rethink sustainability
Forward: guiding our clients through the storm
We are living through a perfect storm of uncertainty, as wave after wave of new risk compounds the economic fallout of the Covid-19 pandemic. War in Ukraine is costing thousands of lives and threatening global food and energy supplies, US-China tensions are putting shipping routes in jeopardy and raising renewed doubts about trade between the superpowers, whilst rampant inflation is threatening the ability of many millions of individuals to meet basic needs. All this comes as nature’s warning shots on climate change are growing louder.
For investors there is no immediate end in sight to this uncertainty. Central banks have turned hawkish; recession appears imminent; European governments face a continuing energy crisis; and geopolitical conflicts threaten further market shocks that governments may have limited ability to control. And what of climate change? As we tackle short-term challenges, will the transition to a sustainable economy be knocked off course?
Breaking energy dependence
Natural gas provides power for much of Europe, underpinning the grid at times of high demand. Much of this is imported from Russia – last year, the country supplied 40% of the EU’s natural gas needs. In the immediate aftermath of Russia’s invasion of Ukraine, as governments moved to impose sanctions on Russian fossil fuel exports, the wisdom of having become so dependent on Russian gas was brought into question.
Today, with the price of natural gas still stubbornly high, governments face two energy systems problems – short-term supply and long-term resilience. For the former, the EU has responded by increasing imports of liquefied natural gas (LNG). Some EU governments have warned that they will also turn to coal to cover the shortfall, a move that UN Secretary General António Guterres has warned might “close the window” on the Paris climate goals.
For the longer-term, zero-carbon renewables hold the key to gaining supply independence and building resilience. In direct response to the crisis, the European Commission’s REPowerEU energy action plan will frontload the rollout of solar and wind power, heat pumps, and green hydrogen investment.
Read also: Green hydrogen: The key to decarbonising heavy industry
Both the long-term need and immediate crisis can also be tackled with smart grid technologies that optimise demand and turn consumers into producers – much of the technology needed for this is already available. Connected appliances, and home hubs that communicate, will shift non-priority power usage to off-peak times of day. Home solar panels will play an increasing role in feeding power into the grid. Electric vehicles (EVs) will become a storage solution, in effect a nationwide battery pack, where smart charging systems charge EVs during off-peak periods, and return power to the grid during times of high demand. For the short-term, by smoothing out the peaks and troughs in energy usage, smart grids reduce the need for fossil fuel imports to cover peak periods. And for the long-term, by filling in the gaps when wind is light or the sun less bright, they increase the viability of large-scale renewable energy projects.
The growth of zero-carbon, zero-marginal cost renewable energy will upend established energy systems and drive the sustainability transition across the entire economy. Today’s uncertainties will, if anything, accelerate this trend.
Food systems under threat
The combination of sanctions and the reality of war throttled other supply chains, too. Russia and Ukraine are important exporters of cereal crops – within a fortnight of the outbreak of war, the price of wheat rose more than 60% to reach an all-time high. The region is also an important exporter of raw materials for the global fertiliser market. The loss of this supply, combined with the sharp rise in the cost of natural gas, proved a double blow for manufacturers – the price of fertiliser followed wheat to new all-time highs. Headlines warned of a looming food crisis, and protests in a number of countries were driven in part by the rising cost of food.
Read also: How can we feed the planet sustainably? 3 interesting sectors for investors
In tackling this crisis there need be no tension between short and long-term goals – the rise of new, environmentally sustainable food systems will also bring immediate respite to the looming food crisis.
Accelerating the ongoing shift to healthier, plant-based diets, especially in the West, will free up grains that are currently fed to animals, an inefficiency that sees more than one third of all crops produced being turned into animal feed rather than being eaten directly by people. Increasing the use of both regenerative farming – which harnesses the power of nature to restore soil health, and precision farming – which uses technology to minimise chemical inputs, will cut reliance on fertiliser imports. And innovations in food packaging and distribution will cut waste and reduce the need for imports, leaving more available for where it’s needed most (in the EU for instance, annual food waste of 88 million tonnes comfortably exceeds Ukraine’s entire annual wheat exports1).
The energy systems transformation will accelerate food’s transition to sustainability. Localised, cheap renewable energy will power vertical farms near to consumer markets and will cut the production cost of alternative proteins. Food will be produced closer to the consumer, minimising food travel miles and increasing system resilience.
Sustainability offers security
Today’s inflationary environment did not start with the Ukraine war. In December 2021, as manufacturers and supply chains struggled to increase output to meet a post-pandemic-lockdown surge in demand, US annual consumer price inflation hit 7%, its highest level in almost 40 years. Now, with food and energy prices high, price pressures are being dealt another blow. By the end of August of this year, for instance, the eurozone had experienced a record 9.1% annual consumer inflation. With employment high, there is little room for manoeuvre for central banks to bring inflation down while avoiding recession. Investors, understandably, are nervous.
At Lombard Odier, our role is to guide our clients through today’s economic storms. With more than 225 years of experience, spanning more than 40 economic crises, we know that there is only one way through – forward. Today, that means moving away from our present Wasteful, Idle, Lopsided and Dirty (WILD) economy, towards a new, sustainable economic model. One that works with, rather than against, nature; harnesses its regenerative power; and operates within its environmental limits. In short, one that is Circular, Lean, Inclusive and Clean. We call this the CLIC® economy.
Despite short-term obstacles, this long-term trend is unstoppable, driven by powerful, compounding forces: changing consumer behaviour, investor pressure, market forces and regulation. Our strategy is to take a science-based, forward-looking approach, to assess each company’s climate-related exposure and specific roadmap to decarbonisation. With our proprietary Portfolio Alignment Temperature Framework, we can then evaluate the future global warming trajectory associated with entire portfolios.
Through our thematic and impact investing strategies we both accelerate and profit from a shift that we believe will disrupt 95% of our entire investment universe. Sustainability is the main driver of outperformance, as we focus on those firms that will provide solutions to the transition, and those that will lead their peers as the decarbonisers of tomorrow. We embrace all sectors, understanding that heavy industries will continue to play a major role in our economy, and that it is where emissions are highest that most investment will be needed and where the greatest impact from their reduction can be made.
Investing in the CLIC® economy provides both potential performance upside and the chance to mitigate risk. The shift to a clean, net-zero emissions model, where more materials are re-used and recycled, and less is extracted from the earth, will lessen the climate-change risk that many businesses are already experiencing. New, nature-based sustainable products and services will benefit local communities and reduce inequality. And by building localised resilience we will minimise the risk of future resource crises.
The Sustainability Revolution offers certainty at a time of great uncertainty. Today’s roadblocks will not knock it off course – it is already transforming our economic model far more quickly and fundamentally than many imagine. Through our expertise in sustainable investing, and our willingness to innovate and rethink investment solutions, we are able to guide our clients forward. Towards a future that has already begun.
1 Sources: Fusions EU project ‘Estimates of European food waste levels’, World-Grain.com
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.
Read more.
share.