Sustainable investing: the dawn of a new economic era. An interview with our Senior Managing Partner, Hubert Keller

Is the starting point, the Wasteful, Idle, Lopsided and Dirty aka WILD world of today?

Yes, we describe our current economic model as WILD to highlight the issues of waste, inefficiency and social inequality. This model has a negative impact on the environment and society and is no longer fit for purpose in maintaining the economic activity of the nearly 8 billion people on the planet. We currently extract more than 90 billion tonnes of resources to produce goods we make very little use of, and to fuel a model based on intensive consumption. We end up creating more than 70 billion tonnes of waste, and more than half of this is in the form of CO₂ emissions. Depleting our natural capital to this extent is more than just an ecological concern; it has become a major economic problem. Our entire economy is based on this same natural capital, so destroying it jeopardises our economic activity.

Are you saying that no progress has been made in preserving our planet?

No, on the contrary, we are fairly optimistic. Firstly, we've seen ecological transition become a political priority, and important measures have recently been taken. We also have a strong sense that companies are becoming increasingly concerned about how well their business models will hold up against these major sustainability challenges; in some instances they are considering far-reaching changes. And don't forget that combining technological innovation with economies of scale gives us solutions that are not only more sustainable, but also cheaper. Let's take two specific examples. The first is the automotive industry. With battery prices plummeting, electric vehicles will soon be selling for less than those powered by a combustion engine. The second example is the US coal industry. In 2019, it became cheaper to generate electricity from solar and wind sources than from coal, forcing many coal mining companies out of business. We believe that market forces will be an important driver of the ecological transition.

Read more on the transport revolution here.

Consumers are also calling for a more sustainable world, but what about finance, which has a lot of muscle? Are your clients ready to follow you?

I still believe that performance remains the priority for most of our private and institutional clients. What has changed enormously is the impact these sustainability challenges are having on investment opportunities and returns. Clients are becoming more and more aware of this, so are asking for their investments to be aligned with these major sustainability challenges. They want to be sure we are putting their money into companies that will be the winners in this economic transformation and we avoid those that might take a hit or even disappear. We think we are entering extremely fertile territory from an investor point of view. It feels the same as in the late 1990s, when it was a choice between Google or Apple on the one hand and Nokia on the other.

Read more about how companies can reduce their carbon footprint here.

How is Lombard Odier, specifically, incorporating these criteria in its management process? What is the bank offering its clients?

Firstly, we offer all our clients the option to align their existing portfolios with these major sustainability challenges. In practical terms, this means prioritising investments in companies that understand how their business model needs to change and have a plan to implement this. We also offer our clients strategies that only invest in companies that are building a sustainable economic model of the future. With regards to ecological transition, for example, we recently launched two global equities strategies, one for climate transition and another for natural capital.

How do you assess the "sustainability" of the portfolios you manage?

Firstly, we aim to understand the transition pathways that each of the industries in which we invest needs to follow to address each of the key sustainability challenges. So in terms of the climate challenge, we want to understand the iron and steel industry's pathway towards decarbonisation and, through that, its alignment with the Paris Agreement. This pathway is based on various assumptions, such as new investments, availability of new technologies, and changes in manufacturing processes. We then compare each of the companies in which we invest against these transition pathways. For us, driving sustainability in a portfolio means overweighting companies that are aligned with their industry's transition pathway and underweighting those that are not. Because this approach requires a significant amount of fundamental research, we have formed strategic partnerships with Oxford University and Systemiq, a renowned sustainability think-tank.

Are you confident that all this commitment to the climate and a more sustainable world will work?

I am encouraged! I sense that we are at the beginning of a new economic revolution, one that could be bigger than the industrial revolution of the 19th century and move as fast as the digital revolution we are already experiencing. Entire sectors of our economy are undergoing a radical transformation before our eyes, creating investment opportunities second to none. Take the car industry for example. It's difficult from today's perspective to say whether Tesla will become as dominant a carmaker as its market capitalisation suggests. But there is no denying that Elon Musk has played an important role in the decision of Germany's major carmakers to finally commit to transitioning to electric vehicles. To mobilise private capital in support of the climate and a more sustainable world, we first of all have to understand how corporate business models need to change, and then redeploy that capital in companies with the ability to adjust.

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