Working towards a net-zero world

The financial industry is facing a great challenge: that of deploying capital in the real economy with a net-zero mind-set. In order to reach the goals set by the Paris Agreement to limit global warming to 1.5 degrees Celsius, CO₂ emissions need to reach net zero by 2050.

We believe that companies on the pathway towards net-zero emissions will be best-placed to take advantage of new growth opportunities, while those who are left behind may not survive. Today, investors need to know how to align their portfolios with the disruption a net-zero economy will create.

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why is it so important?

At Lombard Odier, we believe that sustainability is set to become a key consideration in investment decisions.

Several forces are combining to convert today’s linear, wasteful economic model into one which is Circular, Lean, Inclusive and Clean (CLIC^®). Regulations are making CO₂ emissions more costly and requiring greater transparency. Consumers and employees are demanding that companies adopt sustainable solutions. Market forces are driving down the costs of technology – the solutions to transition to a CLIC^® economy are becoming cheaper and more widespread.

climate exposure.

The financial industry is faced with three key dilemmas in the transition to net zero. First, climate is creating financial exposure for companies. Second, assessing this climate-related exposure is complex. And third, there is a major discrepancy between greenhouse gas emissions trends in the real economy and governments’ pledges and commitments.

Climate-related financial exposure comes in three different forms: transitional exposure, such as consumers moving towards more sustainable products; physical risks, such as weather-related damages; and liability risks, such as companies being forced to take responsibility for climate change.

We aim to mitigate climate-related financial exposure in our clients’ portfolios by investing with a net-zero mind-set. To achieve this, we believe we must go beyond carbon footprint analysis, the European (EU) Taxonomy, climate benchmarks or Environmental, Social, and Governance (ESG) data, and focus on assessing the valuation impact that such exposures could have.

We aim to mitigate climate-related financial exposure in our clients’ portfolios by investing with a net-zero mind-set

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the investor question.

We believe the shift towards net zero is now becoming a central concern for investors. Can a company continue to perform its activity without emitting CO₂? Can it run a profitable business model in a post carbon world or as it transitions to net zero?

As investors, we at Lombard Odier embrace a more forward-looking perspective, where we aim to identify the companies that we think are fit for the transition and those that are not. We believe that climate-related financial exposure should be our guiding principle for allocating capital, and that we should stop simply focussing on low-carbon companies.

Investors should make the net-zero trajectory a condition for investment

How do we do that? By analysing companies’ transition trajectories and assessing how aligned they are with the goals of the Paris Agreement. Having an understanding of how companies are approaching their decarbonisation pathway helps us deploy capital across all sectors and regions of the global economy without creating biases and with a focus on the potential financial exposure of companies to climate change.

We believe that low carbon strategies that avoid rather than address the problem, the excessive use of carbon offsets and shorting high emitters, will not offer a long-term solution. While these represent some of the common approaches taken by investors today, we are convinced that it is only by investing in carbon reductions in the real economy that the transition can be accelerated, and that is where climate opportunities lie.

allocating capital with a net-zero mind-set.

We believe companies that are on a viable pathway to achieve carbon neutrality and manage transition risks will benefit from growth opportunities and more plentiful access to capital.

But this doesn’t mean we avoid high-emitting sectors.

Given that climate exposure is a reality, our industry does not have a common framework, and there isn’t sufficient pressure from policymakers on the real economy, how do we approach net-zero investing? At Lombard Odier, we believe we should stop focussing on low CO2e companies and start relying on climate-related financial exposure as our guiding principle to allocate capital.

We must look beyond a company’s footprint today, and analyse its trajectory and alignment to the transition

Although carbon data are widely available, we think focussing only on low-carbon companies is a flawed approach. This strategy fails to encourage companies’ real reduction of GHG emissions over time, and does not provide a genuine path towards a global, well-functioning net-zero economy. Industries such as steel and cement, for example, are highly emitting. But we will continue to need these materials. These sectors need to invest in greener manufacturing processes to reduce their emissions. Starving them of capital isn’t the answer. Instead, we assess the potential financial impact that the transition to a net-zero economy could have on portfolios and on individual companies.

building net-zero portfolios.

We aim to build resilient portfolios that are well-positioned to benefit from the transition to net-zero emissions.

Therefore, we classify companies into four categories.

Burning logs

Highly exposed companies with an urgent need to decarbonise, yet failing to do so.

Ice cubes

Companies in similarly-exposed sectors, but taking appropriate action and transitioning.

Solution providers

Companies whose products and services help enable the transition across the economy.

Companies insulated from climate risks

These companies may support diversification and other portfolio objectives.

We take a forward-looking approach, considering a company’s own sustainability commitments and any exposure to internal, industry and regulator pressure that could lead to an acceleration of its climate action. We constantly review our portfolio positions and update our climate analysis on a monthly basis.

our Net Zero Investing Strategies.

Our Net Zero Investing Strategies seek investments that we believe are more resilient to, and well-positioned to benefit from, the disruptions of a net-zero world. We focus on companies already aligned with the goal of net zero and those with the potential for acceleration. These multi-sector strategies reflect our belief that there are no ‘good’ or ‘bad’ companies, only those in transition: moving fast, slowly, or not at all.

Instead of assessing only a company’s present-day emissions, we evaluate their likely future trajectory in a decarbonising world. Through these Global and European strategies investors can support the companies that we believe are driving the net-zero transition.

Through these Global and European strategies investors can support the companies that we believe are driving the net-zero transition

our expertise.

where we are.

Our heritage is Swiss, yet our outlook and mind set are resolutely international. With over 25 offices globally, we are able to serve our clients all over the world.

private clients.asset management.technology for banking.external asset managers.

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working towards a net-zero world.

let's talk.

why is it so important?

climate exposure.

net zero insights.

sign up to our newsletter.

the investor question.

allocating capital with a net-zero mind-set.

building net-zero portfolios.

our Net Zero Investing Strategies.

our expertise.

where we are.

get in touch.

let's talk.

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