Patagonia lobs ESG breakup calls back to the wild

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A general view of the Chilean Torres del Paine national park during a wildfire in the southern Patagonia region of Chile January 1, 2012. Around 12,500 hectares have been burnt by a wildfire that affected the world renowned national park, which the Chilean government has declared as a disaster area, local media reported. REUTERS/Stringer

MELBOURNE, Sept 16 (Reuters Breakingviews) - If there were more Yvon Chouinards, humans might be doing a better job of battling global warming. Such sentiments are doing the rounds on social media since the founder of Patagonia revealed on Wednesday that he has ceded control of his outdoor clothing firm. His motive: to direct the earnings generated by what will remain a for-profit company into a charity fighting climate and environmental risks that will own virtually all Patagonia’s shares. Yet he could have built a bigger war chest more quickly by selling the company. That he didn’t is an apt riposte to breaking up ESG.

The idea of separating environmental, social and governance concerns from each other has been gaining traction. It has some appeal: around $17 trillion in assets, per the U.S. Sustainable Investment Forum, sit in funds run by managers from BlackRock (BLK.N) to AllianceBernstein that claim to include ESG considerations in their investment decisions. Yet often they aren’t clear about the relative importance of each of the three, creating consternation and confusion. A climate-focused ESG fund probably should own Tesla (TSLA.O), for example, whereas one prioritising social or governance performance would have a tough time justifying the investment.

In practice, all three should form an integral part of a fund manager’s overall analysis. Not only do they interact with one another, excluding or downplaying one type of performance could result in plenty of risks and opportunities being overlooked.

Forcing companies to pick between the three concepts would also create unnecessary dilemmas. Chouinard, for example, wants to steer more money towards protecting the planet. By handing virtually all shares over to a charitable trust, though, he’s limiting his contribution to the firm’s annual earnings of some $100 million a year, per the New York Times. But Patagonia has a strong brand and a roughly 10% profit margin that beats publicly traded apparel companies like Abercrombie & Fitch (ANF.N). So he ought to be able to sell it at a handy premium to the roughly 13 times trailing earnings A&F commands. At, say, a 20 times multiple, he’d have some $2 billion to deploy.

That, though, would risk selling the company to those who might not defend either the company’s environmentally friendly culture or its employees. His unusual solution is one few are likely to replicate. But behind it is a more responsible approach to managing a business than forcing ESG issues into unneeded siloes.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

Yvon Chouinard has ceded control of outdoor clothing brand Patagonia, the founder disclosed in a letter on Sept. 14. As a result, all company profit will go to a non-profit entity which will spend it to fight climate change.

As part of the deal, Chouinard and his family have transferred all stock with voting rights to the Patagonia Purpose Trust. Overseen by family members and their advisers, according to the New York Times, the trust will be responsible for approving key decisions like choosing the board of directors.

All non-voting stock, which represents the vast majority of shares, has been given to the Holdfast Collective, which Chouinard calls "a nonprofit dedicated to fighting the environmental crisis and defending nature".

Patagonia has annual revenue in excess of $1 billion and profit of some $100 million, the New York Times reported on Sept. 14.

Editing by Robyn Mak and Thomas Shum

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