Billionaire activist investor Bill Ackman, the CEO of the $13 billion hedge fund Pershing Square Capital, made a case that capitalism is “the most powerful potential source” for solving society’s biggest challenges — and ESG investing is ushering in that change.
“With the benefit of substantial philanthropic and investing experience, I have come to believe that capitalism is likely the most powerful potential force for good in addressing society’s long-term problems. A successful business operating ethically and sustainably can create many thousands of high-paying jobs, deliver high long-term returns for pensioners, long-term savers and other investors, and provide goods and services that materially increase its customers’ quality of life, broadly defined. That said, capitalism is far from perfect,” Ackman wrote in a shareholder letter published on Monday.
Ackman, 54, a high-profile activist investor usually known for picking up large stakes in publicly-traded companies and effectuating corporate change, pointed to the elevated importance of environmental, social, and governance (ESG) issues boardrooms and managements need to examine and tackle.
“We believe that good ESG practices are fundamentally aligned with running a successful business. As consumers and other corporate customers have become increasingly educated on matters of ESG, they have begun to avoid companies that contribute to climate change or do not treat their employees well, while rewarding companies with their business that have sustainable and responsible policies. Similarly, a growing number of investors have become increasingly concerned about the risks of companies which do not take ESG issues seriously. These investors avoid investing in companies which do not meet high ESG standards, reducing the valuations and investment returns of these businesses, negatively impacting their cost of capital,” Ackman added.
Ackman, who now deploys an ESG lens to evaluate investment opportunities, explained that as investors move capital away from companies that score poorly on these environmental and social issues and into firms that do better for society and the planet, Pershing Square “can help accelerate this process” with its long-term approach.
“Our focus on business quality has largely enabled us to avoid investments in businesses which make products or deliver services which we do not believe to be desirable, which treat their employees poorly, and/or which have long-term financial and legal risks that are a consequence of their negative externalities. We believe that this approach has helped us to avoid losses and generate profits by identifying great businesses that have contributed to our long-term investment returns, and by avoiding others which would likely have generated losses in the portfolio,” Ackman wrote, noting, though, that Pershing Square has made mistakes in the past where it “failed to fully consider certain ESG shortcomings in a company’s approach to business.”
To be sure, Ackman said they don’t have a uniform set of factors when evaluating ESG, but instead, the due diligence process depends on the company and the sector.
Among the Pershing Square portfolio companies with stellar ESG practices are Agilent (A), Starbucks (SBUX), Lowe’s (LOW), Howard Hughes Corporation (HHC), and Chipotle (CMG). Last year, Ackman’s Pershing Square Holdings, the hedge fund firm’s publicly traded vehicle, posted its best year ever, returning 70.2%, far outpacing the broader market. The fund is up 5.9% year-to-date as of March 23.
“Each of our companies’ ESG initiatives generates a materially positive benefit to society, and fosters customer and stakeholder loyalty, which contribute to the creation of shareholder value,” Ackman added.
The long-term shareholder added that Pershing Square could be “highly supportive of investments that reduce short-term earnings, but increase a company’s long-term net present value.”
In the letter, Ackman acknowledged that he used to think “business was about making money, and philanthropy was about doing good.” He noted that the Pershing Square Foundation had contributed hundreds of millions to addressing inequality, education, health care, social and criminal justice, and more. Earlier this month, Ackman, an early investor in Coupang (CPNG), donated 26.5 million shares of the South Korean e-commerce giant stock, worth more than $1.3 billion at the time, to the Pershing Square Foundation, a donor-advised fund, and another unnamed non-profit.
“Despite these growing resources and the excellent works of many important organizations the Foundation has supported, over time it has become increasingly clear to us that philanthropy alone cannot save the world. Unfortunately, we cannot rely on governments either,” Ackman wrote.
Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.