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    Leading sustainable finance – the race to net zero

    At Lombard Odier we believe that sustainable investing will generate long-term returns and grow our clients’ prosperity, and will be critical to protecting and enhancing our planet’s natural resources. Managing sustainable investment portfolios is not, however, a straightforward task – industries are filled with superficial nods to sustainability, risks of unintended consequences are frequently ignored, and headline-grabbing targets often distract from the real steps that need to be taken to secure a sustainable future.

    At Lombard Odier’s recently held sustainable finance leadership programme, titled “Race to net zero,” Professor Ben Caldecott, founding Director of the Oxford Sustainable Finance Group (OSFG) and Lombard Odier Associate Professor of Sustainable Finance, led experts from across the University of Oxford and Lombard Odier to examine the latest research and share insights. Joined by future sustainable finance leaders, they explored how approaches that dominate current thinking may be a distraction from developing the broader and deeper understanding necessary to achieve net zero, and explored the risks and opportunities that climate mitigation and adaptation, as well as nature-based solutions present to investors.

    …between now and 2050 more than USD 3,000 billion must be invested each year if we are to stay within the 1.5 degrees Celsius warming limit agreed in Paris

    Looking past carbon footprints

    Opening the programme Professor Caldecott examined the vital role finance and investment have to play in the sustainability transition, estimating that between now and 2050 more than USD 3,000 billion must be invested each year if we are to stay within the 1.5 degrees Celsius warming limit agreed in Paris.

    Challenging the overly simplistic approach of focussing solely on a company’s carbon emissions when analysing ‘green’ portfolios, he introduced the idea that it is precisely where emissions are highest that most investment will be needed.

    Professor Caldecott also recognised that there are some sectors, particularly agriculture and aviation, where there are currently no realistic zero-carbon options and where residual emissions may never be stopped. For those sectors carbon capture and sequestration will be needed on an enormous scale. While the “carbon budget is rapidly diminishing,” Professor Caldecott said, headroom must be “reserved for areas that are difficult to fully decarbonise.”

    Read also: 2020: the year of net zero commitments – an interview with Dr Ben Caldecott, Oxford University

    Climate-related adaptation – opportunities and risks on the “horizon”

    Dr Nicola Ranger, Head of Sustainable Finance Research for Development at the OSFG, told delegates, “We are already locked into major future changes. Physical risks are generally under-estimated and not yet priced-in.” With our atmospheric CO2 level higher now than it has been for millions of years, the “horizon,” Dr Ranger said, is already here.

    “We will soon start to see the same emphasis on adaptation as we currently see on net zero...The most significant impact of climate change will not come through temperature, but through water. Rainfall is going to change. Brown areas will become drier, green areas will become wetter.” This, she said, would lead to an adaptation transition in agriculture and other key sectors, and would offer significant opportunities to investors, with upfront investment leading to long-term gains. This would likely be accompanied, too, by increasing requirements on financial institutions to demonstrate resilience against climate-related risks, and to expand reporting on adaptation alignment in portfolios.

    Read more on the partnership between Lombard Odier and the University of Oxford

    …ice cubes operate in highly-emitting sectors and are themselves highly emitting, but unlike their burning log rivals are rapidly achieving de-carbonisation, and in so doing gaining a competitive advantage

    Investing in the future

    Dr Michael Urban and Elise Beaufils, Deputy Heads of Sustainable Investment Research at Lombard Odier, echoed the thoughts of Professor Caldecott and Dr Ranger on the limitations of focussing investment on today’s low-carbon companies. Here, according to Ms Beaufils, Lombard Odier’s latest research on Climate Value Impact (CVI) comes into its own. By quantifying a company’s exposure to climate-related financial risks and opportunities, CVI helps analysts and advisors look beyond the simple metric of carbon footprints, and gain a deeper understanding of how companies and sectors are placed for the change to come – both to weather the liability and physical risks, and to take advantage of the opportunities the transition will bring.

    The CVI analysis, Ms Beaufils explained, puts companies into one of four categories – climate insulated, solutions providers, burning logs, and ice cubes. The climate insulated are companies that need to de-carbonise, but from a low base – they have limited exposure to the market shifts that lie ahead and as such do not make enticing sustainable finance investment prospects. Burning logs are highly emitting companies that are failing to decarbonise – these will become “stranded assets,” paying a high price for their emissions, both literally, via carbon credits, and with an increasingly discerning client base.

    The real value for investors lies with the solutions providers and the ice cubes. Solutions providers are firms whose own emissions are outweighed by the climate mitigation solutions they offer, and whose growth will be aided by a fast-growing market, subsidies, and increasing regulatory support. Meanwhile ice cubes operate in highly-emitting sectors and are themselves highly emitting, but unlike their burning log rivals are rapidly achieving de-carbonisation, and in so doing gaining a competitive advantage. It’s in these two categories that targeted investment is likely to see the greatest return while doing the most good.

    Read also: New study by the University of Oxford and Lombard Odier examines the predictors of success in a greening world

    …market forces are driving the investment momentum. As technologies mature, costs fall, driving a virtuous cycle of increased economies of scale and reduced cost

    Silver buckshot

    Much of the damage that centuries of greenhouse gas emissions have caused will not be undone in our lifetimes, Dr Steve Smith, Executive Director of Oxford Net Zero, explained. “Many changes…are irreversible for centuries to millennia, especially changes in the ocean, ice sheets and global sea level.” There is, he said, “no silver bullet,” rather “silver buckshot,” and “progress needed on all sorts of fronts.”

    This was echoed by Lombard Odier’s Head of Sustainable Investment Research, Strategy and Stewardship Dr Chris Kaminker. But while the problem is complex and there will be no single solution, he explained, the market itself gives cause for hope. As new, cleaner technologies establish themselves, “market forces are driving the investment momentum. As technologies mature, costs fall, driving a virtuous cycle of increased economies of scale and reduced cost.”

    Bringing together world-leading scientists, researchers and sustainable finance practitioners the Oxford event was a chance to change the sustainable finance debate. Scientific research and innovation play a vital role in providing technological solutions to the climate crisis, but equally important is the insight they can bring to sustainable finance, guiding the investment that will be vital if we are to transition successfully to a sustainable economy.

    When it comes to sustainable finance, at Lombard Odier we believe the simple focus on low-carbon companies is fundamentally flawed. If we are to stay within the temperature rise agreed in Paris, and maximise investment returns, sustainable finance portfolios must seek out not merely those companies that look good today, but those that will make the biggest difference over the decades to come.

    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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