UK

March 15, 2007

The former US vice-president Al Gore urged the pensions industry yesterday to adopt longer-term investment goals or risk undermining attempts to build sustainable economies. 

The former politician and Oscar-winning documentary-maker said bonuses and other incentives paid to company executives encouraged short-term profits over longer-term investments. 

He told an audience of pension fund managers, trustees and advisers at the annual investment conference of the National Association of Pension Funds in Edinburgh that short-termism in company decision-making would delay progress in tackling the carbon emissions causing global warming. 

In a measured speech designed to prod rather than berate his audience, Mr Gore produced an array of statistics showing how the investment community, backed by pension fund money, was encouraging company executives to reject investments that failed to improve short-term profits. 

He highlighted the responses of US chief executives to a poll that asked if they would invest in a venture if it failed to enhance quarterly earnings. He said a majority rejected the proposal. 

"You have to ask yourselves 'do incentives matter?' If the incentives have a clear consequence at odds with the stated objective [of your fund] then maybe that is worth consideration." 

Mr Gore is chairman of Generation Investment Management, which he founded in 2004 with several former Goldman Sachs partners, including David Blood, the former chief executive officer of Goldman Sachs Asset Management. The company aims to generate returns for investors based on commitments to more sustainable companies. 

Mr Gore said investments that put companies on a more sustainable footing were by their nature long term and could not be made by managers tied to quarterly or even annual targets. 

He pointed out that a generation ago mutual funds were held for an average of 11 years and that today most funds had a 100% turnover within one year. Mr Gore said the pensions industry should insist that company executives work to a three-year profit target and not the quarterly reporting schedule that had come to dominate stock market-listed firms. 

"Are you surprised if profits are delivered on a quarterly basis if incentives are too? Most do what they are incentivised to do," he said. 

"There is going to be a brutal tension with a pensions industry that says we must have a long-term strategy and fund managers who are rewarded on a quarterly basis, but a three-year compensation cycle would be my preference," he said.

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