Episode 170: Lila Preston, Generation Investment Management
Today's guest is Lila Preston, Head of the Growth Equity Strategy for Generation Investment Management.
Lila joined Generation in 2004 and serves as Head of the Growth Equity Strategy. Prior to joining Generation, Lila was a Director in Development & Finance at VolunteerMatch and a Fulbright Fellow in Chile, where she worked on forestry and conservation projects. Lila currently serves as a Board Director at Nature's Fynd as well as a Board Observer at Toast and CiBO Technologies. In addition, she is a member of the Social Mission Board at Seventh Generation, is on the Board of Advisors at Columbia University's Mailman School of Public Health, and is a Young Global Leader of the World Economic Forum. Lila received a BA in English Language and Literature from Stanford University and an MBA from London Business School.
I was looking forward to sitting down with Lila and learning more about Generation Investment Management. In this episode, Lila walks me through Generation's mission, her climate journey, and how Generation evaluates companies to invest in. We also have a lively discussion about ESG investing, greenwashing, and the ethics of partnering with fossil fuel companies as we head towards a clean future. Lila is a great guest, and this episode is a must-listen.
Enjoy the show!You can find me on twitter @jjacobs22 or @mcjpod and email at info@mcjcollective.com, where I encourage you to share your feedback on episodes and suggestions for future topics or guests.
Episode recorded July 23rd, 2021
In Today's episode we cover:
An overview of Generation Investment Management's mission, origin story, and work
Lila's climate journey and what ultimately motivated her to focus on climate investing
Comparing Generation to similar firms that don't have a sustainability focus and the landscape Generation sits in
What motivates Generation's LPs
The sustainability guardrails Generation uses to evaluate sectors and businesses to invest in
What factors into Generation's charter and if Lila believes there should be parameters when investing
The importance of mission alignment in regards to LP composition
A discussion on whether it's ethical to partner with fossil fuel companies and how Generation thinks about that
The critiques of ESG investing and whether one can uncouple ESG and greenwashing
Generation's approach to climate investing versus the traditional ESG approach
Why a startup should work with Generation
How far market forces can take the clean energy transition, and what else is required to accelerate this transition
The role Generation takes on when looking at climate change as a systems problem
Rapid-fire Q&A about offsets, carbon removal, the threat of wildfires on reforestation, advice for people not focused on climate to learn more
How to motivate companies and society as a whole to value abundant sustainability and justice
Links to topics discussed in this episode:
Generation Investment Management: https://www.generationim.com/
Generation IM's growth equity approach: https://www.generationim.com/growth-equity/investment-approach/
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Jason Jacobs: Hey everyone, Jason, here I am. The my climate journey show host. Before we get going, I wanted to take a minute and tell you about the, my climate journey or MCJ as we call it. Membership option membership came to be because there were a bunch of people that were listening to the show. That weren't just looking for education, but they were longing for a peer group as well.
So we set up a slack community for those people. That's now mushroomed into more than 1300 members. There is an application to become a member. It's not an exclusive thing. There's four criteria. We screen for, Determination to tackle the problem of climate change ambition to work on the most impactful solution areas, optimism that we can make a dent, and we're not wasting our time for trying and a collaborative spirit beyond that.
The more diversity, the better there's a bunch of great things that have come out of that community. A number of founding teams that have met in there, a number of nonprofits that have been established, a bunch of hiring that's been done. A bunch of companies that have raised capital in there, a bunch of funds that have gotten limited partners or investors for their funds in there, as well as a bunch of events and programming by members and for members and some open source projects that are getting actively worked on that hatched in there as well.
At any rate, if you want to learn more, you can go to myclimatejourney.co, the website and click. the become a member tab at the top. Enjoy. the show. Hello everyone. This is Jason Jacobs, and welcome to my climate journey. This show follows my journey to interview a wide range of guests to better understand and make sense of the formidable problem of climate change and try to figure out how people like you and I can help.
Today's guest is Lila Preston head of the growth equity strategy for Generation Investment Management. Generation was founded in April, 2004 by a group of seven founding partners led by Al gore and David blood. The firm began investing client money in April, 2005. Their breakthrough is integrating the disciplines of finance and sustainability, the firm, places, environmental and social factors at the core of its strategy.
We have a great discussion in this episode about Generations approach about Lila's background and what led her down the path of doing the important work that she does. We also have a great discussion about not only where generation fits in, but where innovation fits in in general. What criteria generation uses when assessing their investment decisions, how they balance impact and profitability, what sectors are most interesting to them, their process, some of the upfront research that they do, typical check sizes, and then just a broader discussion about market forces and where they fit in the role of policy, the role of activism, the role of reforming our democracy and Everything else needed to essentially turn our global economy on its head.
Lila, Welcome to the show.
Lila Preston: Thank you. Good to see you.
Jason Jacobs: Well, you may not know it, but you've been on my hit list for a while. So it's such an honor to finally trick you into coming on the show.
Lila Preston: Excellent. I know who to give credit to that for. So I'll thank him.
Jason Jacobs: Well, maybe we should just take things from the top. And I say that as if it's spontaneous, but I say that same thing every time. So maybe I should work on that, but what's generation investment management?
Lila Preston: So Generation is a dedicated, sustainable investment firm. We were set up in 2004 by a group of founding partners. And really from the beginning, the aim was to put sustainability at the core of an investment process. And we did that because we thought it could deliver the very best performance for our clients. We manage money on behalf of large institutions, pension funds, endowments foundation, endowments, and university, and other. And ultimately we believe a long term horizon is required. It is best practice. If you're taking that long term view that you understand the holistic Business quality management quality and ultimately builds very deep research underpinning companies that you back. So that's the backstop generation fast forward today it's still a boutique investment firm. We have just over 100 people. We focus on both listed equity, so public equity and private equity. And I spend my time heading up the growth business, which is our private equity practice. We also have a long term equity sleeve. And what's uniting is obviously really kind of putting sustainability at the heart of what we do, it is kind of all that we've ever done. It is all that we will ever do. We don't have any separate investment strategies. We think that, again, this is best practice and are now in, yeah, year 17.
Jason Jacobs: And maybe talk a bit about the origin story of the firm, but also about just your. Personal origin story in terms of what led you down the path of doing what you do.
Lila Preston: So I may be on the Lila front and then we'll do on the, firm front and how they serendipitously met somewhere in London in 2004. But I grew up in New York city and despite my kind of very urban, early upbringing, I was really lucky to get out west quite a bit in my high school years. So Working on ranches and trekking, and camping.
Jason Jacobs: what led you down that path?
Lila Preston: That is a great question. I,
Jason Jacobs: it doesn't seem like a common thing that New York city, people do.
Lila Preston: it doesn't. although, I mean, my parents get credit for this one. They, I remember taking that road trip, you know, cross country at age 12, my brother was 16. He had just gotten his driver's permit and it was fairly petrifying because he was all- allowed to drive on the highways. And so we did the kind of multi-day journey across the west and ended up in Cody Wyoming. And we went to a rodeo, we went to a dude ranch. We had sought of like that Western experience. And I think that is where I caught the bug. Ironically, my dad also had caught the Western bug as had my mom. And so this was obviously being passed down probably quite deliberately from them to me. And then through high school actually was at a, kind of a ranch camp where you worked on a ranch. I also worked in a cattle round up in Kansas in high school. I liked horses. I liked camping and trekking. and did a month long wilderness exploration tracks, as well as climbing the grand Teton, which was fun.
Jason Jacobs: Okay. So now back to the story, so you did that growing up and then, [laughs].
Lila Preston: ...there you go.
So with that early experience, I basically ended up circuitously in a, kind of a post college experience that was somewhat foundational, I ended up doing conservation forestry work in Southern Chile. I got a Fulbright fellowship and I was heading down to Latin, America. I had studied oddly English and literature, and then Latin American studies and in that time I was working with local communities on alternatives to kind of clear cutting and extractive forestry practices. And so kind of putting people at the center, of What was going to be conservation models that were very community based, And I think that was a bit of an aha moment of environmental outcomes and people practices need to be fused.
Jason Jacobs: Actually. Can we stop there? Because that is yet another example of something that's not something that a typical college student does. So what is it that led you down the path of going to Chile and doing the things that you did?
Lila Preston: Okay. So peeling back again. I read an article when I was a senior in high school, which was called take this Park and Love It, About a deep ecologist by the name of Doug Tompkins, it was in the New York times magazine. It was a amazing photo and it was about conservation practices and sort of efforts in Southern Chile and the Patagonia. region, On protecting land that was ultimately still quite pristine. And that early environmental movement, And I'd missed kind of the environmental movement of the kind of 60s and 70s in the US. but I recognized that there was something happening there quite unique, and that the model that they were pursuing was incorporating not just like put fences around and keep people out, but think about building economic, sustainable development into conservation models And I was struck by that. That's what motivated me weirdly to go to the university I chose to go to because they had a program in Chile and I wanted to go out to Chile and then I spent a year abroad in Chile and then wrote my thesis about it and then ended up applying to get a Fulbright to go back down there. So really that is behind it. What was cool is it was using tools, including ecotourism, including environmental education and including reforestation with native species. So these were different models that were trying to protect lands. And I was working on a reserve called the , Cani, which is down in Chile near Pucon, it's a reserve that protects trees called the Araucaria. It's a monkey puzzle tree. If you think of the Dr. Seuss type. trees, And these are over a thousand years old. They are prehistoric. It looks like dinosaurs could walk among them and they're astoundingly beautiful. And this was a place where community really took pride in showing and sharing that wilderness with visitors, but also with their local schools and ultimately through those different resources and income sources could protect land and not turn it over to industrial logging.
Jason Jacobs: Now, when you are going through this at that time, did you have capitalist high finance aspirations? Did you envision yourself doing the kinds of things that you're doing now? I know it's only one element of what you do, but it's certainly an element.
Lila Preston: It was an element. I think that the seed of like follow the impact, like how do you scale? So these were very specific micro projects and I had like my hands in the soil, so I was doing the thing. Oftentimes people run their career and they want to go do grassroots work at the end. of it. I just had done it in reverse where I started kind of very frontline with, again, real communities, real people, real land dirt under the fingernails, but that was a kind of like a seed of like, well, how do we scale impact?
Because actually this is one conservation area. It was linked to the one that I was inspired by earlier, which is down further south that was called [Humulene 00:09:49]. but like, okay. How do you start to put these together? How do you scale impact? And So this kind of like the seeds of scale kind of thought was in my mind and how do you follow the money? And ultimately that led me. My next job was actually back in the bay area, post .com boom bust. I kind of moved to San Francisco. in 1999, pretty much a few months before everything, sorry, 2000. So pretty much right before the bubble burst was having first round interviews using my writing skills to go work in an internet startup, doing communications or something like that. And the companies would be going out of business between first and second round interviews. And so I turned around and said, well, maybe I should get a job in a sustainable organization. And I chose to go to the nonprofit sector because it was non-profit by design, not by default. And I worked at an organization called VolunteerMatch. And VolunteerMatch was really exciting at the time, it was using the tools of the .com. Boom. So again, technology and software enablement To drive scaled volunteer matching, helping people find a local opportunity using the search model of kind of eBay like buyers and sellers. In this case, it was a person and a location with a cause and they were being matched through technology ended up in the finance group self taught finance through a nonprofit organization is probably not the most traditional way to get into the field. But again, this like How do we, I was raising, helping them raise money, helping build the financial model to raise capital so that we could scale this nonprofit. And ultimately got really hooked in like I liked financial modeling, liked Excel, I liked writing grant proposals.
And ultimately that capital raising experience led me to say, okay, I probably should do something with this like real early environmental passion and interest and impact at scale. And then went to business. School is sort of the classic next step when you don't totally know how to put the puzzle pieces together ended up Over in London and in my second year in that generation.
Jason Jacobs: So I wonder if you're the only person that ever entered private equity through hands in the soil and then non-profit, and then private equity as the third chapter that might be a first ever,
Lila Preston: I don't know. I would have said 10 years ago, perhaps, but like the people we meet today who want to build their careers. Here's what they're doing. They're figuring it out. It took me 10, 15 years to figure it out. I think these current generation are figuring it out in like three to five years or two to three years. So they're cycling through and maybe exploring things earlier on. I just, I would hope that we've diversified experience that coming into finance. I think that's actually one of the big promises of an industry that needs to incorporate again, a broader set of sustainability considerations in analysis, I think will make us better investors.
Jason Jacobs: And maybe now come at it from the other way and talk a little bit about how generation came to be and why it came to be.
Lila Preston: So again, a group of partners had met through different vectors. Al obviously had met David, this Al gore who's our chairman, David blood was formerly head of Goldman's asset management business. Colin le Duc, was coming out of sustainable asset management, Mark Ferguson, Miguel Nogales, Peter Knight, Peter Harris, like a whole crew.
And there was, a group that came together and shared this view that actually a white sheet of paper exercise was needed in finance to really integrate sustainability. So it wasn't a separate sleeve. And I don't think we should go into it here because it's a pretty wonky period of history before generation arrived, but there was quite many decades of Sustainability research applied to finance. There was waves around negative screening, of, around positive screening, but what was pretty core at the beginning of generation is like this can't be separate from the financial analysis. This really needs to be part of and embedded in. And therefore lets kind of create a new firm, blank sheet of paper And set it up with that design principle. And that's where we started. The organization or generation was not managing money. When I first met them, it was before we launched our first investment strategy, which was in the public equity markets. But I happen to do a project as an intern in my second year of business school was introduced by a guy named Jason Scott, who was kind of one of the early employees helping writing out the business plan for generation with the founding partner group.
And I moved from being an intern to ultimately getting a job. offer, And that was in early 2005. So since then have been on a journey now, early on, it was as a public equity analyst. That's what we first launched was our public equity strategy our global equity platform. And then we moved into private equity in 2008, which is what I've been doing ever since.
Jason Jacobs: Are your LPs strictly financially motivated?
Lila Preston: Our LPs are absolutely looking to generation to deliver top performance. So we believe that there isn't a trade off, which we say isn't a trade off between values and value. And I think we would hope that they would always compare us to the very best asset managers, whether it's in public equities or private equities, or certainly across the piece. So that is the expectation. And I think in the early days, Perhaps it was harder for LPs to kind of hear the word sustainability and topics like climate and topics like social justice as core investment topics. Today, I believe that they understand that these are critical and if you're not analyzing them, and if you're not investing in the capability to understand how those trends drive financial and economic development, then you're missing a beat.
Jason Jacobs: Given how broad the clean energy or sustainability generally is. I mean, it's every category and every sector and every function and every geography and many of these businesses have fundamentally different profiles. From an investment standpoint, a cement business, for example, looks very different than a battery business, which looks very different than a geothermal business, which looks very different than carbon accounting software. And I could go On and on. So with that sustainability focus, what are the guardrails as you evaluate either sectors or types of businesses
Lila Preston: We use a pretty concrete framework. I mean, again, everyone needs to have their process and their framework. And for us, again, at generation has public and private. I'm talking about the private equity platform here, but it's not dissimilar in public.
We actually have similar Frameworks and rely on many of the parallel ways to assess businesses and management teams, but for us, it all starts with roadmaps. So number one is research first. That is the way that we develop a lot of our ideas. We call them roadmaps they're deep analysis into pockets of the economy or pockets of the market, Where we recognize there's a shift taking place many times it's a shift towards more sustainable outcomes, whether it's an alternative protein. and I understand you've you know, met Thomas in Nature's Fynd, or it's a shift towards more efficient built environment, electric mobility, all these shifts that are taking place, we call the coverage roadmaps.
We've done probably 300 as a firm and 150 within the growth team. And so that helps us understand the surround sound, sort of talking to the incumbents, talking to the upstart innovators, talking to the regulators, talking to the NGOs and the academic community. That that's a requirement for us to kind of start our work. So that's underpinned with real deep sector research. Then as we lay down these roadmaps. So if you take a roadmap, that's looking at up-skilling and rescaling, You'll take a topic like that. You'll map all the players and you'll probably come up at the end a set of companies that you'd like to meet because you've started to qualify them.
You've looked at maybe their growth rate. You've understood the stage and maturity of the business. And you're forming an opinion perhaps about the business model. And you've gotten to meet the team. We get probably four to six, really highly qualified company pipeline opportunities off of each of our roadmaps. And so we do 12 or 14 roadmaps a year. We probably get about 70 to 80 of our qualified pipeline companies that come off of that. And then we put time and attention. towards Getting under the hood to understand business quality BQ, which is another piece of our framework and then management quality MQ. So those two pieces, plus the roadmap context. And then the final pieces, that system positive analysis, which is really embedded in all of those three. It's a determining that is if indeed this company will be able to drive a more sustainable future. And that specifically, how would we measure that over time? On the growth team, we categorize our opportunity set in these three, bubbles or three spheres, one being planetary health, one being people health.
And the third is financial inclusion. And there's often overlaps in those spheres. We have many companies that might be not only driving planetary health, but also people health or planetary health and financial inclusion. And we recognize that that kind of framing helps us to determine companies that as they grow will deliver measurable outcomes and ultimately hopefully impact over time to address climate broadening health outcomes and broadening economic and social inclusion.
Jason Jacobs: For comparison purposes. If you take, let's say a breakthrough energy ventures. From what I understand, they have a gigaton threshold. I think it's a half a gigaton per year, like when the technologies fully deployed, but what they do is they have this and I'm sure you know this, but they have a process upfront to do that assessment.
And then once it either passes a checkbox or it doesn't, but once it does, then they evaluate it as any other venture firm would. I guess compare and contrast the approach that you're describing to that approach. They have a very, like a clear metric that they use to evaluate and it's upfront and it's a checkbox, and then they kind of enter the pool of contention If you will. How does that compare to how generation does things?
Lila Preston: Yeah, I think it's an important question. And one where it's critical to understand for us that system positive or that what we call that threshold up front. It's not exactly similar to the gigaton target. So I'm not saying it is equivalent, but it is an important gating discussion. Again, it's not just like a one and done discussion. So don't be like recognize it's often iterative. But that Is important such that when a company moves through and we determine that indeed it fits this because of our roadmap work and because of the outcomes that we can measure. And because of the analysis of not only what a business model does, but how it operates that we proceed to business quality management, quality and evaluation construct where we're underwriting kind of a risk return case. And so we think that this is a critical step to pull that up. front, So that you don't find yourself with the trade off discussion in the back. And so I think that's probably where there is some similarity there.
Jason Jacobs: You know, are there cases where companies have that say BQ and MQ, but either like does duration factor in, does capital intensity factor in, does science risk factor in these are terms that I've heard some other funds talk about in terms of, well, we won't do things that require future policy, for example, or we won't do things that have too much science risks that hasn't yet been baked out of it, or we're set up as a fund that we have longer time horizons and typical fund to account for the fact that some of this stuff just takes longer. Do you think any of that is needed? Do you have any of that baked into your charter?
Lila Preston: What is in both business quality and management quality analysis are many elements of, again, what will drive a sustainable. In every sense of the word. So again, from a sustainability perspective and sustainability of an earnings stream, a business. So for example, in, in business quality, we're looking at you know, economics, we're looking at the health of the ecosystem, which would incorporate some of those kind of context factors. We're looking at the difficulty to replicate sort of like some evidence of moat. And so there's elements within BQ. That will drive us towards pretty high quality business models. Again, there's a bit of a proxy that you could use to say that most of the businesses that we're backing and the growth fund.
Again, this is private capital, usually 50 to $150 per investment. We're gonna do 12 or so deals per fund. And this is at the market penetration and expansion stage that we deploy our capital. So we're not taking early science and tech risks like breakthrough is, and it's important and great that they're taking it and we're not taking early product market fit risk, but we're taking market expansion and adoption risks, So really kind of those penetration curves that we studied for our roadmaps are what we are. backing With our framework. So business quality will trend us towards businesses that will have likely higher gross margins. They will be lower capital intensity. And so that does mean there are certain business models that don't fall into our coverage remit likewise, in management quality, we'll incorporate a understanding of culture, obviously the mission of the organization, how that's driven through diversity, equity and inclusion, not only of the broader employee base, but. how that Maps to the management and the C-suite, and then ultimately the board We'll focus on alignment and governance, and we'll actually spend quite a bit of time again, with metrics, like what are the sustainability KPIs that we can track within business quality management quality.
And then how do those fold into our ongoing engagement with boards of directors and so on? So I do believe that there's again, different strokes for different folks in terms of a fit for purpose investment strategy. With an investment framework. Again, this is for us really important that we're motivated to solve problems, but with businesses that we believe we can underwrite with our capability set Of understanding market shifts in this kind of like broader system positive trend.
Jason Jacobs: How important is mission alignment when it comes to LP composition?
Lila Preston: So many of our LPs are number one. They recognize how the world is shifting and they have understood that our differentiation around sustainability is what helps us deliver performance in that context.
So I think that's really critical that there's kind of an alignment. on Kind of why we do what we do and why that is good for them as asset owners and asset managers And the context of that, maybe their commitments towards net zero, that we feel are really critical role. We hope again, that we can fold in tons and tons of other asset managers. And we are seeing so many more coming to the table to address that. And then we have some of the most thoughtful long term thinkers. We have some of the Nordic pension community, certainly in the US, it's been a little bit of a longer to develop journey because I think when we use words like sustainability back in 2005, when we were first raising capital, there was a bit more of a kind of like we'll believe it when we see it.
So that took a little while for them to recognize that we were doing that integration in an incredibly productive. way. But I think our LP community will come together to like talk with us about how do we participate in these market shaping initiatives, whether it's on the COP26 agenda towards financing, the transition to net zero or commitments related to driving up diversity in the financial services industry, they're kind of alongside working with us in many cases, some very vocal leaders.
Jason Jacobs: And then what about in terms of the big strategic landscape, whether it's in terms of partnerships or whether it's in terms of coal investment, there seems to be a bunch of debate or different philosophies around, for example, whether it's okay to partner with the fossil fuel companies and under what scenarios or criteria, how do you think about that at generation?
Lila Preston: The way that we invest, it means that we're again, if you focus on long term, Sector transition business, quality management quality. It won't surprise you to hear that we don't have coverage in a fossil companies and/or extractive industry companies because of that long term research horizon would tell us that perhaps they're less likely to be sustainable organizations and I'll speak just for the growth team in that when we think about backing sustainable solutions, businesses, which is really what the fund is focused on, we're looking for disruptors and innovators. So really the drivers of a shift. And therefore in most cases, they're beyond incumbent industries, they're actually may be developing the next wave of a technology or a solution in the context of the food system. These are shifting to biological based inputs away from maybe incumbent chemistries.
They're moving to more circular business models away from kind of like use and then dispose. They're moving towards a more distributed future of work where people can be more resilient. and Working from their location of choice as compared to centralized kind of command and control. They're delivering financial services in a way that is even leapfrogging some of the previous incumbent models and on and on energy distributed renewables.
I just think that there is so much opportunity in those shifts that it's not that we don't, aren't aware of incumbent and legacy industry players and all of the work that we're doing. on Advocacy related to net zero transition, but our day job and hours are limited. And so we aren't spending them with big pockets of the market, such as the fossil players.
Jason Jacobs: And I'm going to caveat this next question. I'm far from an expert on ESG, but one of the critiques I've heard about ESG is that oftentimes the criteria is fuzzy and there's greenwashing and there's higher fees with driving worse returns and impact. That's questionable. I'm not defending that critique and I'm not knocking that critique.
I'm just more interested in. Your perspective on that critique? Not necessarily from a generation standpoint, more just where are we with the state of ESG in general, and then how does generation think about it? And then how do those two align or differ kind of the conventional lens versus a generation lens?
Lila Preston: So again, I think that perception was in play again When we were first coming into the market, that's a skepticism. I think we've turned the page. And I think it's pretty clear as you look at the capital flows associated with ESG or kind of ESG dollars under management, it is abundantly clear that there's been a shift in the market.
Actually, this was a big topic within our sustainability trends report last week, but also available on our website and people can download it. It's sort of like the Mary Meeker internet trends report, but applied to all the trends we're seeing in a shifting kind of sustainability landscape across all sectors.
And sustainability related financial volumes, I think have tripled since 2015, you today have 6% of the global market cap coming from green economy. That's up from 2% in 2015, that's still small, but growing quickly. And then these ESG volumes, I think a tenfold. increase In flows since 2015 and those dollars wouldn't be flowing.
If there wasn't an indication that this is either better risk management or hopefully not only better risk management, but also a way to seize opportunity in the market in terms of delivering long term performance. So there's been a thousand other initiatives that would point to. This trend towards drumbeat of adoption of kind of ESG as a integrated approach, being best in class. We think, again, that's the very optimal way to manage assets across both public private, but also it's adjust another asset classes, whether its real estate or private. debt, you name it, venture, certainly
Jason Jacobs: Another pretty standard definitions and approaches for ESG today. And if so, how aligned is the generation approach to that standard approach? And if not, what are some of the differences and where does Generations approach? fit in?
Lila Preston: Yeah. So there are, I actually think what people need to kind of be comfortable with. And again, this is maybe for the broader public. This is not some voodoo science. This is actually incredibly well researched. Well understood. Certainly in the environmental sleeve indicators related to emissions reduction, understanding companies, scope one, scope, two scope, three footprint running lifecycle assessment on products and services is very, very, very well trodden territory entirely. unknowable with the right resources. So you can analyze businesses with that lens.
Obviously the S in ESG relates to social outcomes or social aspects, and that is perhaps more diverse. There's more diversity of topics that fall into that bucket, whether it's on diversity of teams, pay equity related to the job creation, economic opportunity. The list goes on. So it's a broader set, but again, within each of these metrics, it is possible to ask companies questions, or ask a fund manager questions about their approaches and ultimately the metrics that they use to track the kind of social aspects of their investments. And then governance is probably one of the most well covered and well understood because it's observable who's on the board. Are there independent directors is the chair and CEO split, What's the diversity of the board, does that reflect the diversity of the customer base and ultimately employee base. And then you have track record on voting and the ways in which term limits are constructed and designed. And again, this is all incredibly rich information and I think the best kind of resource, well there's many resources, but one of them to point to is the Sustainability Accounting standards board, which is shorthand SASB, which is now run multi-stakeholder reviews to come up with a set of ESG factors and ultimately metrics that could be asked of all companies.
They tailor it by sector in the public domain because they're looking at public companies and you can look at the list of questions. You can look at the measurements we choose to use SASB, or at least a subset of this as the framework, as like core ESG metrics across all. of our Private companies, because we just think it's very best in class to do so. And we would encourage other private managers to use that as a base. Again, that doesn't tell you about the kind of impact or the portfolio, but that can tell you About the base ESG profile of a company or of a portfolio.
Jason Jacobs: And given that it sounds like you are so research intensive, upfront. I mean, from what I'm hearing and I guess, correct me if I'm wrong, it's a way to test my own understanding, but your research driven and then you go out and evaluate, okay. If the research is pointing us in this direction, then here are the players within that category. And then here's how they rank relative to each other. And then here's the one that we think is going to be the category winner that we want to put our weight behind. First of all, did I get that? right? And then second of all, what are some areas or categories that you're particularly excited about?
Lila Preston: So, yeah, it is right roadmaps for us populate a set of companies. We use a lot of our network to unlock those opportunities, demonstrating that again, our lens around shifting the shift in their market is value additive and sustainability can play a role again on not only what they do, their products and services, but also how they operate. So thinking about. Again, culture and how they organize the engine room behind their products and services. Again for sustainability has to be present at both of those layers. So, okay. Then you do business quality measure quality analysis to determine again with valuation and how you can underpin an investment thesis you end up with. A portfolio on the other side, it is true that there's a lot of cycles and we're doing five deals or so a year. So think about us reviewing about a hundred highly qualified businesses at any one point in time, there's probably 10 or 15 that are active and we're distilling those to the best fit again, with those steps in place.
Now, On the other side, we talked about planetary health people, health and financial inclusion as three pillars. It's really cool to see when you populate a new fund that you do compete ideas across these broad sectors and. actually Have representation across those. And the reason we have representation is because we set the roadmap agenda at the beginning of the fund, and each year we revise it so that we're hunting in those pockets of the market. So you take a place like, you know, a topic like planetary health, obviously it's broad. It includes the recognition of net zero carbon solutions across major industries, and mobility, agriculture, industrial energy. You get the ability to go deep into. Pockets in the market like food, but also we've invested in companies recently in Nature's Fynd, went more aback in history, we've looked at companies like Ocado, you know, which was doing food delivery.
We in mobility over the years, investing in companies like Proterra, but also Gogoro, or motivate or DeepMap, These are a whole set of different ways to express conviction around a transition to a more distributed Low net zero carbon future. In the mobility space, we have a coverage of built environment and how lighting and building management systems back in the day nest more things like Dialight companies that have been able to play into the built environment with more efficient products and services. And then we could turn the crank on each of this healthcare as a more kind of recent coverage area for us looking at diagnostics and digital tools for better health outcome delivery. So investing in companies Like AlayaCare, which is doing home health, service management. So helping elderly care with best in class software for those service practitioners moving into diagnostics for genetic sequencing, you name it like financial inclusion Digital remittances is a core coverage of ours companies. Like Remitly companies like delivering technology and software to SMB audiences. So kind of small and micro businesses and their employees, companies like Gusto guideline. These are all these little sleeves of our coverage and it is incredibly diverse.
Again, the benefit is that we're using the single framework To review them all. And again, compare and contrast and ultimately find the best fit for us. And a big piece is that engine room, the, how the company operates their mission. People practices their broader approach to solving problems with their business and scaling it such that it has a clear purpose and vision that is aligned with that system positive future.
Jason Jacobs: And what about the generation value proposition? So let's assume that there's a strong company and that they have multiple options, multiple term sheets. And if the terms are identical across firms, What's the pitch or maybe pitches to transactional word. What's the stated value proposition for why that CEO and leadership team should choose to work with generation versus another firm?
Lila Preston: What is great is that we can use examples as much as sort of a hypothesis. So at this point, we've got over a decade of these examples, but certainly understanding of their sector and commercial introductions and helping them scale revenues. Right? So um, the past year we do these round tables, as well as summit's leveraging our chairman's convening power On topics like the future of food, the future of mobility, the future of environmental intelligence, you name it. And we hosted some on the future of supply chain. So looking at supply chain 3.0 in the room, we were able to bring together some of the leading supply chain managers from some of the largest companies in the world.
Maybe companies that we've covered on our public equity side, as well as some of the disruptors pipeline companies or groups that we're trying to meet. And then, a company like convoy, which is a digital freight marketplace, which is in our portfolio. Introducing them specifically to a set of supply chain operators at the largest CPG companies or industrial and manufacturing businesses. So this is really kind of a value proposition related to growth and commercial introductions because we understand how sustainability is playing into the mandate for those supply chain managers and we're curating discussions for our companies to position them as thought. leaders. that's number one. Number two would be this integration of sustainability thinking into not only the products and services that they sell and how they operate On many instances, we've helped companies with their own lifecycle assessment so that they can wrap their arms around the environmental footprint. For example, Or we've done social outcome benchmarking for companies like Remitly so that they can better understand what their users, or senders and receivers, of the digital remittances business is. what shifts in their quality of life or their earnings potential or their savings potential.
The company is enabling. So we'll work on that outcomes, you know, the outcomes measurement. And then there's the governance support. we spent a lot of time building out board of directors and bringing in independent directors to help companies scale. That's actually something, our network is quite extensive and we always believe that we can be really good thought partners on the financial performance of the business and how they're strategically positioned in a market, but we are not operators.
And so we bring in operators who have perhaps done this before, either scale the business from 50 to 150 million or worked in a specific sector. We recently helped support probably more than half a dozen independent directors, such that we can really help these companies scale and drive growth best in class governance. And then there's certainly this sleeve related to us understanding capital markets. We have a big public equity strategy. We've very much understood what it's like that journey to the public markets, whether it's through direct listing or SPAC or traditional IPO and how to get to keep your sustainability mandate front and center. And then finally we sit across London and San Francisco. So helping companies with their international expansion, if they are moving across geographies, we also have coverage of Asia equities and some kind of deep global expertise in thinking about how to support companies as they move across geography. So those would be some of the elements and again, like populated by case. studies, And that's likely going to win us an opportunity to be great thought partners, to the very best entrepreneurs who, again, we believe all have a mission to drive a shift in the market that they've spent their time and energy directed towards, and we want to be there to help them Really. actualize That
Jason Jacobs: next question is a bit higher level, but in. The quest to bring about a more abundant just and sustainable world, clearly you believe. And I believe that the market has a meaningful role to play market forces. I mean, just given what you do for a living and what I do for a living, how far can market forces take us and what else will be required to bring about this transition and the timelines that are necessary?
Lila Preston: I mean, the coordination that's required between the obviously private sector, private capital alongside government and civil society is like never been more urgent. I think again, the tailwinds now seem to be kicking in a bit with a recognition of the short timeline. We have to reach net zero. by 2050 or ideally by 2040 with having by 2030 emissions footprint. I don't think that's, again, the system's thinking side of me going back to the early days of thinking about people environment together is recognizing that social justice. and Inclusion needs to be part of the climate agenda. I think that's been picked up again through both COVID the pandemic as well as black lives matter movement. And if we are leaving any of these topics as a separate one, we're missing the importance of looking at this as a system.
So again, like all of this needs support from all angles, there are absolutely pockets of innovation and perhaps even true kind of private partnerships that need to be designed that will not come from Even the venture sector or the growth sector or the mainstream private equity buyout, or public markets or credit market, its, you're going to need new combinations of capital. I think that we're seeing some really good examples of kind of innovative business model people coming through with like a next generation of like, here's how we could drive climate outcomes and really using catalytic capital.
To unlock that that's something that generation is very actively pursuing right now is like everything we know about the challenges related to climate change. How do we think about innovation in financial structures? What else could we bring to the table? To try to unlock some of these perhaps tougher, longer term, early pilot project de-risking stage where traditional capital has not been as easy to flow So I think that's, what's next in terms of these like novel, innovative financial structures that we're going to see, but also you're gonna see innovation in the public sector. And certainly I think civil society, I love the work that some of the biggest environmental NGOs are doing in using flex or blended return capital to motivate environmental outcomes. That's just one example.
Jason Jacobs: Well, it's great to hear that you're using your perch to experiment with some other types of structures, like the catalytic capital that you mentioned. Do you envision that if you did launch any of these alternative structures, that it would be the same LP base or types of LPs for those structures as well?
Lila Preston: Probably TBD. What is true is there's tons of appetite from our LP base and the fellow travelers that we keep in kind of doing more. We spent a lot of time last year helping to support the launch of the net zero asset managers initiative. Now that's got Over 40 trillion of assets under management and a hundred and close to 130 signatories.
These are all asset managers and behind them, there's asset owners with massive commitments. And so they need to use every tool in the tool belt. So yes, the appetite is there. Would it also touch on broader, different new partnership models potentially. So you'd hope that you can actually bring in kind of new players, perhaps folks who perhaps they haven't woken up to the, to the, to the climate crisis. And like today they, you know, it's incredibly clear. That as custodians of capital, they need to be moving very rapidly towards net zero. we can hopefully help them as partners to identify the the opportunities and the gaps. I mean, a lot of this is pointing out the gaps and hoping that we can find people who fill those gaps, Whether it's us or others.
Jason Jacobs: And then given that this is such a systems problem, as you mentioned, I mean, there's innovation required in education and in R&D, and in democracy and in policy and given generations, perch, and might, and relationships and credibility and resources and access, et cetera, how much does generation get involved As a firm, or, I guess, or personally in some of these other areas of the system that matter. And do you view those as a distraction, where you need to stay in your lane and do what you do best? Or do you view it more as a duty where you try to kind of get your tentacles into as much as. you can?
Lila Preston: So, yeah, systems is sort of the way to take this on, because I think if you don't see the systemic interactions, then you will solve a part of the puzzle. Not the whole puzzle generation has the real, it's a benefit of being a advocacy firm, as well as an investment firm. And that's actually really important. It's a design principle that was established by the group of partners in the early team formation at generation to say that we can show up as advocates and be investors at the same time, we don't have to put one hat over here.
Another hat over there. And so as a result over the years, generation has supported so many things either through our foundation or through our advocacy ranging from early days, the carbon disclosure project, the global impact investment network, the establishment of kind of the Iris taxonomy, the impact management project, the PRI you know, all of these kind of components of infrastructure that we need across our Sector SASB, I mentioned the TCFD, the task force or Climate-Related financial disclosure and on and on obviously net zero asset managers initiative is the latest, but like, there are so many pieces of the puzzle where we've seen the need to link arms with our LPs, or co-investors or companies to fill gaps.
So I just think gap filling is almost a requirement in my mind. It's not an option. Of course you can't fill every gap. And so pick your lanes and our lane is helping the capital. markets To understand and ultimately value the wealth of information to manage risks and seize opportunities around sustainability insights. We believe if we can do that, that's probably our biggest contribution towards the shifts that need to take place, but there'll be a role for so many other parties. And again, that's why, despite not many people being in the room in 2004, 2005, when the firm was established today, it is a fuller room, but it needs to turn into a real party And I think we're really excited about those partnerships. getting, linking up the chains of capital that need to flow.
Jason Jacobs: we're pushing up on time, but I have a whole long list of things that I still wanted to cover if it's okay. Maybe I'll try something new and just to kind of a quick rapid fire and maybe just say a sentence or two on a handful of these kind of burning topics. Ca- Can we try that and see how it goes?
Lila Preston: Sure.
Jason Jacobs: laughs]. Well, one is just reporting. So when you report your LPs, you talked about how it's not concessionary in any way and should be measured by market based. returns. Are there any non-financial metrics that you report to LPs that a typical gross fund would not?
Lila Preston: Yes. And we have um, annual sustainability impact report, which we'll look at outcomes in planetary health People have financial inclusion. There's about three in each of those brackets. And then we use, as I mentioned, SASB for all base ESG analysis. So that's all shared and disclosed again. We think that's best practice. We don't think we're unique in providing that lens for a portfolio investor to understand a portfolio better we would hope That all asset managers would recognize the importance. Again, having scope one, scope, two scope, three emissions footprint for the companies of our size and stage. It is 100% possible to do that and really important to get them as early on in their evolution to disclose and understand that footprint just as one example.
Jason Jacobs: What do you think about offsets helpful or hindrance
Lila Preston: Helpful as a more of a compensation or a transition mechanism towards structural de-carbonization?
Jason Jacobs: What do you think about carbon removal and its role in getting us to net zero
Lila Preston: critical and requires different risk appetite and risk capital, But will be a part of the mix. It will be in combination with everything on the reductions front. So removals and reductions have to both be taking place as fast as possible and concurrently.
Jason Jacobs: Do you think there will be a price on carbon and should there be,
Lila Preston: Had you asked me the magic wand question. That would be my answer. Universal price on carbon. There should be. Yes. And I think that we have. More chance today than ever before steep political uphill battle, but it would be a very important market signal and very valuable for financial investors in the transition to net zero.
Jason Jacobs: How do you feel about efforts to reforest, especially given that many of the offset projects for reforestation are now becoming victim to wildfires?
Lila Preston: Reforestation is a very important, easy to do immediate action. So big fan of that. I think also the role of regenerative agricultural practices and driving. up Soil carbon and then just removing emissions in season. So having emission reduction activities concurrent with building stored carbon in soils is really critical and trees equally, reforestation and obviously avoiding deforestation and the power of mangroves.One of the interesting anecdotes that came through in the sustainability trends report this year was. the Opportunities globally to build mangrove ecosystem services, they are 400% more productive as a carbon storage mechanism, even in tropical forest.
Jason Jacobs: If your neighbor reached out for advice, who does not work On climate for a living, but is just concerned about the problem and asked what can and should they do to help? I have two questions. One, what advice do you give them? And two, what role do you think that the general public has in addressing the climate? problem?
Lila Preston: So number one, I would send them to watch Al's movies. So that would be kind of step one, joking aside. I think that everybody has a role to play choices we make in the home, whether it's on our mobility choices, our living choices, our food consumption choices, the values that we pass on to our children choices. And then I think financial management, to the extent that people understand what is in their pension fund, what securities do they hold?
Are they supporting a transition into a net zero future portfolio? Or they're supporting one that is actually going to deliver an uninhabitable planet? Would strike me to be something that an average citizen should know should have visibility on and ultimately should demand of their Pension managers or their banks or financial service providers. And even if they have low savings, I think that you can translate that to your consumer choices. And ultimately what's behind the consumer products that you buy. Both in the home and the food you put on the table.
Jason Jacobs: And this would be the point in the discussion where I ask you about what you would change outside of the scope of your control, but you already answered that one, the universal price on carbon. So the next kind of standard question is just for anyone listening that is inspired by the work that you're doing, where do you need help? And who do you want to hear from if anyone,
Lila Preston: so meeting entrepreneurs who are solving problems with their businesses, again, whether it's planetary health, people, health, financial inclusion, I would imagine that that covers a broad swath, of the Economy. And so we'd love to hear from them. And then in terms of kind of linking arms, we are quite open and available to talk about everything from impact management and measurement, to the importance of people and culture, to best in class governance structures and how that carries through to scaling enterprises. Like these are topics that we Would love to continue to share. We do that again, through our insights pieces, we have at least quarterly sort of an ability to share out kind of some thoughts that we're having on the system, positive framework or the net zero transition. What have you. So we're always really interested in getting people linked up and linked in to those efforts and advocacy agenda.
Jason Jacobs: and Lila, We've covered so much ground. Is there anything I didn't ask that I should have, or any parting words for listeners?
Lila Preston: I do think if you take a step back and you say that this sustainable investment agenda, if you think it's different or separate from mainstream investment, I think that's a real challenge. I think we've hit the end of like do no harm or business as usual investing. And there's a really important moment to recognize that all Investments all companies have impact positive and negative. There is no investment that doesn't, and again, it is not all positive. it is not all good. There are puts and takes. And that I think kind of like the mental shift to all capital managers, capital owners, as well as individuals, just take that into your day. Life, recognize that there are consequences, positive and negative to all your actions and in finance, it is no exception. Therefore we have enormous responsibility. So again, it is not acceptable to just do no harm. We have to be shifting towards that system. Positive future, As soon and as fast as possible. So that's the rallying cry. I think you have probably a little bit of an echo chamber here, so hopefully it reaches new participants. So kind of asking folks to engage with the unsuspecting, perhaps skeptic and try a conversation or two to open up their perspective.
Jason Jacobs: One quick follow on question to that is just, it makes me think that it's almost like the lens through which equity analysts evaluate public equities and these companies, for example, and the way that the market values them need to shift. Do you agree? And what might we do? As a country, as a society to help more align the way that these companies are evaluated and valued with uh, long term sustainable abundant sustainability and justice.
Lila Preston: Yeah. So there's probably in the next year or two, we call it the risk of greenwashing, their commitments being made again, probably. A decade later than they should have been, but ultimately great to have people with these commitments, but in the next year or two, you have to look for the evidence of action. There has to be clear concrete action that companies are taking. I would, again, argue that this isn't just an environmental requirement. This is thinking about. our massive important need to focus on broadening the diversity of leadership in finance and in the companies that we invest in. So that has to be evidence with real progress.
And so if that progress is not coming through, there should be consequences, whether as a consumer, because you won't purchase from the company anymore, if it's not making those strides, or if, as an investor you're choosing not to invest in a company. I would say on the public markets, there is quarterly reporting where questions get asked so CEOs, why aren't very long term sustainable energy oriented questions consistently coming up to the top of agenda. We can't have just short term filling in what's the earnings per share, going to be next quarter. Is the focus of conversation we need to broaden the time horizons. And I think, again, everyone can play a role in that, but requiring action off the back of commitments and then using power, whether it's as again, a consumer or an investor policymaker, to call out where there's a mismatch. And I think that's, we're going to see more of that. in the next Two years.
Jason Jacobs: Awesome. Well, that's a great point to end on Lila. This was amazing. I really enjoyed the discussion and thanks for all the work you do best of luck to you and the whole generation team.
Lila Preston: Thank you, Jason.
Jason Jacobs: Hey everyone, Jason here. Thanks again for joining me on my climate journey.
If you'd like to learn more about the journey. You can visit us at myclimatejourney.co. No, That is .co not .com. someday. We'll get the .com, But right now got co. you can also find me on Twitter @JayJacobs22, where I would encourage you to share your feedback on the episode or suggestions for future guests.
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