Changing the world through capital

Mills, is in the midst of a quiet revolution in the investment world. “My passion is to make our approach mainstream,” says Mills. “But as much as you can say people should take this approach because it would be good for the world, the reality is that it won’t be mainstream unless we can show this investment approach results in superior investment performance.  That’s when people will take notice.”

Mills cut his teeth establishing SAM in Australia, who administer the AusSI sustainable index. With a background in computing and mathematics, he was previously involved in the bond research division at the then-CS First Boston in Melbourne. Being involved in sustainable investment has been a long-held goal. “The way we invest and allocate capital has a huge impact on the world and the sorts of lives we lead,” says Mills. “Even many years ago, I could understand that the world was suffering and that the capital markets weren’t playing the role in the solution that they needed to.”

Taking a long-term view is key to Generation’s investment approach. “The capital markets today have many inbuilt incentive mechanisms for people to focus on the short term,” he says. “Just think of the broking community. How do they make their money? Often, their incentives are not aligned with that of their clients. 

“There are many people involved in the investment business who are hooked on short-termism. If you are constantly analysing monthly performance, there is something fundamentally wrong. To truly take a longterm view, you have to change the incentive system.”

Mills points out that this is reflected in the firm’s own commercial arrangements. “We aim to cover our costs through low base management fees and, in many cases, the large companies only incur a flat dollar base fee. We will derive profits through three-year performance-based fees.” It’s a case of putting their money where their mouth is.

Influencing behaviour

He also believes it’s important to influence the rest of the investment community in adopting a more long-term view.  “Our firm is a founding member of the Enhanced Analytics Initiative which encourages the broking research community to integrate non-financial issues and longerterm views into their research,” says Mills. The Enhanced Analytics Initiative rates research providers on how well they research issues such as human capital management, climate change, governance, and other material sustainability issues that affect long-term shareholder value. 

“It’s like a competition,” says Mills. “The research providers are rated and the top five will receive a percentage of commission from the members of the group. This sends an explicit signal.”

The investment world is clearly shifting. “We’re seeing a very major trend in the separation of alpha and beta,” says Mills. Alpha refers to excess return, while beta is the market return.

“It means investors can get beta at low cost, using indexed or enhanced indexed managers, and alpha by carefully selecting skill-based managers which are aligned with their own interests. We see our firm very much in the alpha group and our long-term approach is very compelling in the sustainability side of the equation.”

Mills points out that sustainability analysis must be relevant and material. “There are some funds that have a tick-a-box approach,” he says. “But we think very carefully about the link to shareholder value.  It’s different for different industries and companies.  For example, in the energy sector, climate change is very material, but is not such a material issue in, say, the software industry. In that case, a more material issue would be how the company attracts and retains human capital.”

As a boutique investment firm, Generation integrates sustainability principles into all its investment decisions.  “There are other products in this space,” says Mills.  “But generally speaking, you’ll often find that when an organisation offers a sustainability product or an ethical product, the investment team or manager is separate to the main investment team. In some cases, you may even have a team of investment people who don’t know much about sustainability and buy in a sustainability rating from somewhere else.

“With those kinds of companies, they have two products – one that’s mainstream and another based on sustainable principles. It raises some big questions about why.”

Working with Blood and Gore

Mark Mills has a deep-seated passion for the planet. “I grew up in an outer suburb of Melbourne called Chelsea Heights,” he says.  “I spent more time with native animals than with human friends and so I’ve always had a strong passion for the environment.”

In 2003, Mark Mills was working with his thencolleague Francis Grey at SAM Group in Australia.  He met former Vice President of the United States Al Gore at a sustainability conference in Sydney.  Gore subsequently founded Generation Investment Management with David Blood, former CEO of Goldman Sachs Asset Management in 2004.  Mills joined the firm as a director in 2005. 

The London-based firm has 23 staff, 11 of which share in the profitability of the firm. 

Investment performance has started well.  Despite this, Mills emphasises that the investment strategy should not be evaluated on these early results: “We don’t want people to join us because our first 18 months looks good.” Instead a long-term investment horizon is emphasised. Generation Investment Management undertakes ongoing thematic research on sustainability trends in conjunction with its Advisory Board, a high-level think tank of key people from around the world, chaired by Al Gore. “Topics include everything from climate change and demographics to poverty, water and pandemics. We get into indepth analysis on these issues and assess the implications on the sectors and companies in which we invest,” says Mills.

Mark Mills is director of Generation Investment Management. Formerly from Victoria, Australia, Mills is now based in the firm’s London office. Generation Investment Management bases its investment decisions on sustainability measures and long-term horizons.

www.generationim.com