rethink sustainability
Building value and managing risk – sustainable investments in the spotlight at Transition Investment Summit
The transition towards a net-zero, nature-friendly economy has become the most pressing challenge of our time. At our recent Transition Investment Summit (TIS) in Zurich, which followed hot on the heels of our London event, delegates, climate experts and leading sustainable investment voices gathered to explore how finance can accelerate this shift.
Jean-Pascal Porcherot, Lombard Odier Managing Partner and Co-Head of Lombard Odier Investment Managers, opened the summit by outlining both the size and complexity of the challenge facing the finance industry. “At Lombard Odier,” he said, “we believe that the environmental transition will lead to…the biggest investment opportunity since the industrial revolution.”
However, he noted, “The transition is complex. It is not structured around classical sectoral clusters.” For investors it defies traditional analysis and instead demands ‘systems thinking’, to anticipate the broad, cascading changes that will impact multiple sectors at once.
“That’s why at Lombard Odier we have invested in building a strong research team,” he explained. “It’s why we partnered with systems change experts Systemiq and invested in their business to work hand-in-hand with their leading market research. It’s why we formed partnerships with the University of Oxford and E4S. And it’s why we recently launched holistiQ, our unique sustainable investment platform in collaboration with Systemiq, as we continue to take a leading role in sustainable finance.”
The purpose of the summit, he concluded, is to explore why investors should share this strong conviction, and how sustainability should be incorporated into portfolios to improve long-term performance.
Value or values?
Doctor Zacharias Sautner, Professor of Sustainable Finance at the University of Zurich and Senior Chair at the Swiss Finance Institute, gave the day’s keynote speech. He began by going back to basics, asking delegates, “What is the motive for sustainable investing? Is it value, or values?”
In the US, Sautner warned, there is a growing backlash against taking Environmental, Social & Governance (ESG) factors into account when investing, with some states prohibiting ESG pension funds. “This is caused by fundamental misunderstandings of what sustainable finance is about,” he said. “It is not about values, or moral or political ideas. It is not leaving money on the table. It is about financial risk considerations. It is about value.”
The other side of the coin, he warned, is that investors are taking a misguided approach to ESG considerations, and choosing to divest themselves of investments in high-emitting companies. “But does divesting lead to a better world?” he asked. “No, you just divest to someone who doesn’t care. It has no effect on making the world a better place.” The key to achieving change, he said, is investor engagement: “We should stay invested to actively change firms.”
“We do not have the climate crisis or biodiversity loss under control. We have not invested enough in investor coalition engagement. How can you engage? You can join investor coalitions and push peers to do the same. More investors have to engage and come together to address these risks,” he concluded.
Capitalism – problem and solution
Since the 2022 Kunming-Montreal Biodiversity Agreement, “Nature risks have arrived in financial markets. If you care about risk you cannot ignore biodiversity,” Sautner said. The same is true of carbon risk, he continued. High-emitters make for more risky investments, due to tightening regulations that demand emissions reductions over time.
While capitalism is part of the problem, thanks to an economic model that has failed to “price-in” the environmental cost of manufacturing and services, it is also part of the solution, he explained. ESG analysis can incorporate carbon and biodiversity risks into investment decisions, which in turn will incentivise firms to change.
Returning to the theme of investor engagement, he emphasised how the power of investors to encourage or even force change is one of capitalism’s big advantages. Strong investor engagement can create market outperformance, he explained. “If you engage portfolio companies on climate and biodiversity, the market will recognise it. The price of shares goes up and you can potentially generate alpha1.”
Simply looking at ESG criteria, he emphasised, “Is not impact investing.” It does not necessarily generate either on-the-ground impact or investment value. Instead, he explained, his ideal portfolio for both returns and effective impact, would hold the “100 firms responsible for 70% of global emissions2. Then you would have to engage with those firms.”
Daniela Stoffel, Swiss State Secretary for International Finance at the Federal Department of Finance, highlighted the importance of regulation in requiring corporate disclosures to help investors play this active role. “[In Switzerland] we put a focus on transparency on climate and other aspects of ESG. Pressure on companies to disclose [their climate-related risks] is increasing. Sustainability will not work without regulation and the subsidiary role of the state.”
Sustainability as an investment starting point
Thomas Hohne-Sparborth, Head of Sustainability Research at Lombard Odier Investment Managers (LOIM), outlined Lombard Odier’s approach to portfolio allocation, saying, “We put sustainability at the beginning of the idea generation process.” For Hohne-Sparborth, like Sautner, this need not mean losing out on investment performance. “We want companies that can offer exposure to attractive hotspots of economic activity, where new and defensible excess return opportunities can be found,” he said.
Picking up on other points Professor Sautner had made, Hohne-Sparborth continued, “Is this simply about ESG scores? Investing in companies that score better on how they operate their business? We don’t believe that that is how we ultimately generate outperformance. ESG is part of the picture, but it’s not enough,” he said, adding, “what we must really understand is which companies are best positioned for major system changes across the global economy, and the shifts in value chains and profit pools that follow from it.”
Elise Beaufils, Deputy Head of Sustainability Research at LOIM, agreed. “If you want to make a wind turbine you need aluminium and steel. And IT is nothing without copper mining, for example. We need heavy industry in order to transition. A low-carbon portfolio will divest but will miss out on opportunities in heavy industry. We need to see beyond today’s carbon emissions, and take a forward-looking approach to building transition-fit portfolios.”
If ESG analysis alone is not sufficient for sustainable investing, Felix Philipp, Sustainability Analyst at LOIM, asked, should we then be “investing in trends”? The narrowness of this approach means “we would never be able to spot tipping points or shifts in markets,” he concluded. Instead, agreeing with Porcherot’s opening analysis, he said, “We have to understand the end-state and dynamics of the transition, and learn to invest in the system changes that follow from it.”
For Porcherot, this systems outlook highlights the need to invest for the long-term. Lombard Odier’s private ownership model, which doesn’t focus on short-term shareholder value or quarterly earnings, is key to our ability take a long-term view, he explained. “And our long-term view is that sustainable investing is essential for preserving and growing wealth for the next generations.”
1 Market outperformance
2 Just 100 companies responsible for 71% of global emissions, study says | Guardian sustainable business | The Guardian
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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