rethink everything
The unavoidable future - how sustainable investing is the only way forward
Statistics give a daunting view of the future. Over the next 30 years, the population is expected to grow by three billion people. Meat production has increased six fold since the 1950s. As a result, land used to feed the growing population is putting pressure on natural resources such as rivers and forests. It was of little surprise then when Jean-Claude Junker said we would need four planets to maintain our current lifestyle.
But where does this leave investors?
Where we are
The population has already trebled since the 1950s. As people become healthier and wealthier, they need more protein-based food which has resulted in a rise in meat production of 600%1.
The current demand is already pushing sustainable levels - without looking to future rises in want - and factory farming, believed to be more efficient than grazing, has proved to be ineffective.
As agricultural land expands, natural resources contract leading to deforestation, soil erosion and marine pollution. At the same time, land-based meat production is affecting our ability to get protein from alternative sources and is being blamed for creating the largest ever 'dead zone' recorded in the Gulf of Mexico as toxins from manure and fertilisers pollute waterways, reducing fish production.
Added to all this, livestock are also significant contributors to climate change because of the sector's high greenhouse gas emissions - just under 15% of the total in fact, according to the United Nations (UN), putting them on a level with transport. In the first 12 years of the century, it was estimated that areas in tropical forests the same size as five football fields were illegally cleared every minute in order to satisfy consumer demand for beef and leather as well as timber.
Campaigners have said that in order to address this problem, we need to consume less meat and instead eat a greater range of food which does not have the same environmental impact.
But what has this to do with investment portfolios? Because tackling these problems is central to building sustainable companies across all industries. This in turn will drive future returns across all asset classes.
An unavoidable problem
Demographic changes, scarcity of natural resources, climate change, inequality and the rapid advance of technology will have a transformative effect on most companies, sectors and, ultimately, our economies.
While time scales may seem long - over decades for example - when you're talking about reshaping several industries and national infrastructure systems, it's not long at all. And the faster they have to change, the greater the chance of shocks along the way.
For example, the move to phase out cars with internal combustion engines in the UK, France, India, Norway, China and the State of California will have profound implications. Automakers are already scrambling to secure supplies of lithium to make batteries for electric vehicles. But lithium supply is not keeping pace with growing demand, leading to spikes in prices. Suppliers to car manufacturers and dealerships will be affected as will service stations and homes across those nations as new charging points have to be installed.
This is one of many instances of how sustainability challenges are forcing companies to adapt or else risk their own future survival.
Where this leaves the investor
Given the scale of change underway, investors need to ask some fundamental questions:
Are sustainability factors driving economies today and in the future? The answer is yes - the subject is now at the centre of strategy and investment decisions in energy companies for example.
How fast is the transition likely to happen? We are now at the tipping point and transitioning is about to start. Last year, the leading climate change scientists warned we have 12 years to keep global warning at 1.5C otherwise we risk drought, floods and the lives of millions being lost. Our time is limited.
Are companies preparing themselves to transition? If not they need to, both as a result of pressure from staff and from consumers. The new generation of millennial customers demand that brands have a level of authenticity about them and respect causes that are important to them, such as climate change.
What can investors do to avoid shocks in their portfolios, and leverage opportunities? There are three pillars which we here at Lombard Odier look to the sustainability of a company's financial model, business practices and business models.
We believe that we are on the cusp of a revolution. One that touches every aspect of all 7.6 billion lives on this planet: energy, transport, food-systems, population growth, healthcare, education, data management. Sustainability is the very future of our business, the largest investment opportunity of all time and the biggest driver of returns. No country, sector, company, or asset class will go untouched.
Sustainability is a fundamental building block of economic growth and of long-term investing and integrating it into the investment process is increasingly important. It is no longer a question of choice for companies - they must make the transition towards a sustainable future or face being left behind.
We believe that we are on the cusp of a revolution…Sustainability is the very future of our business.
For those companies that do commit to a sustainable future, the results will be a positive economic impact. It is investing in these companies that we are focused on. And we call that sustainable investing.
1 https://qz.com/93900/we-produce-6-times-more-meat-than-we-did-in-1950-heres-what-that-means-for-animals-and-the-earth/
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.
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