Families are the true eco-warriors, institutions are just ticking boxes

Fifty years ago, US economist Milton Friedman argued: “The Social Responsibility of Business is to Increase its Profits.”  

But the pursuit of profits by a growing number of entrepreneurs is damaging the planet and a rethink is overdue.

Time and again, as the cries of the green lobby get louder, companies and institutions talk of the importance of taking action on climate change but reap rewards from the status quo. Instead, family enterprises, who care more deeply for the future generations are stepping up to the plate.

Family offices lead the way in sustainable finance innovation because they are in a post-capitalist phase, more concerned with their reputations than profits generation

Alan Schwartz, co-head of Australia’s Trawalla Group family office set the tone this summer, as reported in Family Capital last month, by saying social impact investing cannot save the planet until company profits account for environmental costs and improvements.

At present, companies do not pay for the damage they cause, and green endeavours do not boost the bottom line. Sir David Attenborough’s Extinction: The Facts squarely puts the blame for biodiversity destruction on a corporate obsession with growth, along with government inaction. 

Former Goldman Sachs risk chief, Bob Litterman is a director of the World Wildlife Fund, backed by Roche’s Hoffmann family since 1961. 

He has published a report for the US Commodity Futures Trading Commission which concludes climate change is a market failure. 

The report has called for carbon pricing and a level of corporate transparency which can achieve a more sustainable accounting approach.  

Members of the financial community egged on by increasingly worried central banks, insist they are deeply concerned about the direction of travel. 

But profit growth and rising fees are central to their way of life, as well as their bonus pools. They welcome corporate pledges to achieve zero-carbon status by 2030 or 2050, but rarely ask for an action plan. 

One sector where sustainability has punched through is renewable energy via innovation and government subsidies which made it more profitable than fossil fuels by 2018.  But it was a long, tough, haul and institutional investors like to travel easier routes, which rarely live up expectations. 

A recent survey by Invesco, the asset manager, found that a majority of investors expect to use cost-efficient passive styles to meet their Environmental, Social and Governance (ESG) requirements within five years.

This may be better than nothing but it amounts to an easy way for investors to meet their green commitments, without needing to make further commitments. 

Green ETFs can boast a strong performance, but this is largely due to a 30% weighting in technology stocks, whose outperformance has little to do with climate change. And banks of computer servers, particularly in cryptocurrencies, can produce surprisingly high emissions. 

Technology also performs poorly on broad ESG criteria because it tends to undermine job prospects. Concern is also growing over the way algorithms from consumer-facing tech is manipulating user behaviour in a damaging, or addictive, way. Facebook, frequently included in passive ESG products, has been forced to develop a science-based hub to counter false climate-change claims on its platform.

Green bonds have been another lazy route to riches for some investors. But the Bank of International Settlements (BIS) has failed to find proof they reduce emissions.

Corners are being cut elsewhere on the ESG front as research costs, particularly for passive products, are reduced and managers overlook warning signs at certain companies. Governance at payments company Wirecard was questioned, long before it collapsed. 

It was an open secret that fashion retailer BooHoo relied on UK sweatshops long before a recent scandal erupted. The BIS says investors would do better backing green-rated companies than green bonds.

J Safra Sarasin, controlled by the Safra family, believes it is far better to probe corporate credentials, rather than rely on ratings based on self-reporting by companies. It has resorted to using cameras and physical inspections to inspect potential infringements.

Activist investor Jeff Ubben of ValueAct has won backing from Lynn Forester de Rothschild in plans to set up a fund dedicated to encourage responsible corporate stewardship.

Family offices lead the way in sustainable finance innovation because they are in a post-capitalist phase, more concerned with their reputations than profits generation. Sustainable ventures are frequently driven by families in their early stages. 

Keen proponents of green issues include Jame Murdoch, Nat Simons, Jeff Skoll, Reuben Munger, Ben Walton, David Packard, and Jeremy Grantham. But there are many others who often join forces at lobby groups like Toniic, backed by 400 families.

Martin Rex Empacher is pursuing ESG opportunities for YardHouse family office but stresses the importance of challenging the assumptions, such as those which assume supply chains are sustainable.

Stripe, the tech-driven payments company, founded by Patrick and John Collison, has hired a climate change team which invests in ventures capable of stripping carbon dioxide out of the atmosphere.  It believes this is a more reliable way to deal with emissions than carbon offset deals with third parties, which rarely get audited. 

Bill Gates’ Breakthrough Energy has gathered $1 billion from wealthy investors to back clean energy ventures capable of reducing carbon dioxide emissions. Pierre Omidyar is dedicated to sustainable markets, encompassing socially-responsible internet use. 

The potential in Elon Musk’s pioneering electric cars and batteries have made Tesla one of the largest listed companies in the world.  

Marc Benioff draws on family values to run his US corporate software supplier Salesforce. He condemns Milton Friedman’s view of profits and calls for the development of stakeholder capitalism. 

Members of the Rockefeller family pioneered the divestment of fossil fuel investments, leading to the view that such assets would become stranded, and ultimately worthless.

In January 2014, Bob Litterman went a step further by persuading the World Wildlife Fund to take a short position in stranded assets like coal, oil and gas and use it to fund a long position in the S&P 500 index. 

By December 2019, according to Litterman, this Stranded Assets Swap was outperforming with an annualised return of 13%.