Firstly, regarding governance factors, the luxury sector ranks poorly in general terms. Some factors that must be assessed are board quality, remuneration schemes, corruption and ethics showed by integrity and reporting, and the protection of shareholders’ rights.
To start with, some companies are controlled by families from first to the third generation, their decisions tend to be final, and their interests come first so that some firms underperformed during the last years due to the stubbornness of the executives and the owners about particular issues. This matter could be better managed by ensuring a diversified board integrated by experts in key areas related to the luxury sector and also if manufacturing gives a sounding board and various insights.
Regarding remuneration schemes, many levels seem to be consistent with the companies performance but around 35-40% of management remuneration is concentrated on the CEO. Other issues to look at are for example how variable pay is structured (which now is half of the remuneration on average), and an equity-based component of the remuneration that is now being adopted by most of the companies.
Third, referring protection of shareholders’ rights, you should look at the CEO/main shareholder link, free float, multiple voting rights, the percentage of capital increase possible with no subscription rights, and takeover defense/golden share schemes. In general, luxury firms do not align with shareholder interests because some families hold the vast majority of voting rights and also benefit from double voting rights.
Fourth, regarding integrity and quality of reporting, the disclosure level is near to the average compared with other industries.
Lastly, regarding business ethics, the general picture is favorable if we look at aspects such as litigation, taxation, and whistleblowing policies. Although tax issues are common in the sector due to transfer prices, other aspects such as the adoption of proper anti-corruption policies, whistleblowing processes, and codes of conduct are quite positive and common among luxury companies.
Moreover, regarding environmental factors, some objectives to accomplish are the inclusion of clear and ambitious targets related to ESG projects and the company strategy and also decrease the green impact.
Green impact refers to issues such as climate change adaptation and mitigation, a decrease of carbon footprint, pollution prevention and control, the preservation and restoration of ecosystems and biodiversity, sustainable use and protection of marine resources and water, and a transition to a circular economy.
Examples of these are the signatory of the Fashion Pact by lots of luxury firms to reach several environmental goals, implementation of compatible actions with the Paris agreement’s 1.5°C trajectory through a "fair transition" to achieve net-zero CO2 emissions by 2050; the use of ECONYL (a recycled fiber made from plastic waste), upcycling, use of renewable energy, elimination of fossil fuel-based virgin plastic in packaging, the reuse of materials, and other ways of recycling.
Ratios you may want to use to compare carbon footprint: emissions/sales, emissions by employee, and water consumption/sales.
Finally, regarding social factors, some variables to look at are health and safety, working conditions, supply chain, and product responsibility.
In the first place, health and safety are not so relevant for this industry because luxury is a low-risk activity in itself. Secondly, referring to product responsibility, the industry score is pretty high due to lots of the firms are members of REACT, the anti-counterfeiting organization, plus most of them are managing recycling initiatives and offering repairment assistance for damaged goods as an aftersale service.
Secondly, regarding working conditions, this refers to factors not necessarily above average compared with other industries. Some examples are labor relations controversies, freedom of association, training hours per employee, the total amount of money invested in training, working time, remuneration, and minimum wages.
Lastly, referring to supply chain, there is a lack of regulation on issues you need to assess such as the number of suppliers and longevity of supplier relationships, if suppliers are selected based on ESG criteria, the percentage of production subcontracted, and the number of KPIs related to environmental and/or social impacts.
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