rethink sustainability
Building back better - a sustainable post-covid recovery
Lombard Odier Investment Managers
It is clear that the COVID-19 crisis has already had a devastating impact on global society and will continue to do so in the months ahead. As a result, we think it is more important than ever to focus on sustainability. The transition to a more sustainable economy is already underway, spurred by positive market forces - regulation, technology, investor pressure and consumer demand. All these elements are working in unison to accelerate the revolution.
There is, of course, a risk that the current crisis could derail the speed of this transition but we believe that with a concerted response from policymakers, now is the opportunity to “build back better" – to build a healthier, more resilient, net-zero-emissions economy that drives sustainable economic prosperity.
For this reason our Managing Partner, Hubert Keller, has endorsed the detailed recommendations laid out in the COVID-19 recovery statement “7 priorities to help the global economy recover" from the Energy Transitions Commission (ETC), of which we are member. The seven priorities are outlined below:
- Unleash massive investment in renewable power systems
- Boost the construction sector via green buildings and green infrastructure
- Support the automotive sector while pursuing clean air
- Make the second wave of government support to businesses conditional to climate commitments
- Provide targeted support to innovative low-carbon activities
- Accelerate the transition of the fossil fuels industry
- Don't let carbon pricing and regulations spiral down
The search for winners
At Lombard Odier, we believe it is vital to place sustainability at the very core of investment strategy. Therefore we are constantly looking to identify companies that have expanded their focus to multiple bottom-lines – not just profits, but also people and the planet. In the current environment of crisis and uncertainty, we strongly believe the most sustainable companies are going to outperform and generate strong, sustainable investment returns for our clients.
Growth without a negative impact
Evidently, our world is facing multiple challenges and inequalities – whether they be as a result of climate damage, pandemic impact or biodiversity changes. Our economy today is WILD (Wasteful, Idle, Lopsided and Dirty) and completely unsustainable. So adapting and transitioning to a more sustainable economic model, which delivers growth without imposing a negative footprint on the environment and society, is key. We call this decoupling.
If we can get more out of the resources we have by decoupling GDP from materials, we can become more productive. Dimitri Zenghelis, Project Leader for the Wealth Economy at the Bennet Institute in the University of Cambridge, said “innovation in production efficiencies and material use, together with leasing, sharing, recycling and re-using allows us to get more out of the resources we have. More prosperity does not require more materials". At Lombard Odier, we call this the CLIC (Circular, Lean, Inclusive and Clean) economy. And to ensure the continued viability of our society and future economic growth, we must transition to a CLIC economy. This model leverages efficient production and consumption, and the sharing economy, reducing the wasteful accumulation of idle assets.
Post-covid pressure
It is vital to see a return to productivity at a global scale as quickly and as safely as possible. But the clearer skies, less congested streets and strong scientific evidence for a link between COVID-19 and both air pollution and biodiversity challenges are all focusing attention firmly on the need for a more sustainable recovery.
Consumer and investor pressure for better responses from corporates during the current crisis are emphasising the growing importance of a triple bottom line – People and Planet, and not just Profit.
Asset managers should be embracing the changes in patterns of economic growth. We expect to see an acceleration in leaner, more efficient and circular manufacturing and supply chains. Many businesses will benefit from enhanced capabilities due to growing connectivity and digitalisation. Many of these changes were already underway prior to the pandemic outbreak but the crisis has brought the need to focus on adaptation and resilience.
More steam, not derailment
Due to 2020's global lockdowns, the world has experienced a significant drop in emissions. However, the reduction is only on a par with what is necessary, annually, by 2050 to achieve the most stringent goals of the Paris Agreement.
As lockdowns start to ease, will the world return to “business-as-usual" and see emissions creep higher again? Potentially, but we also expect to see a significant shift in behaviour in many industries and a new normal.
We expect a drop in transportation demand, a rise in demand for virtual technologies and a refocus on green enabling technologies. With the right policies in place and with technology advances in renewables and batteries driving 'cleaner to be cheaper', we believe the global emergency offers the opportunity to accelerate the sustainability revolution.
We think consumer support for cleaner mobility, more conscious consumption and new modes of more active and sustainable transport are strong enough to mitigate the attraction of reduced gasoline prices as oil demand and prices remain depressed. We believe the transition to clean transport, greener buildings, dematerialised manufacturing, shorter supply chains and more sustainable energy sources continue to provide attractive investment opportunities. We also believe it is vital to focus on forward-looking, judgemental analysis to identify those companies best able to transition and thrive.
Green growth
The current pandemic is as much a physical manifestation of climate damage as wild fires, flooding and typhoons and requires a strong regulatory response to ensure we “build back better" post-crisis. The earliest emergency responses to the crisis have focused little on sustainability but this does not mean it has moved off political agendas. We expect to see sustainability clearly on investor and consumer radars, even before any regulatory boost.
However, we expect the next round of fiscal stimulus packages will provide a boost to green infrastructure and technologies. We wholeheartedly believe that any economic stimulus packages that contribute to building a healthier, more resilient, net-zero-emissions economy will drive sustainable economic prosperity.
A recent working paper from the Oxford Smith School of Enterprise and the Environment argues that fiscal recovery packages resulting from the crisis “will have a significant impact on whether globally agreed climate goals are met". Otherwise we will lock ourselves into a fossil system that will be nearly impossible to escape. What we need to do is reallocate capital from fossil fuel subsidies towards job-rich renewable energy, according to the study. “Green projects create more jobs, deliver higher short-term returns per dollar spend and lead to increased long-term cost savings, by comparison with traditional fiscal stimulus."
At Lombard Odier, our Climate Transition Strategy argues that we must disentangle the knot of fossil fuels which have become entwined in all regions of the global economy. We must allocate capital not only to low-carbon solution providers but also towards carbon-intensive, hard-to-abate industries which are required to fuel future economic growth but which must urgently need to transition to a more sustainable model.
Opportunities not limitations
We believe the scale, scope and urgency of the climate transition will present multiple sustainable investment opportunities, despite the current crisis.
In the past, regulation was the key driver behind countries and corporates acting on climate. But now powerful, irreversible market forces are in the driving seat. We see technological innovation spurring change.
This in turn is leading investors to see strong opportunities in the climate space and also galvanising consumers to choose brands and services with the best climate and social credentials. These forces, combined with the increasing outperformance of businesses with the most results-focused ESG metrics, are driving a greater investment focus on sustainable finance.
Our focus on adaptability and the resilience of business models to key sustainability challenges will stand us in good stead to identify the industries and companies which stand to outperform over the coming months. We are attracted to companies which have a bias towards the digitalisation, virtualisation and robotisation of the economy not only in the IT sector but also in most other areas.
Digitalisation - a key enabler of sustainability
We believe the sustainability of numerous businesses will be scrutinised in new ways post-crisis. This may offer opportunities for the most nimble standouts, including tech sector firms.
Technology will be a key enabler of greater connectivity for remote working, to enable transport systems to better manage dramatic shifts in demand and to monitor any future spread of the virus.
Digital Technology and FinTech also play a pivotal role in bolstering financial inclusion and providing cost efficiency for emerging markets.
We see digitalisation, as long as its growth is managed in a decoupled way, as an overarching, irreversible trend enabling future economic growth and the Sustainability Revolution.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
Read more.
share.