Can ‘Sustainable’ Investing Pay Off? A Report from Wharton Says Yes

1: *How*, exactly, does the Generation model “shift the incentives of financial and business operations to reduce the environmental, social, political, and long-term economic damage being caused by unsustainable commercial excesses”? Is it basically just by saying to companies “if you behave this way, then we will be more likely to buy your stock”? It seems to me that whether or not Generation has done well for itself and its investors, there’s really no evidence at all that it has shifted any incentives even in the companies it invests in, let alone in the companies that it *doesn’t* invest in.

To take a big example, how, say, are Exxon Mobil’s incentives shifted by the the existence of Generation, and companies like it? The story says that Generation is “reducing the destructive side effects of modern capitalism”, but I don’t see any evidence of that?

2: The benchmark being used here is the MSCI World, which, fine, is as good a benchmark as any, I guess. (Although it ignores the bulk of all investable global assets, in that it includes no fixed-income bonds. Does Generation invest in bonds at all? Or anything other than publicly-listed stocks? From the story I’d guess not, but who knows.)

Still, you have to set your benchmark ex ante, not ex post. Did Generation say, when it was founded, that its benchmark was going to be the MSCI World? Because if it didn’t, this is basically the investment version of p-hacking. [JF note: More on p-hacking here.] The main benchmark that investors tend to use is the S&P 500, which has significantly outperformed the MSCI World over the past 10 years.

3: What is this Mercer “survey” on which the claims of outperformance are based? The piece annoyingly has no hyperlinks, even to things like public Andy Haldane speeches, so I’m unclear on whether the survey is even public. [JF note: I’ll try to restrain myself in general, but this doesn’t have links because it’s an article from the print magazine.] And is the 12.1% figure before or after Generation’s fees? How much is Generation charging for its revolutionary model?

4: More p-hacking: all we’re being told about here is the 10-year return of a single Generation fund, which may or may not be the one which is closed to new investment. Remember that because Generation is highly secretive about its results, it gets to open itself up to Jim Fallows on its own schedule, at exactly the point at which it can claim the best results. What we don’t see in the article is even a simple chart of the value of $1,000 invested in Generation: all we get is a single datapoint of the 10-year annualized return. Which is interesting enough, as far as it goes, but how’s the 5-year return? The 3-year return? And, more importantly, what are the *investor* returns, as opposed to the *investment* returns?

If I could only get one number from Generation, this is the one I’d be most interested in: what is the average annualized return per dollar invested with the company? Here’s my suspicion: that Generation launched with a small amount of seed investment from its founders and maybe a passel of other Davos Man types. (Big institutional investors don’t even tend to consider a fund for investment until it’s at least 3 years old.)

During its first three years, when it was very small, Generation managed to do extremely well — so well, indeed, that it was able to attract billions of dollars in institutional capital. (We’re told Generation has $12 billion in AUM, although investment firms have all manner of ways of exaggerating that number, and I’m not sure I believe it.) But in the years since — in the years in which it has been a multi-billion-dollar investment fund — Generation has not been able to replicate the results it had when it was small, and as a result, none of its institutional investors have seen the 12% returns that you talk about. Has Generation actually managed to prove that it can deliver above-market returns to investors? I’m still unconvinced on that front.

5: Talking of which: Why is the fund closed to new investment? Ambitious investment managers like Blood and Gore don’t tend to do such things unless there’s some kind of problem with the fund in question. Best case scenario is that the fund can’t scale: it works when it’s small, but not when it has real money. Worst case scenario is that the fund is just doing really badly, however well it did in the early years.

For that matter, what’s with the $3m minimum, not being open to normal investors, etc? If this is going to revolutionize capitalism, rather than just being a feel-good diversification play for the ultra-rich, why can’t all of us be part of it? And why is Al Gore, of all people, gating himself off from 99.9% of the population who might be interested in going down this road?

6: The noncommittal quote from David Rubenstein is golden. But isn’t it that case that the likes of Rubenstein have vastly more ability to actually change the way that companies are run than the likes of Blood & Gore? Rubenstein has almost total control of the companies he buys. He can run them as sustainably as he likes, with an eye to as many different bottom lines as he likes. He can change them in deep, far-reaching ways. Whereas all that Generation can do, really, is buy and sell stocks on the secondary market.

Even Larry Fink, with his trillions under management, can’t do much more than that: look how much of his company is iShares, for instance, and other passive investment vehicles which give managers essentially no discretion over what to buy and sell.

7: But also, Rubenstein is right about constraints. Generation is trying to make money by trading in and out of roughly 125 companies, all of which are, to a greater or lesser degree, “sustainable”. That’s great. But what would happen if it then gave itself the *option* to trade in and out of other companies which are *not* sustainable? That option has some value, no? Would it not help if Generation understood Exxon Mobil well enough to be able to short it, rather than just taking long positions in its cleantech competitors?

8: There’s lots of talk in this piece about the problems of short time horizons, with a hinted implication that Generation’s time horizons are long, or at least longer. But some numbers would be really helpful here. Are Generation’s time horizons longer than any other institutional fund manager? How long does Generation hold on to its positions, on average, and how does that number compare to its more conventional competitors? That kind of thing. I’m perfectly willing to believe that Generation’s *analysis* involves a long-term outlook. Almost all stock analysis does. But does its investment behavior reflect that?

9: There’s also a bunch of talk about inequality, and wealth disparity, and that kind of thing — but how does running billions of dollars for major institutional investors, and delivering above-market returns on those billions, *decrease* inequality? Surely the more successful Generation is, the richer rich people like Al Gore become, and the more that inequality goes up.

10. It seems obvious to me that Gore’s job at Generation is the classic chairman job of asset-gathering. He’s not picking stocks, or making buy or sell decisions, or anything like that: he’s a sales guy, trying to persuade huge institutions to give him some of their billions. He’s also had ten years to perfect his sales pitch. When faced with a guy like that, you naturally need to have a certain degree of skepticism about what he’s selling, unless you can independently come to the same conclusions.

But it seems to me that Gore has almost complete control over what he chooses to reveal about Generation’s results, when he chooses to reveal it, and what he keeps secret. No one can do the kind of independent analysis on Generation that Generation does on the companies it invests in. Or if they can, they can only do so under strict NDAs. I’d love to know whether you talked to any of the investors in Generation, to see whether they are actually as happy with Generation’s returns as Gore would like us to think that they are. [JF: OK, I can’t resist on this either. Yes.] Or, better yet, whether he talked to anybody who kicked the tires and decided *not* to invest.

11. How does the actual business of buying and selling work? This is incredibly vague to me. The only example in the article is that of Kingspan, where we’re told that Generation bought 5% of the company in 2007, and then bought more and more stock when it got cheaper. Which implies to me that it should have well over 5% of Kingspan right now — but a quick Google search shows that in fact it only has 3.87%. Did Generation cash out when its investment became profitable? Did it even make money on Kingspan? I’m very unclear on what the Kingspan story is meant to be telling us.

12. There’s a lot of mean stuff written in this article about other firms on both the buy side and the sell side, and how short-termist they are, and how obsessed they are about stock price, and how their live events and conferences are incredibly narrowly focused, and stuff like that. But of course no names are named, at least on the buy side, and I do wonder how much of a straw man this is. The investors I know tend to spend a very great deal of time looking at long-term trends and the like, while it’s obvious to me that Generation, just like any other shop, has traders who are ultimately in charge of buy and sell decisions and who Jim probably didn’t talk to at all. Is Generation really all that different? Isn’t compensation based on 3-year performance, for instance, pretty standard for this kind of company?

13. In any event, even if Generation and investors like it do succeed in getting above-market returns from long-term investments in sustainable companies, how does that change anything? If you’re a long-term investor, after all, then pretty much by definition you’re not a marginal price-setter; that’s always going to be a short-term hedge fund or algobot. The effect on companies’ share prices is going to be de minimis, and the effect of companies’ share prices on the planet is going to be even smaller. I really don’t see how a tweaked investment strategy for rich institutions is going to Reform Capitalism, let alone change the planet, or reduce inequality, or anything like that. I mean, Al Gore is (sorry) no Warren Buffett. And even Warren Buffett hasn’t really changed anything!

Thanks to Felix Salmon for a bracing kickoff to a discussion. Stay tuned for more.

China: World Leader in Female Billionaires

“Women hold up half the sky,” goes one of Mao Zedong’s most famous lines. Now women are starting to hold a larger chunk of the world’s wealth, especially in China.

According to the research institute Hurun Report, eight out of 10 of the world’s richest self-made women come from China. Two-thirds of all self-made women billionaires do, too.


Topping the list is “touchscreen queen” Zhou Qunfei, the founder of Lens, which makes touchscreens for mobile devices. Raised by her blind father in rural Hunan, Zhou dropped out of school at age 16 and moved to Shenzhen, making watch lenses for $1 a day. After starting her own company with about $3,000 in 1993, her big break came when she won a contract from Motorola to make screens for the Razr. Lens listed on Shenzhen’s ChiNext board in March 2015, causing her net worth to spike to a current value of $7.8 billion.

The only non-Chinese women on the list are Elizabeth Holmes, founder of blood-testing company Theranos (which is currently embroiled in scandal), and Diane Hendricks, co-founder of the private roofing-supply company ABC Supply. They’re worth $3.4 billion and $2.7 billion respectively, according to Hurun.

World’s Top 10 Richest Self-Made Women

Hurun Report / Quartz

Oprah Winfrey, America’s iconic female entrepreneur, sits at the number 12 spot.

Hurun’s data shows that China dwarfs the rest of the world when it comes to self-made female billionaires, with 49 of the 73 women that fit the category residing there. The rest live in the U.S., U.K., and just a handful of other countries.

Female Billionaires by Country

Hurun Report / Quartz

As a result, Chinese female entrepreneurs are collectively worth about three times as much as their U.S. counterparts.

Total Wealth of Self-Made Female Billionaires in Dollars

Hurun Report / Quartz

Of China’s 50 wealthiest women overall—those with fortunes both self-made and inherited—Hurun says that 36 earned their fortunes independently.

This comes as individual wealth has skyrocketed in China over the past two decades. But there was an unusually steep rise from 2014 and 2015, when China’s billionaire headcount, including men and inherited wealth, increased about 25 percent, bringing the total of 596.

Number of Billionaires in China by Year

Hurun Report / Quartz

Of course, much of this is paper wealth, not cash. If China’s economy stagnates, billionaire lists like this will get thinner.

A Story I Hope You’ll Read: Al Gore’s Role as the Green Warren Buffett

Astronomers have spotted a strange mess of objects whirling around a distant star. Scientists who search for extraterrestrial civilizations are scrambling to get a closer look.

In the Northern hemisphere’s sky, hovering above the Milky Way, there are two constellations—Cygnus the swan, her wings outstretched in full flight, and Lyra, the harp that accompanied poetry in ancient Greece, from which we take our word “lyric.”

Between these constellations sits an unusual star, invisible to the naked eye, but visible to the Kepler Space Telescope, which stared at it for more than four years, beginning in 2009.

“We’d never seen anything like this star,” says Tabetha Boyajian, a postdoc at Yale. “It was really weird. We thought it might be bad data or movement on the spacecraft, but everything checked out.”

Kepler was looking for tiny dips in the light emitted by this star. Indeed, it was looking for these dips in more than 150,000 stars, simultaneously, because these dips are often shadows cast by transiting planets. Especially when they repeat, periodically, as you’d expect if they were caused by orbiting objects.

The Return of ExIm?

If you have had any working exposure to the way big aviation, infrastructure, telecom, agricultural, or other high-stakes business actually gets done around the globe, you realize that the departures-from-market-optimum created by ExIm are tiny compared with those caused by governments in Asia, Europe, Latin America, the Emirates, etc. If you’d like to read about this at length, I invite you to check out my books Looking at the Sun and China Airborne.

Thus in an economic system modeled solely in a classroom, or consisting entirely of the United States, ExIm would be a waste. But in a world where Boeing, GE, Caterpillar, etc are dealing with usually more subsidized competitors from Asia and Europe, doing without ExIm is a form of unilateral disarmament. I say this based on what I have actually seen over the decades.

(And, yes, I also recognize that according to purist theory, even “unilateral disarmament” in trade competition still makes sense, in maximizing consumer welfare. For why I don’t think that’s the end of the discussion, please see “How the World Works” from back in the 1990s. I’m all in favor of expanded trade! But the U.S. did not grow rich by applying pure Ricardian trade theory, nor did England or Germany or Japan or any place else.)

Here’s a parallel: In principle, all military spending is a big waste. Armies destroy things. Their contracting systems are historically rife with corruption. Everybody would be much better off if military spending everywhere went down.

I can agree completely with that in-principle goal — and yet still consider it an idiotic blindness to realities if someone tried to defund the entire Pentagon to reinforce this theoretical point.


In last night’s installment, I didn’t fully spell out the pro-ExIm argument the way I had in books or 20-plus years ago in the magazine. Instead I just leapt to the end point, saying that willful blindness to real-world consequences amounted to idiocracy. Readers beg to differ! And also take offense at the term. Here is a sample.

One of the friendlier-toned dissents:

I don’t think that opposition to the EX-IM bank ranks on the idiocy scale anywhere near the Republicans denial of global warming or their claims of a link between vaccinations and autism.

There are legitimate concerns about any government subsidy.  Government subsidizes things like sports stadiums and single family housing; when these things are subsidized, there are opportunity costs–other parts of the economy must shrink.  Similarly, the EX-IM bank subsidizes large multinational exporting companies such as Boeng and GE.

You apparently hope that these government subsidies trickle down to U.S. workers and to smaller suppliers to these corporations, and perhaps some of the benefits do trickle down.  But these benefits are the result of exporters offloading the default risk on financing exports from themselves to taxpayers. Additionally, at least to a minor extent, when loanable funds are used to subsidize exports, this competes with and might crowd out funding for non-exporting businesses.

I don’t know enough about this particular issue to say more.  But generally you are even-handed in your analysis of issues.  In this case, you should at least acknowledge the potential costs of the EX-IM bank.

Agreed: any subsidy brings risks and costs. In my judgment and observation, the costs and risks would be worse from doing without. Now, from a writer who generally supports public efforts for the public good:

Obviously I don’t think I’m a zealot, and I like Fred Hochberg [chairman of ExIm, whom I also know and like], and I think I’ve been as outspoken about the wackadoodle GOP as anyone…but I think the Republic would survive the loss of the ExIm Bank.

I find the everybody-else-does-export-subsidies argument somewhat persuasive, but on the whole I doubt we really need a government bank to provide 99.8% safe loans to Boeing and Pemex and the emirate of Dubai.

I think those of us who believe government has a very important role to play in fighting climate change and providing universal health insurance and so forth ought to support getting rid of marginal government roles that it can focus on doing those important things well.

I wrote him back giving my pitch on “this is the flawed world we live in, and you have no idea what mercantilism looks like until you’ve checked out the Chinese / French / etc.” He replied:

That’s fair. I bet I would feel differently if I knew anything about foreign affairs…

I guess what I would say is that it doesn’t seem completely cut-and-dry, and that defenders of the ExIm don’t usually acknowledge that the gross mercantilism you mentioned is gross. I also think the corruption scandals that inevitably seem to pop up at obscure money-sloshing institutions like this really do give government a bad name.

I agree that it’s important to acknowledge the costs and distortions of institutions like ExIm, and insist that they be run well.

Finally, a scolding letter from a reader who I believe is an MBA student at a leading business school. He started with complimentary remarks about my past practice of airing dissenting views. But …

That is why I found the attitude in your latest post on the Ex-Im bank to be so disappointing.

You write that “The people bringing down the Export-Import bank are zealots who care more about their theories than the completely foreseeable damage they are doing to American workers and companies.”

I don’t have a strong view one way or the other on whether the Ex-Im bank is good policy (my sense is that in a perfect world we wouldn’t need it, but in our imperfect world I’m not sure whether it is better or worse than other feasible “second-best” policies). But I do have a strong view that the attitude in the above quote in particular, and your entire post in general, is out of character, factually incorrect, and dangerous.

It is out of character because, as I mentioned earlier, you have a long and admirable history of giving a respectful representation of those that disagree with you (your series on the Iran nuclear deal is one recent example of this).

It is factually incorrect because the opponents of the Ex-Im bank are self-evidently not Ayn Rand fanatics. The opponents include not only the conservative Greg Mankiw and the libertarian leaning but hard to classify Tyler Cowen, but also Senator Obama in 2008. [JF note: this was a throwaway reference in a campaign speech, unrelated to anything Obama has said or done since.] Perhaps in the last few years Obama has started inserting block quotes from the Fountainhead into his speeches, but if so I have somehow missed it.

It is dangerous because it is an example of a habit of thought that closes our minds and prevents us from learning. As soon as we explain our enemy’s disagreement as resulting from some defect in their intellect or character, we feel safe to ignore any of the actual good arguments that identify flaws in our own position. The problem is that it is much easier to find some reason that our enemy is a knave or a fool than it is to question our own beliefs. If this habit is left unchecked, we get our contemporary politics: one group on either side of the aisle, each totally convinced that they are the party of honest, right-thinking folk defending the truth and the light against the pack of morons and zealots on the other side.

This is an easy pattern of thought to slip into – it may even be automatic. But for that reason it is all the more important to consciously fight against it. You have historically been at the vanguard of this fight. I hope that this post is merely a temporary stumble.

I wrote back saying that the tone was a decision rather than a stumble, but that it was based on observations I hadn’t bothered fully to spell out this time. Rather than take the argument through any more cycles right now, I’ll thank these readers and others for weighing in, and encourage readers to look more closely into the issues at stake with ExIm.


Still:  I think it would be a big, pointless, self-inflicted, and self-indulgent policy error to kill off the ExIm Bank.

FIFA’s Blatter Under Pressure

Updates on October 2 at 5:07 p.m.

Visa, McDonald’s, and Coca Cola, among the biggest sponsors of the FIFA World Cup, have called on Sepp Blatter, the head of soccer’s governing body, to resign immediately.

Here’s McDonald’s statement:

The events of recent weeks have continued to diminish the reputation of FIFA and public confidence in its leadership. We believe it would be in the best interest of the game for FIFA President Sepp Blatter to step down immediately so that the reform process can proceed with the credibility that is needed.

Coca Cola said:

For the benefit of the game, The Coca-Cola Company is calling for FIFA President Joseph Blatter to step down immediately so that a credible and sustainable reform process can begin in earnest. Every day that passes, the image and reputation of FIFA continues to tarnish. FIFA needs comprehensive and urgent reform, and that can only be accomplished through a truly independent approach.

Visa added:

We believe no meaningful reform can be made under FIFA’s existing leadership. And given the events of last week, it’s clear it would be in the best interests of FIFA and the sport for Sepp Blatter to step down immediately.

CNBC reported that AB INBev, the parent company of Budsweiser, echoed those calls.

Blatter’s response:

The pressure from the corporations comes amid increased scrutiny of both FIFA and Blatter. FIFA has faced allegations of corruption for years. Those drumbeats became more prominent after the 2018 and 2022 World Cups were awarded to Russia and Qatar, respectively. They were capped in May by a joint U.S.-Swiss operation that resulted in the arrests of several FIFA executives in Zurich.

Last week, the Swiss attorney general’s office announced it had opened a criminal investigation into Blatter. As my colleague Matt Ford reported:

Blatter faces allegations of criminal mismanagement and misappropriation during his presidency. According to the attorney general’s office, the allegations center on a contract Blatter signed with the Caribbean Football Union in 2005.

To put in perspective FIFA’s clout and the power exercised by Blatter, consider this from Matt:

FIFA commands tremendous financial resources and international clout. Blatter sat at the center of the web of regional and continental fiefdoms that shape the world’s most popular sport for more than 17 years. Corruption allegations dogged various FIFA officials throughout his tenure, and as recently as last week, but Blatter endured, aided by his mastery of the organization’s election processes and his dispensation of patronage to smaller, far-flung national soccer organizations that backed his reign.

But that reign ended on June 2, days after Blatter was re-elected to a fifth term as FIFA’s president when the U.S. announced its indictments. Blatter resigned the presidency and announced new elections. He says he will stay in the position until that election takes place in February 2016. But it’s unclear if the pressure from the biggest corporate sponsors will allow him to stay in office until then.