“There are now more than 2,700 billionaires, 600 more than one year ago. They, too, can be cajoled, bullied and taxed to make them act in everyone’s interests and commit to restore damaged nature,” noted John Vidal in following the end of COP26 in Glasgow.
At the risk of seeming to defend the indefensible I’d like to take issue with Mr Vidal. It’s easy to take a pop, to have a negative view of billionaires. Yet sustainability is increasingly and vitally important to them in their approach to running their businesses. And many of them are already doing something about it.
“Luxury and sustainability are one and the same,” says François-Henri Pinault, boss of luxury goods conglomerate Kering, who numbers Gucci, Yves Saint Laurent and Alexander McQueen amongst the brands within his empire. He has gone all-in to change the way his businesses approach [environmental, social and governance] ESG issues.
Kering has developed an innovative tool, the Environmental Profit & Loss (EP&L) account for measuring and quantifying the environmental impact of its activities. It is also a major driver behind the fashion pact which was launched at the G7 Summit in Biarritz. The pact is a global coalition of fashion and textile companies committed to three key areas: stopping global warming, restoring biodiversity and protecting the oceans.
Now nobody, no corporation, no billionaire, scores 100% in fulfilling ESG criteria. We have conducted research into billionaire-owned companies, using two different methods of analysing ESG compliance, and analysed their performance over the past five to seven years. We discovered, to our initial surprise, that the 80% of billionaire-owned companies that scored well have outperformed their less ESG-compliant peers. Why is this?
Most (some 80%) billionaire-run business are family enterprises, where the founder is involved in the day-to-day running. Jokes about the TV series Succession aside, they have a vested interest in ensuring their businesses are future-proofed, able to be passed onto other family members. From an emotional perspective, they may well seek to see their business playing a part in a better future for their children – a financial and social/environmental legacy.
Long before the ESG headwinds gathered force, some billionaire-owned companies had already started to make important contributions to their local environment. Dan Gilbert’s Rocket Companies (originally Quicken Loans) is the largest home mortgage lender in the USA. Since founding his business in 1985, Gilbert has committed financial support and services to help regenerate his hometown Detroit.
The biggest project has been a $5.6bn investment in renovating buildings in poor swathes of downtown Detroit, creating 24,000 jobs in the process. Mike Duggan, Mayor of Detroit, has acknowledged this important contribution saying, in April 2020, “The Rocket Mortgage and Rock Family of Companies continues to step up to the plate as a partner for the city and its residents”.
The necessity to be on the right side of ESG trends has been growing every year. It is not just the looming threat of climate change or calls for greater social justice but the demands of external shareholders to see proper environmental management, social diversity and governance.
Any business that scores badly from ESG perspectives will face increasingly powerful resistance. Consumers will avoid their products, they will face regulatory criticism and end up on the wrong side of secular trends. Capital will then flow to their competitors. There is also the reputational damage that billionaires face should they fall foul of malpractice.
As we saw at COP26 it is hard to get real consensus from hundreds of countries if a major stakeholder wants to hang tough or delay. It is similar in the corporate world where fossil fuel corporates have moved as slowly as their giant supertankers to alter direction and actually implement changes. Crudely it is much easier and faster for individual owners to enforce their will. And potentially more profitable.
Take Adani Green Energy, which has been the leading renewable energy company in India since its foundation in 2015. It operates the Kamuthi Solar Power Project, one of the largest solar photovoltaic plants in the world and claims to be the world’s largest solar developer by capacity.
Yes, its sister company does operate a number of coal-fuelled power stations but Chairman and founder Gautam Adani has seen the future. Commenting on a deal with Total Gas in January 2021 he said: “We have a shared vision of developing renewable power at affordable prices to enable a sustainable energy transformation in India. We look forward to working together towards delivering India’s vision for 450GW renewable energy by 2030.”
It seems to be working. In the quarter ended September 2021 net profits at AGEL rose 455%, giving it a market value of $20.3bn.
Billionaires are more likely to run their businesses in a way that will ensure that they are sustainable economically by taking a conservative approach to M&A and corporate activity, being cautious in relation to leverage, taking a longer-term view of the opportunities and threats that face their business. This makes them better equipped to weather economic storms that might impact their corporate competitors
All of this demonstrates an alignment with the interests of investors, personal and institutional alike. Investors prefer businesses that are managed well, with an eye on the future and not on maximizing short-term profits, and that will not be left behind as ESG considerations become ever more important. Combined, these factors make the many billionaire-run companies that are adopting sustainable models and taking ESG seriously attractive long-term investment propositions.
Samed Bouaynaya is the portfolio manager for the Global Billionaires fund. The views expressed above are his own and should not be taken as investment advice.