Al Gore has taken on the root cause of most of our modern societal ills: unsustainable business practices. He and David Blood, a partner with Gore in Generation Investment Management, have written a Manifesto for Sustainable Capitalism:
Before the crisis and since, we and others have called for a more responsible form of capitalism, what we call sustainable capitalism: a framework that seeks to maximize long- term economic value by reforming markets to address real needs while integrating environmental, social and governance (ESG) metrics throughout the decision-making process.
Such sustainable capitalism applies to the entire investment value chain—from entrepreneurial ventures to large public companies, seed-capital providers to institutional investors, employees to CEOs, activists to policy makers. It transcends borders, industries, asset classes and stakeholders.
And how would this work? And will capitalists willingly change their ways? Generation has also written a more in depth white paper on Sustainable Capitalism that makes a clear argument: the rejection of short-term thinking is necessary to increase long-term value creation. To allow capitalists to make a transition to a long-term timeframe in their thinking, we have to change the way the game is played. Specifically they recommend five key actions:
- Identify and incorporate risks from stranded assets — Assets that would change dramatically in value under new approaches to long-term scenarios of change might be ‘stranded’, and as a result give businesses an incentive to maintain the status quo, and avoid transition to more sustainable models of operation.
- Mandate integrated reporting — Integrated reporting of financial data along with environmental, social and governance factors will allow investors to make more informed judgments about investment options.
- End the default practice of issuing quarterly earnings guidance — Quarterly earnings guidance can incent executives to manage for the short term.
- Align compensation structures with long-term sustainable performance — Financial rewards should be tied to long-term value creation, using multiyear milestones for performance evaluation.
- Encourage long-term investing with loyalty-driven securities — Short-termism makes for a more volatile and unstable market, driving away long-term investment; loyalty-driven securities provide additional financial rewards for holding securities for a longer time, which leads to more stable markets.
There is no doubt that these ideas are sweeping and revolutionary. We will have to see what the response is from the international financial community… if they can take their eyes off the newest flare-up in the Euro debt crisis, China’s slowing growth, or the spike in US gas prices. It might take a generation for this change to happen.