroll and access to healthcare and that kind of stuff. There are a lot of SMEs, but let’s see what happens to that underlying cohort, which will probably be going through some difficult times repairing. Toast provides restaurant point-of sale systems software and really helps drive efficiency in the restaurant space, and in particular around food waste, which is why we are interested in them. Obviously restaurants are struggling, so let’s see what happens to that one.
ImpactAlpha: What warnings signals and opportunities are you watching for right now?
le Duc: One thing we’re watching is the unemployment rate. I think it’s a very clear indicator of where we are and that shot up dramatically.
From a macro policy perspective intervention, these very large government interventions are incredibly interesting. The Defense Production Act that Trump is proposing to pass, for example. The possibility of the renationalization, even if temporary, of private industry is unprecedented in peacetime.
There’re these massive monetary injections from central banks. The thing to look out for there is their effectiveness. A key topic that we’re thinking about is: do these central bankers and the powers that be actually have the tools at their disposal to control things anymore? Interest rates can’t go much lower than they already are. So, what are the tools, would be a big question.
Then what does this all mean for the climate and climate diplomacy, private capital and global collaboration on global topics? In one way it’s a dry run for what needs to happen on climate in terms of the war footing in the face of the crisis. But equally it reveals how unseriously the world has been taking the climate threat. Look what happens when there’s perceived to be a real threat. The world mobilizes. But with climate, they basically haven’t mobilized, because look at what they could do. That’s a huge, huge topic and then a huge opportunity as well because it’s like, “guys, we did it with the virus, let’s do it with climate.”
ImpactAlpha: Is this the sustainability disruption you have been calling? Maybe it didn’t arrive in the way you might have predicted, but is it here?
le Duc: Not necessarily, in our view. The ball was already rolling pretty quickly thanks to cultural changes and citizen activism in particular around climate. I feel this may just be something that pushes it along further. Putting sustainability as a central organizing principle in the economy and human activity is a long-term driver of change. It’s not a short-term catalyst. It’s a long term catalyst. Multiple things are pointing us in the direction of sustainability and pushing us in that direction, including mother nature, through the virus as well as through climate.
That is a slow burn, long-term transition that is happening. This is just an accelerant for a short period of time on a trajectory that is inevitable. Sustainability is imperative.