Capturing sustainable opportunities in an ever changing world

corporate

Capturing sustainable opportunities in an ever changing world

Amidst the COVID-19 crisis, partial economic restrictions, climate change and the aftermath of the US elections, our world, economies and societies are in a challenging position. As investors, at Lombard Odier, it is our fiduciary duty to achieve sustainable returns for our clients. For some time now, we have been in a low growth, low interest rate environment but we are convinced that growth and strong returns will come from innovation that tackles the challenges we face today.

…we are convinced that growth and strong returns will come from innovation that tackles the challenges we face today

Much of this innovation can be seen in companies that are already transitioning to sustainable business models and practices. At Lombard Odier, sustainability is a core investment conviction and we believe we are at the beginning of a profound economic shift that will alter the investment landscape. This shift will see a move from a WILD (Wasteful Idle, Lopsided, Dirty) economic model to a CLIC™ (Circular, Lean, Inclusive, Clean) economic model that harnesses the power of nature and creates a net zero emissions economy.

The cost to our environment

It’s evident that our human activity has devastating consequences for the environment. Our Managing Partner Hubert Keller explains that we are extracting “approximately 92 billion tonnes of natural resources each year…. the equivalent of half of Mount Everest.” With this activity, we create around 70 billion tonnes of waste. This is clearly not sustainable. We are living WILD. Some planetary boundaries have been transgressed and we are in a dangerous zone where we see species rapidly going extinct for example. Hubert Keller asserts that “this destruction of our environment is a huge economic cost.” The scientific community has given us a carbon budget so we know how much CO2 we can still emit if we are to remain within the goals of the Paris Agreement. Hubert Keller goes on to say, “at current rates, we only have between 7years left of this carbon budget if we are to hold temperature rise to a level below 1.5°C – the most ambitious goal of the Paris Agreement. In 2017 alone, the cost of climate damage events was already 327 billion USD to the economy. It will soon reach a 1 trillion USD per year.” We must remain within our carbon budgets or face catastrophic climate damage.

Hubert Keller asserts that “this destruction of our environment is a huge economic cost”


The power of Natural Capital

“Nature is the bedrock of our economy” declares Hubert Keller. Nature plays an essential role in economic activity and enables activity as it provides a range of ecosystem services. 51% of global GDP is moderately to heavily dependent on nature, either directly or via supply chains. Take the pharmaceutical industry. Two thirds of new drugs rely on nature. If we look at pollination, we know that more than 75% of our leading crops rely on pollination but this is at risk as species extinction levels rise. The same challenge can be seen with our land. A third of our land today already suffers from degradation and trillion dollar industries that depend critically on natural capital are being put at risk.

A third of our land today already suffers from degradation and trillion dollar industries that depend critically on natural capital are being put at risk

Market forces at work

There are powerful forces at play already pushing for a transition. We see new policy such as the EU Green Deal, China’s Great Green Reset and the Biden Administration’s commitment to tackle climate change as all moving in the right direction. We believe, for example, that the switch to electrification will reach a tipping point when electric vehicles will become cheaper than petrol cars. Consumers are demanding more sustainable practices and business and investors are realising the unparalleled opportunity of this moving from this linear “take-make-waste” model to a CLIC™ model: Circular, Lean, Inclusive and Clean.

Yet how do we do this?  Hubert Keller argues that if we leverage the power of nature, we can move to a circular economy and shift part of our industrial activity to one that is bio-based. This is the transition to a nature-positive economy. We also need to be much leaner in our industry to preserve natural capital, and need to target zero waste. Not only do we need to do more with less, we need to decarbonise our entire economy and make it climate-resilient. By electrifying our economy using clean sources, by developing the hydrogen economy and by using land to sequester and capture carbon, it is technically and economically feasible for us to achieve net zero.

...if we leverage the power of nature, we can move to a circular economy and shift part of our industrial activity to one that is bio-based

Creating value with companies

Achieving these goals requires a transition to a new economic model. Our Head of Sustainable Investment Research & Strategy, Christopher Kaminker, explains how, we, at Lombard Odier, focus on companies that will stand to benefit from this transition. He explains how we “want to capture all of the different business model revolutions that we see are creating a huge amount of wealth today.” In the move to a circular bio-economy we want to focus on those companies that are harnessing nature and can be an engine for growth.

We are investing in firms that deploy bio-based materials for cheaper and leaner industrial activities or even companies that create bio-degradable plastic. Looking at the food industry, there are innovative companies that are creating bio-protected cultures that extend the shelf life of food products or are using natural products to replace unhealthy chemicals. A revolution is underway in the construction, chemical, textile and transportation industries. In Japan, for instance, a pioneering project has sought to construct a car from nanocelllulose, replacing usual materials such as aluminium and steel. In the field of construction, there are companies that are creating skyscrapers out of glued laminated timber, which is stronger than steel.

We also seek to identify companies in heavy industries that are better positioned to decarbonise or mitigate their adverse impact on nature, and are turning this into a source of competitive advantage. These are the companies who will gain market share and disrupt competitors

In our carbon-constrained and nature-positive world we don’t just focus on solution providers that are making great strides, such as in renewable energy or bio-based products. We also seek to identify companies in heavy industries that are better positioned to decarbonise or mitigate their adverse impact on nature, and are turning this into a source of competitive advantage. These are the companies who will gain market share and disrupt competitors, driven forward by changes in regulation, technology and the attitudes of investors and consumers, which will favour their business models. Companies that are adapting to this brave new world are the ones who will be the winners in the future.

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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