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Green goods

Do luxury brands have a place in an ethical portfolio? CampdenFB takes a look at the growing trend for sustainability among high-end companies and how family offices can get in on the action.

Luxury and sustainability do not seem like natural bedfellows. In fact during the worst excesses of the boom years, they appeared to be polar opposites. For some, luxury was synonymous with excess, waste and a culture that seemed to know the price of everything but the value of nothing. We live in different times today and the whole concept of luxury is undergoing something of a rethink.

The luxury products market was worth around €140 billion in 2010 and is forecast to be 64% bigger in 2015 than it was in 2010, with sales growing fastest in the emerging economic powerhouses such as China, Russia and Brazil, where the middle classes are rapidly expanding. Western companies are well placed to take advantage of the rising demand, said Willem Sels, UK head of investment strategy at HSBC Private Bank, in April. “Although current share prices already reflect some of this trend, it is likely that luxury goods companies can continue to grow in this space.” Already the increase in demand is paying off – the big luxury houses, such as PPR and LVMH, reported strong annual results in 2011, while the likes of Mulberry returned 50%+ over one year, leading many to class luxury as a key part of any portfolio.

Emerging markets provide huge opportunities but also huge challenges for luxury goods brands – challenges that the concept of sustainability can help them meet. China, for example, is the second-biggest luxury market in the world but at the same time the sector is seen as “the embodiment of social injustice and corruption”, according to a Chinese economist quoted in a recent article in the Epoch Times. “In a society where 13% of the population or 150 million people earn less than $1 [€0.77] a day, you may wish to control and even regulate further this industry,” says Christopher Cordey, founding director of the Switzerland-based Sustainable Luxury Forum. “The latest ban by the Chinese government on outdoor advertising for luxury goods is an example of this.”

More generally, the luxury sector is suffering from a loss of trust as a result of being identified with past overconsumption, says Tony Siantonas, a senior manager in the sustainability team at the consultant Deloitte. “The idea of exponential and never-ending growth is no longer plausible and people are going to have to face up to that. Nonetheless, it is perfectly possible to make products ethically and source supplies sustainably,” he says. Part of regaining that trust is finding a less extravagant way of consuming. “One of the challenges is the conceptual link between sustainability and luxury, but the idea of sustainable luxury is becoming more important,” Siantonas adds.

Brand is all important for luxury goods, making up far more of the total value of the product than elsewhere in the economy. But it is incredibly easy for that value to be jeopardised. A product or company can easily find itself in the news for all the wrong reasons thanks to the spread of social media. The range of issues the sector needs to be aware of is vast, from the possibility of using conflict diamonds in jewellery and watches to destruction of biodiversity for the perfume industry, child labour and poor working conditions in the fashion industry, and prostitution, which is an issue for the mining and luxury travel companies.

We are also living in an age where consumers, including those of luxury goods, are better informed and more concerned about provenance and quality. “Sustainability plays a part in what I buy,” says Ben Goldsmith, co-founder of green investment firm WHEB Group and one of the heirs to the late Sir Jimmy Goldsmith. His brother Zac was formerly editor of the Ecologist magazine and is now a Conservative MP. “There are two ways people can influence the world – how they vote and how they spend their money. I don’t wear a hair shirt, but I would always definitely choose the sustainable option,” says Goldsmith. Many high net worth individuals of the younger generation would doubtless say the same – meaning companies that are making inroads in sustainability are likely to perform better in the future than those that aren’t.

At the same time, the sector is subject to the same increasingly strict regulations that other parts of the economy face – carmakers, for example, are subject to EU regulations to reduce average emissions per vehicle to 120g/km by 2012. This is far more of a challenge for makers of luxury cars, which tend to have bigger engines and be heavier than other models. In response, carmakers have risen to the challenge. Rolls-Royce has created an all-electric concept model  (the 120EX, pictured) while Porsche, BMW and Mercedes are among the manufacturers that are working on hybrid models.

Yet, asks Cordey, why should luxury be incompatible with sustainability? “Luxury, in essence, celebrates noble materials, authentic craftsmanship and very often cultural heritage and tradition handed down through generations,” he says. “Luxury is also, by definition, a symbol of innovation, creation, quality, know-how, preciousness and expertise,” he adds. “These values correspond often to what is best for the planet and the community.”

However, luxury brands have often been reactive rather than proactive in dealing with the issue of sustainability, particularly family-run businesses where the flipside of a long tradition of artisan craftsmanship can be a reluctance to embrace change. “Companies can be concerned about sticking their heads above the parapet and being exposed on sustainability factors, which is where trade associations and industry-wide initiatives can come in very useful,” says Siantonas.

There are a number of these helping companies to get to grips with how they can incorporate sustainability into their business, such as the Responsible Jewellery Council, the Kimberley Initiative, which seeks to end the trade in conflict diamonds, and the Centre for Sustainable Fashion.

Sustainability fits nicely with the ethos of many family-owned companies, which are focused on the long-term health of their business. “Many of the investments needed to become more sustainable have a longer payback than many publicly owned companies are comfortable with, but family businesses have more freedom to make changes that make sense in the longer terms,” says Siantonas.

A number of family-owned luxury companies are leading the way. “The Italian cashmere brand Brunello Cucinelli [pictured] is a great example of a family-owned luxury brand where a humanistic approach, social care, respect for tradition and nature are values part of the brand’s DNA,” says Cordey.

At the other end of the scale, PPR, which owns brands including Gucci, Yves Saint Laurent and Balenciaga and is led by François-Henri Pinault, has become the first large company to commit to introduce an environmental profit and loss account across all its divisions, after its Puma sportswear brand pioneered the technique. This aims to calculate the environmental impact of its manufacturing.

“Sustainability is not only necessary to minimise business risks and enhance cost savings; it is a must if we want our brands to keep their desirability and competitive edge into the future,” said Pinault (pictured), the group’s chairman and chief executive, in a statement last year.

“An EP&L account is a pioneering solution to provide us with a deeper understanding and real visibility in our businesses, to assist us in reducing and mitigating our environmental footprint and to make better informed operational decisions while taking nature into account,” he added.

Puma’s first EP&L revealed that the environmental impact of the company and its suppliers from the five key areas of greenhouse gas emissions, water use, land use, air pollution and waste, generated through the operations and supply chain of Puma, came to €145 million in 2010, of which 94% came from the supply chain. However, some have said that many of the calculations were guesswork, which highlights how hard this sort of calculation is.

However imperfect, this information allows the company to identify where it needs to focus its efforts to become more sustainable. For Puma, the focus will be on its supply chain, but companies in other sectors will identify different priorities – carmakers or luxury travel companies may find the biggest impact comes from their customers, for example, while fragrance companies such as Givaudan could discover that ecosystems and biodiversity are their biggest concerns.

The ultimate luxury, of course, is in being able to put your money to good use, and more and more companies, family offices and wealthy individuals are focusing on sustainability in their investments, philanthropic activity or their business ventures.

Investors such as Ben Goldsmith, Andre Heinz, whose Sustainable Technologies Fund is based in Sweden, and Al Gore, the former US vice-president and co-founder of ethical fund Generation Investment Management, are just some of the high net worth individuals putting their money where their mouths are. There are many ways wealthy individuals can contribute, says Cordey. “The most obvious one is philanthropy; but just giving is quite old-fashioned. A new breed of wealthy individuals is keener to invest in ethical funds, ethical stocks or eco-companies that offer a similar return to traditional stocks,” he adds. “For me sustainable luxury is not an oxymoron, but rather an exciting opportunity to contribute to solve complex environmental and social issues in a more and more uncertain and intertwined world.”

However, these funds are not the playthings of the idle rich – they are serious businesses focused on profiting from their investments. “This area happens to tie in with my personal interest in the environment, but I don’t do it because I want to change the world, I do it because it is one of the most interesting areas to invest in,” Goldsmith says.

“The world is undergoing something of a green industrial revolution at the moment, with companies doing all they can to become more efficient in their use of resources and to reduce their environmental footprint, cut their costs and protect themselves against increasingly tough environmental regulations. Most companies know that they cannot ignore the scale of the changes that are taking place,” he adds.

Investing: Which companies are sustainable?

There are a number of funds that focus on environmentally friendly and ethical businesses, but direct investments in companies can also make sense – particularly as more and more luxury brands are making inroads when it comes to sustainability.  Leading the way among the larger brands is PPR, found a recent report from private bank Sarasin, which praised the conglomerate for its group-wide commitment to the development of environmentally friendly products. LVMH also scored highly, thanks to its transparency – every brand discloses where and how products are manufactured. Signet, Burberry and Hermès, too, ranked above average when it came to sustainability. But US-based Ralph Lauren found itself last out of the 15 companies examined by Sarasin, while Tod’s, Coach and Guess were also among the poorer performers.

First published in CampdenFO, Issue 14

Copyright for all pictures belong to Press Association, unless otherwise indicated

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