Investment Strategies
Behold The Sustainability Revolution - Patrick Odier

One of the most prominent names in Swiss private banking addresses the topic of sustainability.
The word “sustainability” is thrown around a lot in the financial world these days with varying degrees of sincerity and credibility. In many cases the term is about how we look after the environment so that its bounty remains for future generations. Less often, alas, it is used to describe how, in all too many countries, people live beyond their means, have so few children that populations are ageing, amass huge debts and rely on future generations to pay off the bills. Tackling the latter form of unsustainable conduct seems less politically fashionable at present than the cause of environmental sustainability, although in some ways they ought to overlap in people’s minds.
To address sustainability and wealth managers’ roles is one of the dynastic figures of Swiss private banking, Patrick Odier. He is senior managing partner of Lombard Odier.
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At Lombard Odier we believe that the world has reached a tipping
point. Our world is changing and we have to change with it.
Our current global model is not sustainable, and this challenge
goes way beyond the single, albeit very important, issue of
climate change. It is one of five megatrends that are set to have
an undeniable effect on the world we live in.
Those effects are already being felt. Our population has grown by
70 per cent in the last 70 years and will grow by another 1
billion people over the next decade. We use resources 1.7 times
faster than the world can replace them every year, and too many
people are still excluded from access to capital, basic goods and
services, and healthcare. Climate change is exacerbating all of
the above, creating both physical and transition risks, and
technology is changing our lives at an extraordinary pace.
According to the World Economic Forum, the pace of the digital
revolution is such that 65% of children will have jobs that do
not even exist yet.
A changing world
From an investor’s perspective, this also requires change.
Investors have to look at companies in a much broader way than
before in order to locate sustainable returns over the long
term.
Take, for example, transport. Demographic change will lead to
higher mobility, migration, urbanisation and a huge increase in
the volume of people transport systems have to carry. At the same
time, resources are getting scarcer, affecting the cost
efficiency of current transport models. As a result, we need to
rethink transportation. It needs to be more scalable, fast,
efficient and emission free.
Other sectors face the same challenges, including food systems,
education, healthcare and many more, and how and what we
recycle.
It is no longer a choice
A critical policy milestone was recently reached, when global
governments came together to both adopt the 17 Sustainable
Development Goals, and to sign up to the Paris Agreement to limit
global warming to well below 2 degrees centigrade. These
agreements put us irrevocably on the path towards a
sustainability revolution. Today, change is not just inevitable.
It is highly likely to accelerate.
The EU’s new Action Plan for Financing Sustainable Development is
one example of how far and how fast regulatory change is starting
to happen. And, of course, capital markets are not blind to this.
There is already a significant shift underway in how money is
being put to use in the economy.
Who has to change?
In a complex ecosystem like our global economies, everyone has a
part to play in developing a more sustainable system. Companies
are responsible for making sure they adapt in a smooth, orderly
manner. This will be essential if they want to continue to grow
and attract capital. It also means providing more transparency
and disclosure to allow investors to make more informed
decisions.
Asset managers also have to adapt and innovate. It is essential
to find better ways of working out how sustainable companies and
countries really are, and where their strengths and weaknesses
lie. Asset managers also have a critical role to play in
encouraging companies along the road to orderly transition.
Asset owners are also important players. Demand is perhaps the
strongest force for change. If asset owners ask the right
questions of their managers and the companies they own, and
direct more of their capital towards sustainable businesses,
their voices quickly build into a roar that is very difficult, if
not impossible, for companies to ignore.
Asset owners can do this by defining their long-term beliefs,
values and objectives. What level of carbon emissions or water
consumption do they want to target? How important are the
sustainable development goals? Increasingly, we see asset
owners focusing not just on what money is made, but how that
money is made. This is a vital ingredient for our future
sustainability.
How does change happen?
This process has evolved over the years. Exclusions out of a
sense of social responsibility were a popular first step because
some things just don’t belong in a portfolio or in the capital
markets. At Lombard Odier, we have group-wide exclusions on
controversial weapons and essential food commodities.
The next step is to look at sustainability through the lens of
risk mitigation. Considering non-financial environmental, social
and governance criteria can be used to mitigate risk
effectively.
Rather than taking an exclusion approach, we believe it is more
impactful and effective to differentiate between the best and
worst – essentially promoting the best students in a class and
limiting our exposure to those who prove less willing or able to
adapt.
At Lombard Odier, we have a long and prestigious history of
thinking sustainably. This was built into the foundations of our
bank, and is a large part of why, 223 years later, we are still
going strong. Our independent partnership structure gives us the
flexibility to think in generational terms, not quarter to
quarter. We believe this makes us uniquely positioned to generate
returns for our clients.
Sustainability revolution continues to
unfold
What are the three pillars? When it comes to integrating
sustainability into portfolios today, we take a three-pillar
approach. We believe these pillars are interlinked and
interdependent – take one away, and the whole system is much more
vulnerable to collapse. Our first pillar assesses the
sustainability of the financial model. Can a company continue to
generate excess economic returns? Is it likely to maintain its
credit quality and solvency?
The second pillar looks at the sustainability of their business
practices. How well is the company run in the context of its
broader ecosystem of stakeholders? This is where ESG criteria are
employed.
But sustainability is about so much more than just ESG. This is
why our third pillar looks at the sustainability of companies’
business models. As our economies continue to transform, how are
sectors likely to benefit? How do they need to change? Can coal
continue to compete in a world where the cost of renewables is
rapidly decreasing? How will that affect the value of unburned
fossil fuel assets that are currently marked to market on the
balance sheets of energy companies? What are the energy sources
of the future?
We also believe strongly in the importance of active ownership.
Stewardship is a valuable tool to help companies transition in an
orderly fashion, to adapt and increase their resilience. Dialogue
and engagement can help influence companies into adopting a more
sustainable operating model.
When we put all of this together, it becomes easier to see the
sustainability revolution for what it is - the biggest driver of
investment returns in modern history. It will require us to
fundamentally rethink sustainability, rethink investment and, in
fact, rethink everything.