Market News

 February 16, 2012
Gore: ignoring carbon risks repeat of sub-prime mortgage crisis

Former US vice president sets out vision of how 'sustainable capitalism' will benefit companies and investors

Investors who fail to realise the cost of carbon emissions could be making the same mistake as financiers who failed to realise the true value of sub-prime mortgages, according to Al Gore.

Writing in a new five-point plan designed to encourage sustainable investment, the former US vice president warns that many investors' assets could see their value slashed if environmental externalities such as a price of carbon are taken into account.

"So long as their true value is ignored, stranded assets have the potential to trigger significant reductions in the long-term value of not just particular companies but entire sectors," Gore writes alongside David Blood, the former Goldman Sachs executive with whom he co-founded asset management firm Generation Investment Management.

"That's exactly what occurred when the true value of sub-prime mortgages was belatedly recognised and mortgage-backed assets were suddenly re-priced. Until there are policies requiring the establishment of a fair price on widely understood externalities, academics and financial professionals should strive to quantify the impact of stranded assets and analyse the subsequent implications for investment opportunities."

The Manifesto for Sustainable Capitalism, published on Generation's website, sets out proposals for reforming the investment markets to factor in environmental, social and governance (ESG) metrics.

It comes as a group of UK investors have also called on both the Bank of England and the European Central Bank to investigate the risk posed by high-carbon assets to financial stability.

The manifesto notes that companies that have integrated sustainability into their business practices have boosted profits, cut waste, and achieved higher compliance standards, while also realising financial benefits, such as lower cost of debt and lower capital constraints.

Investors identifying such companies can earn substantial returns, while experiencing lower levels of volatility, add Gore and Blood.

As well as urging investors to assess the risk of being left with high-carbon stranded assets, the paper reiterates a call for businesses to integrate their financial and ESG performance into one report. It argues that this integrated reporting would help businesses and investors make "better resource-allocation decisions by seeing how ESG performance contributes to sustainable, long-term value creation".

In addition, it advises that ceasing to issue quarterly earnings guidance, aligning employee compensation with environmental performance, and providing incentives for longer-term investments could all help drive more sustainable business models.

It recommends that new incentives take the form of securities that offer investors financial rewards for holding onto shares for a certain number of years.

Gore and Blood note that the private sector will play a key role in mobilising most of the capital needed to overcome the threats of climate change, water scarcity, poverty, disease, growing income inequality, urbanisation and economic volatility.

"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," they add.

"Those who advocate sustainable capitalism are often challenged to spell out why sustainability adds value. Yet the question that should be asked instead is: 'Why does an absence of sustainability not damage companies, investors and society at large?' From BP to Lehman Brothers, there is a long list of examples proving that it does."