Writing the Roadmap for Sustainable Capital

Lila Preston, the Co-Head of Growth Equity Strategy at Generation Investment Management, began with an environmental awareness gained through a love of the outdoors, and is enabling sustainable growth companies to scale and succeed by investing equity capital and delivering deep expertise.

Your career has been centered around sustainability for some time now, going back to your time as a Fulbright Fellow in Chile working on forestry and conservation projects. What was that experience like and, stepping further back, how did your interest in sustainability start?

I grew up in a New York City apartment, and that environment led me to search for something more expansive. I was motivated to be outdoors whenever possible, and I spent all of my high school summers out West in Idaho and Wyoming, conducting wilderness studies and working on a ranch.

In high school during the mid1990s, I was inspired by the work of Doug Tompkins, the Founder of North Face. He was a deep ecologist working in the Patagonia region of Chile to preserve some of the most pristine temperate rainforests still undeveloped.

After graduating from Stanford, I went to Southern Chile with a Fulbright Fellowship to focus on community-based conservation. I wanted to better understand conservation models that took into account the needs of local communities to be involved as stewards, educators, and conservationists. I was fascinated with the ecosystem and the vast beauty of Southern Chile. The experience piqued my interest in how to scale impact beyond one piece of land, or one country, but across systems.

I moved back to California in April 2000 almost the day the tech bubble burst. I was trying to get a job and so many of the tech companies where I was interviewing were going out of business. I landed at a non-profit organization called VolunteerMatch, where I was first introduced to finance and fundraising in order to help them scale. It was on-the-job finance training, and really sparked my interest in how to use finance as a tool to drive impact.

Ultimately, I chose to go to business school to get formal finance training at London Business School. It just so happened that in my second year of business school I was introduced to a startup called Generation Investment Management. It had some very impressive founding partners, and I was lucky enough to do a project which eventually turned into a job. So, since early 2005 I’ve been at Generation – beginning in our London office for 11 years, and in the U.S. for about five years. I’ve worn many hats – first as a thematic research analyst, then as a public equity analyst covering the consumer sector, and for the past decade or so, I have been focused on private equity and growth stage investment through our Sustainable Solutions platform.

Generation is tackling the entire sustainability sector with investments in smart mobility, consumption, energy, food, and a half dozen more areas. With so many different subsectors under the general umbrella of sustainability, and Generation’s own limitations, how do you think about meaningfully allocating capital across all of them?

Within our private equity strategy, we focus on investments in growth-stage businesses in three core areas: Planetary Health, People Health, and Financial Inclusion – addressing a broad set of the sustainable development goals (SDGs).

• Planetary Health includes low or zero carbon solution transforming mobility, food, energy and enterprise

• People Health relates to better health outcomes and a lower-cost, more accessible healthcare system

• Financial Inclusion supports access to finance and an equitable future of work

At Generation, we believe that we are in the early stages of a systemic, secular, and multi-decade transition to a sustainable economy – we call this the “Sustainability Revolution.”

Whether it is the shift to electric mobility, plant-based diets, the distributed future of work, or to remote healthcare – all of these trends are exactly why Generation exists: to research, debate, and to translate developments into the very best investment opportunities. By creating competition for capital across a set of themes, we believe we can find the very best investment opportunities. You can look at our latest published Sustainability Report regarding our third fund, which sets out the work Generation does across the three pillars.

What are the drivers that will continue the push toward sustainability in consumer companies? What is the biggest hurdle in the retail sector in reaching goals such as zero waste or net zero carbon emissions?

We are seeing the power of consumer demand for more sustainable products and services. This has been a drumbeat that has only continued in pace and volume over the past 15 years that we’ve been looking at this sector.

We believe consumers should not need to pay more or sacrifice quality for sustainable products on a holistic level. In our view, the best products in the market have sustainability baked into a superior total value proposition. This is a key tenet of our investment case in the area of sustainable consumer. At Generation, we see strong secular growth of many segments – including healthy/natural food, natural personal care, natural homecare, smart home and so on. Over the years there have been many examples of how consumer demand can propel more sustainable products – just take Patagonia, Tesla, Nest, Seventh Generation and Beyond Meat.

The biggest hurdle in the retail sector is often not the innovative products and more sustainable technology, it is the distribution channel – whether it be the lack of commitment from big retailers or the high investments needed in terms of marketing dollars. I do believe consumer demand will continue at pace, but we need to see more pressure so that large retailers and consumer brands also manage and measure their own footprints, and commit to bringing more sustainable products to market. There needs to be more visibility and transparency in supply chains and the impact of consumer choice on environment and society.

You are a board observer at Optoro, which aims to eliminate waste in the retail industry by offering a seamless returns platform. What is the pathway to scale for these technologies that sit at the intersection of retail and logistics? Will there be any movement to partner with sustainable mobility providers?

Optoro sits at the software layer to power the decision making related to product returns. Each year in the U.S. alone, $400bn worth of merchandise is returned. Five billion pounds of waste from returns are sent to landfill. On average, Optoro clients were able to keep 96% of their returned and excess goods out of landfill. This gives just a sense of the size of the problem or opportunity. This is a massive intervention point for large retailers, especially during COVID19 when more and more people are buying online, which boosts the volume of returns.

Optoro itself does not power transportation and logistics. They are more like the brains behind smart disposition – finding the best next home for a product. They work closely with incumbents – they have a partnership with UPS, as well as with major retailers like IKEA, and they will benefit from advances in clean mobility and efficient fleet management.

Complementary to this, we’ve done work on broader supply chain and logistics – this has been a consistent focus for our team for over a decade. One example of driving efficiency in the trucking and logistics market is Convoy, one of our portfolio companies. It is a digital freight marketplace that connects shippers to carriers to optimize the movement of hundreds of thousands of truckloads across America. Convoy uses advanced analytics and a centralized decisionmaking platform to solve inefficiency and wastage in the $800bn trucking industry. They save money for shippers, increase earnings for carriers and reduce emissions from empty truck miles.

Generation recently invested in Andela, the largest network of software engineers in Africa, and has also invested in M-Kopa, a solar energy company out of Kenya. Both of these represent the firm making a push toward investments which help to democratize sustainability in Africa and emerging growth markets. How do you view the sustainable opportunity and related challenges in emerging growth countries, and how does Andela fit into that broader theme?

As mentioned, our Growth Equity strategy addresses a broad set of the sustainable development goals across the pillars of Planetary Health, People Health, and Financial Inclusion. MKopa is a great example of a company that addresses all three. First, they principally sell distributed solar systems to offgrid households across Africa (this displaces in many cases fossil energy previously used for lighting). Second, they are able to address indoor air pollution due to displacement of kerosene indoors, not to mention reduce risk of re, so that addresses respiratory health. And finally, they enable households to make micropayments (using the displaced kerosene budget) so that the family owns the solar system after a year, and also establishes a payment history such that they can enter the formal banking system. So, while it isn’t always the case, we recognize that looking at an investment systemically from different angles can reveal some of the most profound sustainability solutions.

Part of Financial Inclusion for us is ensuring the future of work is resilient, inclusive and low or zero carbon. In 2016, Generation embarked on work to sketch out trends in the future of work including the power of distributed workforces.

For those who don’t know the company, Andela is a provider of engineering as a service. They empower African software developers to address the global undersupply of engineering talent and match them with tech companies in markets across the U.S. and Europe. They have trained and matched several thousand software developers across six African countries.

It is increasingly clear that the future of work will be distributed, and we have absolute conviction that the model of work is changing to be more remote, dynamic and empowering, enabling access to new and different forms of talent. As Jeremy Johnson, the CEO, is known to say, “Brilliance is evenly distributed, opportunity is not.” We believe Andela represents the education and upskilling model of the future, while broadening access to earnings and development of a global workforce.

Many sustainability-focused companies are trying to implement change with new technology, business models or value chains. From your perspective, is COVID-19 hurting or hastening the implementation of these innovations? On a more macro-level, how do you see COVID-19 impacting sustainable themes?

Even before COVID19, Generation has always aimed its research and origination engine at pockets of the market where we see disruption and growth that we think can drive a better long-term future. We study cost down curves across technologies, track changes in consumer demand, and monitor broader climate and societal shifts. So, in some respects, putting aside so many things that are challenging at this time, navigating disruption is what we actually do best.

One of our great methods for understanding sectoral shifts towards sustainability are what we call Solutions Summits.

Generation has held over a dozen of these Summits, which are curated two-day events gathering 30-40 executives and thought leaders in a particular industry around a massive board table to discuss the long-term transformations taking place in their industries.

To give an example, at the end of last year two members of our team put together a Sustainable Healthcare Summit in San Francisco. The event included big companies like Google, Apple and Danaher, policymakers from the FDA and NHS, doctors from some of the top medical schools, and about a dozen private companies we wanted to build relationships with. These summits help us identify how disruption may affect various sectors and where the most sustainable solutions may lie.

Despite the abundance of investors seeking to deploy capital in the sustainability space, especially recently, do you still see unmet funding needs? In which sectors or areas? What is behind the shortfalls in those areas?

In some respects there is quite a bit of capital chasing high quality companies. The growth markets have been somewhat frothy with respect to chasing high quality digital disruption and software business models. That probably is true through cycles and makes sense.

Perhaps the one area that is less fully-resourced is project development finance for new tech deployment. This seems to be a harder area to attract capital, especially for deployment of novel environmental technologies that may still have some tech risk to work through. For example, the bioeconomy is a more challenging pocket of the market to scale, requiring sometimes significant capex for new production systems, and there I’ve seen some companies struggle. However, we have observed some of the large asset managers, like KKR and TPG, jumping in to provide a broader spectrum of capital alternatives, which is great to see.

Nomura Greentech as an advisor, and Generation as an investor, have had parallel experiences in seeing sustainability moving from the peripheral to the core. Are you confident that this momentum will continue?

Yes, we are confident that the momentum around more sustainable business innovation is still in the early innings. We actually track these shifts in our annual Sustainability Trends Report. Our 2020 report was just released in July. The report draws on more than 190 sources, and now is in its fourth year. It provides insight into the transition to a sustainable economy, the accelerated steps made partly because of the global pandemic, as well as the critical choices now facing governments, businesses, and investors to ensure a healthier, safer and more equitable world.

Key findings from the 2020 Sustainability Trends Report include:

A rising awareness of the need for change: the data in the report confirms that the pandemic triggered fundamental changes in consumer and social behavior. This is matched by an acceleration in innovation by governments and businesses.

The report finds a growing awareness that the world’s collective social and economic fate is inextricably linked to that of the natural world. There is now a shared understanding of what an existential threat might look like. The consequences of ignoring scientific advice and of poor governmental decision making are in focus.

The report finds that to limit global temperature rise to 1.5 degrees Celsius – in line with Paris Agreement targets – greenhouse gas emissions need to fall by 7.6% per year for the next decade. That is more than the drop expected in 2020 due to COVID‐19.

The report also highlights the many ways in which the burden of the crisis has fallen unequally, reinforcing and highlighting unfairness across societies. It argues that addressing these historical injustices – reflected in the Black Lives Matter movement – must be at the center of a transition to a sustainable future.

What themes or trends in sustainability are you most excited about over the next 5‐10 years? With a longer‐term perspective, perhaps through the second half of the century, what are macro changes and drivers you anticipate?

If you ever meet someone from Generation, you will probably hear the word “roadmap.” These are market maps that help us research the future and how sectors will evolve, and identify the risks and opportunities associated with sustainability.

As a firm, Generation has completed 280 roadmaps, and 120 of those have been completed by the Growth Equity Team.

Recent roadmaps have included: “Asset and facility management software” as part of Energy & Buildings, “personalized medicine” under Healthcare coverage, and “alternative protein,” which framed our most recent investment into a novel protein company called Nature’s Fynd.

As an example, our Agriculture & Food coverage area is one which has been built up over a decade, including three roadmaps on tracking plant‐based trends since 2015, three on biologicals in agriculture, two on logistics and last mile delivery, two on environmental intelligence, one on soil health, and so on.

Recently we had a great roadmap debate on “Restaurant Software and Commercial Food Waste” – this is one that was a refresh built upon our initial coverage of this space in 2015 and informed by our investment in a company called Toast. A fact I was reminded of again was that “if food waste were a country, it would be the third largest greenhouse gas emitter after the U.S. and China.” That, plus the current market dislocation related to COVID‐19, makes this an important time to recast our work and think about not just the environmental opportunity of waste reduction, but the social and financial inclusion opportunity for technology disruption to improve restaurant profitability and viability through this crisis.

Are there any themes in sustainability around which you have a contrarian view?

We do take a contrarian view in that we will be very long‐term oriented, and perhaps see a market transition before others.

Back about five years ago, we were very early to identify the trends towards electrification, automation and sharing in the mobility sector. This is an area where we have made several investments over the years including Proterra, Motivate, Greenroad, Gogoro and Deepmap.

Last year’s Sustainability Trends Report cited that 2019 marked a milestone as the world reached five million electric or plug‐in hybrid vehicles on the road, over 1,500 bike sharing schemes and, in the U.S.,

70,000 alternative fueling stations. Many countries have set dates to permanently end sales of petrol and diesel cars.

At the same time, the WHO cited that 90% of children still breathe toxic air, and congestion in major cities continues to increase while public transit ridership is in decline.

I mentioned the future of work and thinking about remote collaboration and distributed workforce back in 2015. We would have never expected that this would play out this way, but certainly we see an acceleration on the appetite for distributed workforce with COVID‐19.

Today, we are quite bullish about the future of personalized medicine, the adoption of biologicals in agriculture, the advances of non‐animal protein and the acceleration of green data infrastructure for cloud computing, just to cite a few examples.

You’ve been working in and around sustainability for over 15 years. What has surprised you the most in the way the space has changed?

One of our favorite quotes that we often refer to at Generation is by the economist Rudi Dornbusch, “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.” I truly did think back in the 2008‐2009 timeframe that we were on track to put a price on carbon in the U.S. We had the Waxman/Markey bill and were in an environment where that could have taken place. So, it is astounding to me how long it has taken for us to have a more significant price signal related to pollution.

That said, 2019 proved to be a seminal year in terms of mainstream coverage of impact investment and sustainability. The topic of climate change rose to the top of the World Economic Forum’s global risk matrix, traditional investment groups like BlackRock made bold climate commitments and more and more companies are setting an internal price on carbon or adopting net‐zero targets. Discussion of diversity at the board level, the true costs of income inequality and how to address the Sustainable

Development Goals (“SDGs”) are becoming more common investor topics. As we entered 2020, we were seeing increased attention to Environmental, Social, and Governance (“ESG”) disclosure and were glad to see progress at many levels.

Then the past nine months have been unprecedented in terms of a health crisis, an economic crisis, and a still‐looming climate crisis. There has never been a more important time to think about systems‐positive investing and the imperative to “Build Back Better.” In July, two of our founding partners, Al Gore and David Blood published an op‐ed in The Wall Street Journal which advocates for that and we are heartened to see this philosophy play through into some of the public discourse now too.

Having worked in finance for much of your career, how have you been able to navigate a field that is dominated by men? What obstacles need to be removed for the industry to become more diverse?

Diversity and inclusion are topics that have only grown in importance over my 15+ years in finance. It has not reached a tipping point yet, despite global attention and social movements. I just don’t think – especially in the finance sector – that we’ve made enough progress. I must say there were times, especially when I used to be a public equity analyst, where I’d end up at an analyst day and be one of three women in a room of hundreds. I think private equity traditionally has been just as poor in terms of the metrics around female participation.

According to Prequin, 18% of private equity employees worldwide are women. This is the lowest figure of any asset class and is unchanged from 2017. And only 10% of senior roles at private equity firms are occupied by women.

Generation has and will continue to focus on diversity, equity, and inclusion as a key business topic because it is conclusive that more diverse teams make better investment decisions. Full stop. And while we have made progress in gender diversity at our firm, we still have distance to travel in terms of broader diversity, and this is a key priority. If we don’t learn, build capabilities and join forces with co-investors, clients and others on this topic, we will not succeed in delivering sustainable capital allocation.

Who is your sustainable hero and why?

I get to work with one of them every day. I could list several people like the late Edward Abbey or Rachel Carson, or current leaders like Paul Polman, Christiana Figueres and Greta Thunberg, but I can’t tell you what a privilege it is to work alongside Al Gore, among my other partners at Generation. To see Al host a Solutions Summit on any number of topics like the future of food, the future of mobility, or the future of healthcare is to watch a true systems thinker at work. Rarely in my career have I seen someone able to operate at 30,000 feet and three millimeters in terms of depth of knowledge on topics related to sustainability. It is inspiring.