Practising what we preach

Set against the impressive backdrop of historical gem Salon 1861, a renovated church, the 2019 McGill International Portfolio Challenge (MIPC), took place on 8-9 November in Montreal, Canada. Known as the world’s most pre-eminent buy-side finance case competition, the competition awards substantial cash prizes sponsored by Canada’s leading pension plans to the very best participants from 90 universities across the globe who have come together to solve a topical pension challenge  related  to sustainable investing.

The MIPC had a compelling beginning. In 2015, the world-renowned Canadian university McGill had a small group of students who aspired to bring together the world’s brightest pupils to help solve t­­­­­he retirement-savings shortfall. Fast-forward to today and professionals, investors and academics are giving best-in-class students a seat at the table to solve global problems on the buy-side. The thematic this year focused on the challenges of transitioning a pension plan from dependency on fossil fuel revenues to more environmentally sustainable investments.

The opening ceremony, attended by over 300 participants, featured a symposium panel discussion between Patrick Odier, our Senior Managing Partner, Lombard Odier Group, and Josée Guibord, CEO, Evolugen by Brookfield Renewable, titled ‘Investing in a Changing World: Transitioning from Traditional to Sustainable Investments’. Lombard Odier was the lead sponsor of the opening symposium. Mehreen Haider, Global Capital Markets Associate at Scotiabank, moderated the conversation.

The state of sustainability

The wide-ranging discussion began by taking the pulse of sustainability in business today. In order to embed sustainability, there must be an economic paradigm shift. “Our current economic model is unsustainable,” shared Patrick. “We need to transition from a “WILD” [Wasteful, Idle, Lopsided, Dirty] economic model to a “CLIC” [Clean, Lean, Inclusive, Circular] economic model.”

As Patrick highlighted, there is every reason for companies to embrace sustainability. He believes that, “Sustainability could be the single biggest source of financial returns going forward”. He went on to explain that at Lombard Odier, “Sustainability is applied through a disciplined process, addressed in two dimensions: looking at the How (the extra-financial information to assess business practices) and the What (what a company creates and its business model)”.

However, there’s still work to be done, particularly when it comes to agreeing on ESG (Environmental, Social and Governance) measures that work for everyone. There are multiple challenges on the data side of sustainability. Data is extremely valuable and yet is becoming less accessible. It is essential we create a framework that encourages business to embed sustainability as a bottom-line gauge. “Capital has become cheaper for companies that are ESG friendly,” declared Patrick. In talking about the way forward, he added, “When defining sustainability, finding common standards to measure sustainability will be key, as will regulation.”

Uniting stakeholders around incentives

Later in the discussion, the panellists discussed the challenge of uniting stakeholders. From investors and clients to local communities, stakeholders have different angles on what is ultimately the same view: sustainability. Thus, uniting them around common incentives is vital.

“It might be cheaper in the short term not to apply sustainability, but it’s much costlier in the long term,” Patrick pointed out. “Five years ago, 5% of RFPs [Requests for Proposal] included questions regarding sustainability. That number has now reached 80%. Sustainability is now a mainstream demand.”

Of course, some businesses are further along the journey to sustainability than others. Identifying and investing in such companies is vital; both to support them in creating the sustainable solutions we need, and to incentivise those who are behind on sustainability to step up their efforts. Furthermore, stewardship reveals good companies through disclosure and dialogue: it is important companies are encouraged to do this.

“At Lombard Odier, we are actively looking for companies where top management understands their business model in the context of broader megatrends,” said Patrick. “Top management should be recognised as going through a journey; thereby preventing assets from becoming stranded and turning them into high-profit ideas. These far-sighted, visionary companies are committed to sustainable behaviours and growth strategies. We identify them as Eagles.”

The road ahead

Since none of the challenges we face in the 21st century will have one “silver bullet” solution, everyone is a uniquely important contributor to a sustainable future. Companies play an important role alongside the legal and regulatory environment that must anticipate the future. Today’s society is moving faster than they are. In discussing what it will ultimately take to secure our future, Patrick said, “Visionary companies bring solutions to existing problems tied to megatrends. Two of the mega-trends we’ve identified are climate change and rising inequalities.”

Going forward, failing to contribute is only going to become more painful for businesses.

“The Paris COP 21 accord in 2015 was a game-changing event for sustainability,” said Patrick. “‘Dieselgate’, for example, signalled to investors that the market will sanction inappropriate behaviour.” In the end, businesses will have no choice but to adopt the mind-set of an Eagle if they are to survive.

The next generation are the real game changers

Events that bring together like-minded individuals aspiring to participate in building a sustainable future are delivering real impact. The MIPC is no different. Of the 90 universities that enrolled, 25 were selected to present their work at the semi-finals. Our Head of Canada, LOIM, Géraud “Gerry” Dambrine (McGill graduate) alongside leading investment professionals from McGill University’s endowment, Mercer and CPPIB, judged their efforts. Afterwards, the teams were whittled down to five finalists competing for the top spot. They presented to Patrick Odier; Jonathan Hausman, Head of Strategic Partnership, Ontario Teachers’ Pension Plan; Geoffrey Rubin, CIO, CPPIB as well as Bertrand Millot, CDPQ’s Head of Sustainability. HEC-Montreal came out the winners with an ingenious portfolio management strategy for a defined benefit pension plan. The winning team impressed the judges with their three-layer investment strategy.