“Incentives are needed to encourage the sustainability transition” – an interview with Patrick Odier

Article published in Le Figaro, 25 November 2022

Lombard Odier’s Senior Managing Partner is calling on governments to increase incentives for businesses. After a disappointing COP27, the banker says Europe should take inspiration from the American support plan created by President Biden.

Is the energy crisis delaying investment in the climate transition?

This crisis is an opportunity: it forces us to look for alternative solutions, other energy sources and other suppliers. As they did during the Covid crisis, governments have made massive budgetary decisions, which allows for the acceleration of capital deployment. The US Inflation Reduction Act (IRA) is a huge, unprecedented programme of environmental and social reform through several hundred billion dollars of investment.

On the energy transition, the market has failed. This failure implies a redefinition of the role of the state and the private sector. This can be a positive: the leadership that the major powers are taking is guiding investments. In Europe, too, the opportunities and the means exist. States must seize them.

Read also: Is sustainable policy working?

Why has the market failed?

There is a trap to avoid: making the sustainability transition the responsibility of one sector and not another. It is essential to strike a balance between the different stakeholders: economic, social and political. Business has made great strides in recent years. The financial sector is a facilitator and an accelerator of these transformations – they offer real investment opportunities, which can mobilise funds and create a virtuous circle.

Faced with the difficulty of getting all the stakeholders to agree – which we saw at COP27 – companies are asking for a framework to help them move in the right direction. It is up to governments to be more concrete in their commitments. Our job is to allocate resources based on a trade-off between risk and return. States should take inspiration from this in their management of the fight against global warming.

Aren’t we being too slow to reduce greenhouse gas emissions?

We should not stigmatise certain sectors and activities. We will continue to be dependent on materials that damage the planet for a long time to come. For the time being, we are unable to do without oil and gas; steel cannot be replaced overnight; cement, aluminium and plastics remain essential to our economy.

The evolution towards low-carbon energies will take time, and we must accept this reality. We need to develop these sectors by dealing with the entire chain, from the extraction of resources to their recycling and utilisation. We need to find a consensus on the duration and pace of the transition. Getting the timing right is essential, both to ensure success technically and in order that the transition is fair socially.

However, there is an urgency, as demonstrated by the signs of climate change.

Fear has never been a good advisor. Eco-anxiety reinforces the difficulty of finding a consensus on how to transition effectively. We need to set a credible time horizon. The goal of carbon neutrality in 2050 is ambitious. At the moment, we are not moving in the right direction. Why can’t we agree on a carbon price? We have to take into account the relationship between the countries of the North and the South, between the West and the East, between the developed world and emerging economies.

If some countries want to exploit their fossil resources, it is because their conversion potential has not been sufficiently studied. The question of compensation and incentives must also be addressed. Rather than making economic actors pay for their negative impact, they should be able to mobilise these funds to finance the necessary transformations to have a positive impact. This is the case for agriculture, which must undergo a revolution, even though producing sustainably is more expensive.

Read also: Towards new food systems

The normative system must change. If you announce ten years in advance that constraints are going to be imposed, that gives the economic players time to adapt. But that is not enough. It is the role of politicians to find an incentive framework to encourage the transition. All levers must be used: training, the use of public and institutional capital, also fiscal and prudential levers. We should, for example, ensure risk sharing for the financing of new energy production infrastructures.

The environmental transition is inflationary. Is this a threat to the economy?

The transition to a sustainable and circular economy will have an inflationary component in the short term, and we will have to accept this. We might as well integrate it into a medium-term vision of the world. We should not fear moderate inflation, especially since there are ways of living with it. One of the levers is the huge technological revolution that accompanies this industrial transformation and enables productivity gains. Another is to find support measures to ease the burden of those most affected by this inflation.