In this content I am presenting my personal opinion as an active private investor. This content is not intended to provide investment, financial, accounting, legal, tax or other professional advice and should not be relied upon or regarded as a substitute for such advice.
Do Pure Climate Stocks with large CEO ownership outperform their competitors
Environmentally focused companies like Tesla continue to earn attention for outperforming the market…and in many cases for the outsized profiles of their CEOs. Executives like Elon Musk command attention not just because they seek it, but also because they own such large controlling stakes of their flagship companies. When they speak, they speak not just for themselves but also for the companies they lead.
This raises an interesting question: does a large ownership stake by a green stock’s CEO influence its performance? Retail investors seeking to support climate-resilient businesses without sacrificing financial returns stand to benefit from any predictor of market success. Could CEO ownership be an important consideration here?
Musk parlayed a small family fortune into a unicorn play with PayPal, but founding Tesla made him the richest man on earth. Tesla claims to have prevented the emission of five million metric tons of CO2 in 2021, and has set its sights higher for 2022. Could that sort of vaulting ambition have something to do with the fact that its founder controls a 10% ownership stake?
Other Pure Climate Stocks follow similar models. Let’s look at their performance, and that of companies whose chief executives do not also possess large ownership stakes, to see if a useful correlation exists between green companies’ ownership models and green stock performance.
- Environmental impact of cryptocurrencies
- The secrets behind insider transactions and the case of Tesla
Does CEO ownership influence market performance?
Let’s start with a basic proposition. A CEO’s ownership stake can indeed provide some insight into a company’s strategic goals. Among companies in the Russell 3000, the highest median three-year total shareholder return is produced by those whose CEOs maintain ownership stakes of between 6% and 15%. This may have more to do with a company’s approach to market capitalization than its overall market strategy: CEOs who maintain significant ownership shares naturally benefit more significantly than others when a company’s share price rises.
This observation is borne out by academic studies. Lilienfeld-Toal and Ruenzi, for example, demonstrate that an investment strategy focusing on firms whose CEOs own 10% or more of a company’s publicly traded shares produces outstanding returns.
How does CEO ownership affect Pure Climate Stocks?
Bloomberg recently published its Green Billionaires list, celebrating individuals whose wealth is derived largely from investments like renewable energy and electric vehicle manufacture that directly address climate change. The CEOs of four Pure Climate Stocks companies appear on the Green Billionaires list.
- Elon Musk, unsurprisingly enough, heads the Green Billionaires list. Tesla dominates the electric-vehicle market it helped create, and Musk personally owns 10% of the company.
- Li Zhenguo is CEO of LONGi Green Energy, which supplies 25% of the world’s solar wafers, the building blocks of solar panels. Li holds a 14% ownership stake in LONGi.
- He Xiaopeng owns 20% of XPeng while serving as its CEO. XPeng designs and manufactures smart electric vehicles and operates an extensive network of free charging stations throughout China.
- Li Bin is CEO of Nio, a manufacturer of high-end electric vehicles. Nio’s share of the Chinese EV market is second only to Tesla’s, and its share value has increased more than sixfold since its 2018 IPO. Li holds a 10% ownership stake in the company.
Each of these companies is publicly traded. As the chart below illustrates, each has performed well over the last three years.
Now let’s look at four Pure Climate Stocks whose CEOs do not hold significant ownership stakes.
- Canadian Pacific Railway owns and operates 12,500 miles of transcontinental freight railway in Canada and the US. It is a major component of North America’s freight infrastructure, transporting commodities, merchandise, and retail goods. It is also a significant facilitator of global trade, transporting containers to and from international ports. Its CEO is Keith Creel, and its largest investors are TCI Fund Management (6%) and Blackrock (4%).
- Nordex is a German wind-power company that designs, develops, manufactures, and distributes multi-megawatt offshore turbines around the world. It also provides development support to utility companies looking to build wind-power systems and integrate them with regional and national power grids. A merger with Acciona SA gave the Spanish energy company a 24% stake in Nordex; less than a year later, former Acciona CEO José Luis Blanco was named CEO of Nordex. SkiOn Gmbh (4%) and Blackrock (3%) are other major holders.
- SolarEdge Technologies, based in Israel, designs, develops, and sells DC-optimized inverter systems used in solar photovoltaic installations. In recent years it has expanded its scope of operations into battery-making and electric vehicle design through acquisitions of Kokam and SMRE. Following the death of founding CEO Guy Sella in 2019, Zvi Lando was named SolarEdge’s CEO. Its largest ownership positions are held by Blackrock (8%) and JP Morgan (4%).
- Enphase Energy designs, manufactures, and sells comprehensive home-energy solutions that integrate solar energy production, battery storage, and software-based system controls. Its stock currently trades at nearly $190 after a 2012 IPO priced at just $6. Badri Kothandaraman was named Enphase’s COO in April 2017 and its CEO in September of that year. Blackrock (11%) and The Vanguard Group (10%) are the company’s leading shareholders.
The following chart compares the performance of all eight stocks under consideration here.
Three of these companies stand out clearly from the others: Tesla, Solaredge, and Enphase Energy. Nio and LONGi have also posted significant gains for long-term investors who have held since buying them years ago. Results are not as encouraging for the other companies listed here.
Of the five strong performers here, Tesla, Nio, and LONGi have CEOs who retain large ownership positions. Tesla is an outlier here as it is in so many other contexts, and it owes its remarkable performance to a host of factors. That leaves us with two of five strong performers, or 40% of our sample: not enough to support the hypothesis that CEO ownership is linked to superior green stock performance for retail investors.
At the same time, Tesla, Nio, and LONGi do show that CEO ownership can generate wealth for shareholders while developing technologies that address climate change. Executive leadership and investment acumen do not always go hand in hand, after all. With greater sample sizes and more detailed analysis, we may yet discover a measurable relationship between CEO ownership and the performance of green stocks.
Subscribe now to our newsletter and receive detailed stock analysis of Pure Climate Stocks and 4 practical tips on successful climate-impact investing.