As McKinsey research indicates, executives around the world increasingly recognize that the creation of long-term shareholder value depends on a corporation’s ability to understand and respond to increasingly intense demands from society.1 No surprise, then, that the topic of socially responsible investing has been gaining ground as investors seek to incorporate concepts like sustainability and responsible corporate behavior into their assessments of a company’s long-term value.
Yet socially responsible investing has always been an awkward science. Early approaches simplistically screened out “sin sectors” such as tobacco. Subsequent evolutions tilted toward rewarding good performers, largely in the extraction industries, on the basis of often fuzzy criteria promulgated by the corporate social-responsibility movement. These early approaches tended to force an unacceptable trade-off between social criteria and investment returns.
Three years ago, former US Vice President Al Gore and David Blood, previously the head of Goldman Sachs Asset Management, set out to put sustainability investing firmly in the mainstream of equity analysis. Their firm, Generation Investment Management, engages in primary research that integrates sustainability with fundamental equity analysis. Based in London and Washington, DC, Generation has 23 employees, 12 of them investment professionals, and a single portfolio invested, at any given time,...