How the next economic revolution is changing the face of investment

In a keynote speech on repositioning the investment industry at Bloomberg's 'The Future of Finance' event, Keller said focusing investment on sustainability is a question of arithmetic and not only morality or ethics.

“We believe the transition to a sustainable economic model is firmly under way, is accelerating, and is fundamentally changing our investment universe,” said Keller, who is also CEO of Lombard Odier Investment Managers (LOIM).

“As with all major Industrial Revolutions, it will create a vast range of investment opportunities as well as significant risks. Our role as an investment firm is to help our clients navigate those risks, and capitalise on these opportunities.”

Keller's speech, 'Repositioning the Investment Industry', illustrated the importance of sustainability for investment at a time when spiralling population growth means the traditional economic model is no longer sustainable. “The model that worked in the 1970s, when the global population was 4 billion people, is clearly showing its limits,” Keller said.

“Our growth model has heavily relied on ever more consumption, more resource extraction, more pollution, more waste, and ultimately more polarisation of societies between those who benefit from growth and those who don't. In a world that supports nearly 8 billion people, and will soon have to support 10 billion, this model is leaving a disproportionate negative footprint on the environment and society, a fact that businesses are increasingly recognising,” Keller argued.

“The good news is that we believe we have actually begun the transition to a more sustainable economic model. This model is being built on the concept of “decoupling” and will transition us towards a Circular, Lean, Inclusive and Clean economy. We call this the ‘CLIC’ economy,” Keller said. He pointed to four powerful catalysts driving the Sustainability Revolution – regulation, changing consumer behaviour, technological innovation and investors – which are forcing us to drastically re-think many established norms.

This is already having a significant impact on the world of business. “For example, companies will need to think about how they operate amid regulatory requirements to move towards net-zero emissions. The limitation of fossil fuel consumption mean leave trillions in stranded assets floating on company balance sheets,” Keller said. “Meanwhile, the move towards electric cars means many sectors need to fundamentally reorganise, and any firm involved in the distribution of water or other consumer goods using plastic packaging will rapidly need to consider their transition strategy.”

The corporate world is already bifurcating into two types of companies - which we refer to as the Eagles and the Ostriches.

“Eagles are companies that have the foresight and agility to adjust their business model or invent new ones so their profits and financials can be sustainable in the long term,” he explained.

“For us, Eagles are companies that have now expanded their focus to multiple bottom-lines – not just profits, but also people and the planet. In this environment, we strongly believe that Eagles are going to outperform the market.

“Ostriches are best characterised as spending a fair amount of time with their heads in the sand – proverbially speaking. These are companies that are either oblivious to this transition or in denial about the sustainability challenges they are facing, or how fast they need to react. They think of sustainability as a box-checking exercise or a branding matter with limited financial implications. They carry on with a business model that will increasingly be questioned, that risks being disrupted by new technologies or their products being displaced by better, cleaner alternatives. We want to avoid Ostriches and invest in Eagles,” Keller said.

Today, studies show more than $30 trillion of global assets are invested in a manner that integrates some form of sustainability. “There is a lack of clear definitions and standards around the integration of sustainability into portfolio management. In reality many of these investments will have very different approaches, with various degrees of focus on sustainability,” he shared.

Lombard Odier sees the world of sustainable investing as having two main constituent categories: strategies that integrate sustainability into the security selection process, and those that place sustainability at the core of the strategy.

Only a small part of the industry has begun investing in sustainability as a core conviction – where sustainability is the primary driver of risk and return in the portfolio. To some extent this is because it requires moving away from passive or low tracking error strategies in part due to limitations with the original benchmarks. “When we integrate sustainability as a core conviction, it’s also important to distinguish between companies that are on a transition journey, and those who are providing immediate solutions to sustainability issues. The latter will be the natural hunting ground for impact investing, which would typically relate to smaller companies in public and private markets,” he said.

Lombard Odier has also built its own proprietary environmental, social and governance (ESG) framework for integrating sustainability across its product range. The model is based on a two-dimensional system, Keller told the audience.

“The first dimension is the How - we look at extra-financial information to assess business practices. The second dimension is the What. This is as important, if not more so, than the How dimension and looks at what the company creates and its business model. For the What dimension, we look at the nature of a company’s range of activities and try to assess how well it is positioned for the transition, for instance, to a CLIC economy,” Keller explained. “For each dimension, we will also try to identify criteria that are the most material to the future fitness of the company – i.e. factors that could ultimately affect the P&L, balance sheet or cash flows. This provides us with a comprehensive framework to make investment decisions, and to engage with companies on sustainability topics.”

“We firmly believe that sustainability will drive risk and returns in the future,” Keller concluded. “Our role as asset managers is to help our clients navigate the opportunities and risks, and help them to capitalise on the next economic revolution.”

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