Family business

Family Firms: Leading in green practices, lagging in communication

Family Firms: Leading in green practices, lagging in communication
Oskar Kowalewski, professor of finance at the IÉSEG School of Management, reveals that, while family firms are leading the way in pollution reduction, they need to communicate their environmental policies more effectively.

It appears that we are in for yet another scorching summer. Records are already being broken in many places for the warmest spring season and lowest rainfall in decades. Consequently, concerns about climate change are escalating, and more people are scrutinising whether companies are abiding by environmental, social, and governance policies (ESG). ESG and climate change have become hot topics in the business press.

Professor Oskar Kowalewski
Professor Oskar Kowalewski

When Yvon Chouinard, the founder of outdoor apparel company Patagonia, announced that all future profits would be donated to help fight climate change, the news was widely embraced by the media. Previously, American model and actress Kate Upton had partnered with luxury company Canada Goose to raise awareness about climate change and its effects on polar bears. Both companies hail from the fashion industry, which is estimated to contribute to 10% of global carbon emissions, exceeding the combined emissions of international flights and maritime shipping. The common thread between these companies is their status as family-owned and managed firms. This raises the question: are these announcements merely marketing manoeuvres, or do family firms have a unique perspective?

There is significant evidence suggesting that family ownership affects pollution levels. Many family firms prioritise passing the business onto the next generation over maximising profits. As climate change threatens both families and the long-term survival of firms, family-owned businesses might place a higher value on preserving future climatic conditions and ensuring a sustainable future for their descendants. This may explain the recent environmental initiatives in the apparel industry.

In a recent study, the IÉSEG School of Management adopted an empirical approach to explore differences in carbon emission patterns, using data from family and non-family firms across 44 different countries. We tracked their carbon emissions over the past decade and compared them with the pollution levels of non-family firms during the same period. In our sample, on average, each million dollars of revenue generates 124 tons of carbon emission. However, there is a substantial divide between family and non-family-owned firms. While non-family firms emit 144 tons of carbon emission to generate one million dollars of revenue, family firms only emit 83 tons. These differences in emission intensities aren’t explained by the specific characteristics of family and non-family firms. Instead, we find that the disparity has grown especially pronounced since the 2015 Paris Agreement, suggesting a shift in regulatory policy has had an impact in particular on family firms.

environmental, social and governance (ESG)

Interestingly, family firms with family management exhibit lower emission levels, particularly when the CEO is a second-or-later-generation family member. This aligns with recent studies showing that family values grow in importance over time. On the other hand, firms run by hired CEOs (i.e., non-family members) have seen an increase in their pollution levels. This underscores the central role of family values and familial transmission. Furthermore, we observed that family firms increased their investments in Research and Development following the 2015 Paris Agreement, indicating a move towards the development of greener technologies.

Consequently, we find that family firms pollute less, yet we find also that they have lower ESG scores, including environmental scores. It means, family firms are not communicating their environmental policies effectively. This is a crucial lesson for family firms that could potentially increase their revenues and profits through better communication. Our results also demonstrate that public environmental displays are currently poor indicators of genuine environmental commitment. Investors and regulators should therefore prioritise hard emission data over superficial environmental statements. Our work contributes to the recent literature highlighting this paradox, and may also explain why ESG scores are nowadays controversial.

Oskar Kowalewski is Professor of Finance at the Department of Finance at the IÉSEG School of Management (Campus Paris), Associate Professor at the Polish Academy of Science, and Fellow of the Wharton Financial Institutions Center at the University of Pennsylvania. He was previously Warsaw School of Economics (SGH) and the Kozminski University in Warsaw.