rethink sustainability
Sustainable investing in five easy questions
We are in the middle of a revolution, a change that has not happened before in our lifetime. Governments, companies and populations are rejecting the Wasteful, Idle, Lopsided and Dirty (WILD) economy that has grown around us. Instead, we are shifting to one which is Circular, Lean, Inclusive and Clean (CLIC™). It is a revolution where sustainability, social justice and responsible stewardship of the environment is key. But what does this mean for investors? How will this change where and how they deal with their money? Here are some of the key questions answered.
1. What is sustainable investment?
When someone wants to invest their money, they may want to avoid certain companies or sectors. In the past, this could have meant companies which makes weapons or cigarettes. This could be for many reasons - ethics; concerns about the environment; a set of beliefs that someone may have.
In other words, the investor is saying “I don’t want anything to do with this”. But this can create problems for investors in that many companies or sectors may be left out of their consideration completely.
So another approach can be taken - how are companies addressing the problems? Now investors have started to look under the bonnet of companies more, scrutinising their environmental footprint, their policies and their practices. Traditionally, one way to do this has been through their Environmental, Social and Governance (ESG) scores - a measure of how it is performing in those key areas. These tell us whether a company is putting basic best practices in place.
And then the next step for investors is to look at how a company will perform tomorrow and whether it is transitioning to a more sustainable model. An example of this would whether a company in an industry which has high emissions - such as steel, cement or power - is making moves towards decarbonisation. Here, we want to understand not only the pace of that transition, but its financial implications. A successful sustainable investment is one which can weather changes as the industry it is in changes.
Read also: The shift to a Net Zero economy brings questions to all businesses
2. How do I know if an investment product is sustainable?
This is indeed a challenge, as opinions on a company can vary, depending on whether we look only at how its operating, whether we take into account the kinds of products and services a company provides, or whether it is starting to transform its business model.
There are some certification schemes which can help you. Companies can get validation of their practices, one of the most sought-after being B Corp Certification.
As asset managers, Lombard Odier has developed a range of tools to help distinguish companies that are merely talking-the-talk from those that are walking-the-walk. We look not only whether companies are saying the right things, but whether this is translated into meaningful results. We look not only whether a company is talking about decarbonisation, but actually achieving it.
Of course, different investors will have different goals, depending on how much, where and over what time horizon they seek to invest. With the help of trusted advisors, investors must look at individual companies to determine what suits them best.
Read also: Building portfolios around Eagles to deliver superior returns for our client
3. Are the returns from sustainable investments lower than from traditional investments?
It’s a hotly-debated question and it is difficult to come to an answer, mainly because there is not enough proper information. Many argue that sustainable investments outperform traditional markets.
But what is important to remember is that the past is not a good guide for the future. The sustainability movement is young and has only recently been gaining momentum. Now a growing part of the world is focused on net-zero targets while renewable energy and sustainable lifestyles are gathering pace. There is also a focus on ‘building back better’ after the pandemic. All this while the falling costs in green and sustainable technologies have pushed on their adoption.
The sustainability transition is at a tipping point but most of the transition lies ahead of us.
Read also: Covid-19 One-Year-On: our 5 key takeaways
4. How do I set my own personal convictions and priorities in sustainability?
Often, living more sustainably begins with the choices we make as a consumer. Rethinking the way we live, work and organise our lives can have a significant impact on our footprint. And, when we choose a product, taking into account whether a product was produced sustainably can make a big difference – although product labels are often still quite confusing.
But there are some changes we can make more easily, from dietary choices or to considering how often we wear a fashion item. There are multiple ways to act sustainably and it is the sum of all our actions that will make the world move.
One underappreciated option may be to rethink how to invest. This could be through pension schemes or personal savings. How and where you place your money has a large impact on the world around us.
Read also: Five reasons why you should consider going plant-based
5. How do I know if the company I invest in takes sustainability seriously?
You need to ask a few questions. Firstly, how does it operate? Is it transparent? Does it have the right culture? Secondly, will what it produces last as a business model in the future? Coal, for example, won’t have a place in a sustainable future. Thirdly, where is it? Does it operate in an area which is prone to flooding or in a biodiversity-sensitive area?
Once you know the answers to these questions, you can understand the challenges that the company faces. But you must also think of how the company is addressing those problems, which will tell you how it is set for the future.
Read also: How to reduce a company's carbon footprint in the race to net zero
A fresh future
The coming years will see a huge transformation in our economy. Progress towards a lower carbon economy and the transition from a WILD to a CLIC™ economy will affect every country, sector and industry. At Lombard Odier, we are at the forefront of this change and our teams are able to analyse and tailor portfolios to the exact requirements of our clients. The Sustainability Revolution is unfolding at the scale of the industrial revolution and the pace of the digital revolution. As investors and consumers, we must consider how we adapt to this new future.
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.
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