Why Al Gore Might Be a Better Investor Than You

You may not agree with Al Gore about climate change. You may not agree with his politics, "lockboxes," purported invention of the Internet, or that he has an effervescent personality. But as an investor, you should agree with his outlook on markets, which he calls "sustainable capitalism." Here's why -- and what stocks you can invest in to follow Gore's principles.

Sustainable capitalism
The word "sustainable" may turn you off, as it usually means costlier practices that immediately harm profits. But as Generation Investment -- a firm that Gore co-founded -- reports in a recently released paper, not incorporating sustainable practices damages the business in the long term. If companies focus on maximizing long-term value and consider all costs -- including environmental and social costs -- then they can achieve lower costs of debt, and are freer to invest cash in improving the business. And, sustainable companies can worry less about the possibility of boycotts, regulations, lack of investors, finding and keeping talented employees, and maintaining supplier relationships.

Sustainable rewards to investors
Most important for the investor, according to a study cited by the paper, is that a set of sustainable companies beat the returns of unsustainable companies by 4.8 percentage points annually from 1993 to 2010. In addition to the higher return, sustainable stocks had less volatility. With higher returns, less volatility, and less burden on consciences, sustainable stocks give investors three reasons to sleep better.

The path to better capitalism
Generation Investment calls for five actions to help promote sustainable capitalism, all aligned with the long-term investor, and paraphrased here:

  1. Price in the extra environmental and societal costs and risks of businesses.
  2. Report these costs and other sustainable measures alongside financial reports.
  3. Stop companies from reporting quarterly guidance.
  4. Compensate executives on long-term performance.
  5. Reward investors who hold stock for more than three years.

The paper claims that pricing in the complete costs and risks of what it calls "stranded assets" will give investors the true value of a business as resources are depleted and regulations may be put into place. And these costs and risks, together with other sustainable metrics, will gain importance in investment decisions if reported alongside financial information.

Ending the practice of reporting quarterly guidance will take the emphasis off executives' short-term decisions. As reported, "78% of managers will actually reject an NPV-positive project if it will lower quarterly earnings below consensus expectations," and "publicly held companies are investing at half the rate of privately held companies when the gains from such investments will not be realized on a quarterly basis."

And while long-term investors can agree that executives should be rewarded for long-term performance, the paper also argues for companies to reward long-term investors with a special dividend or shares. This type of incentive would attract longer-term shareholders, while stabilizing the stock price and moving the market's focus to the long term.

The sustainable stocks
According to the latest SEC filing, Generation Investment held the following:

Company

Proportion of Portfolio

Henry Schein (Nasdaq: HSIC  )

11.1%

Becton Dickinson (NYSE: BDX  )

9.4%

Danaher

9.1%

eBay (Nasdaq: EBAY  )

7.2%

Quanta Services (NYSE: PWR  )

5.7%

Northern Trust (Nasdaq: NTRS  )

5.0%

Source: SEC filings, as of Dec. 31, 2011.

Henry Schein -- a health-care products provider to doctors, dentists, and veterinarians --has several environmental efforts that also help efficiency. For example, all technicians drive the most fuel-efficient cargo van available, and the company decreased the kilowatt-hours per carton at distribution centers.

Becton Dickinson, a medical device manufacturer, was one of Ethisphere's World's Most Ethical Companies in 2011. In 2010, Becton Dickinson donated $18.5 million in cash grants and products to organizations working to improve health care.

eBay, the online auctioneer, drives sustainability through a number of programs. The company donated $2.9 million to charities in 2010, launched the Opportunity Project in 2011 to help promote social entrepreneurship, and runs Green at eBay, which focuses on buying and selling sustainable products.

Quanta Services, a contractor for energy and telecommunications, was chosen to help with the construction of Keystone XL, before Obama rejected the proposed pipeline that would have carried oil from Canada down to the Gulf of Mexico. Quanta's participation in the renewable energy industry may just originate from its industry, but the company is building pieces of the transmission lines from wind farms in the California desert to Los Angeles, and built three solar projects in Avenal, Calif., in 2011.

Finally, Northern Trust, a bank that has paid its dividend for 115 years straight, gave more than $14 million to civic organizations and charities in 2010. Its Chicago office received an EPA Energy Star designation in 2010, and its London office operates solely on renewable energy.

A sustainable summary
As Generation Investment's paper begins, "The market is long on short and short on long." Short-term investors skew the emphasis to short-term results, and executives are rewarded to achieve these short-term results. But, as shown, companies that strategize beyond the next quarter reap bigger gains for investors. These stocks that make up Generation Investment's portfolio are a great starting place to building your own sustainable portfolio, and if you're interested in finding out three more stocks for the long term, please read this free report.

Fool contributor Dan Newman is glad that hanging chads haven't made a comeback. He also holds no shares of the companies mentioned above. Follow him @TMFHelloNewman. Motley Fool newsletter services have recommended buying shares of eBay and Becton, as well as writing puts on eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On February 21, 2012, at 3:26 PM, DJDynamicNC wrote:

    Paying more upfront for substantial long term savings is a fundamental business concept. It's also central to the idea of sustainability.

    Personally, I want any business I invest in to be running at peak efficiency. Making an investment in enhanced efficiency pays long term dividends.

    And I invest for the long term.

  • Report this Comment On March 17, 2012, at 8:34 PM, NYCDOG wrote:

    I haven't the slightest doubt that Al Gore is a more successful investor than me. However, "sustainable capitalism" based on highly questionable science is hardly the reason. Try "crony capitalism" where jack booted EPA directives and regulations financially benefit Gore's budding empire of "green". Silver Spring Networks, for one got a multi billion $ Dept of Energy grant-guess who sits on the board? His Capricorn Group has backing from Goldman Sachs-guess who got bailed out? These "Solyndras with a long fuse" are the ultimate insider scandal. To sully the good name of Capitalism with this self-righteous yet sleasy shell game is contemptible

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