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“Finance can accelerate the transition to a sustainable economy” – an interview with Patrick Odier, our Senior Managing Partner
Article published in Le Matin Dimanche, 19 September 2022
Sustainable finance is currently under fire from critics, including weekly magazine The Economist, which considers the criteria to be vague and subject to manipulation, or even “greenwashing”. Should we stop it all?
No. It is not abnormal to see a certain amount of criticism today in the implementation of financial activity oriented towards sustainability. Why is that? Because the issue of sustainability itself is complex to grasp, even for the financial sector. Today’s economic growth, with its significant collateral damage, can no longer be ignored and must be reoriented so that its continuation ceases to be harmful to the climate, nature and our survival.
The fact remains that finance and private companies stand accused of pursuing unsustainable growth.
This is the difficulty of this debate: what are we talking about? Are we talking about the present, which is unsatisfactory? Or the future? The important thing is to identify the companies that are providing solutions, but also those whose business models must change radically in order to make a transition compatible with the objectives of the Paris Agreement and the United Nations. The difficulties and criticisms arise when selecting such companies. It is a huge task. Clearly the necessary debate is above all focussed on the current situation, which is largely static. As well as the fact that too few companies have decided to adapt their business model.
Do you have any examples?
The Danish company Ørsted, which used to be active in the oil industry, has become a leader in renewable energy. Essentially, it is important to distinguish whether a company is “green" or not and to assess whether it is well positioned to benefit from the environmental transition.
But how can we explain the fact that one company may be rated highly by one bank and then poorly by another? Is this not proof that the system is open to all kinds of manipulation?
You refer to the famous ESG ratings (i.e. environmental, social and governance indicators). Some companies may be at the forefront of good governance but ill-prepared to make a radical ecological transition. Hence the confusion. The scores used today are therefore insufficient. This can be illustrated by the MSCI World ESG Leaders stock market index, which includes more than 1500 companies. Fewer than 10% of the companies in the index meet the European “green” taxonomy.
So this is proof that there are too many companies that qualify as “green”.
Yes, in a way. The base is too broad. But such classifications are simplistic. It is the pathway and the quality and feasibility of the objectives that count. To this end, Switzerland is preparing to impose the international standard (TCFD) for the publication of greenhouse gas emissions data by large companies in all sectors from 2024.
Couldn’t finance be at the forefront of sustainability?
Finance is not all-powerful. It can accompany, help and stimulate companies in their transition, but it cannot replace industrial activity or government legislation. Let’s not ask finance to say what is permitted or forbidden, or to judge whether or not it is reasonable to use snow cannons at an altitude of 2000 metres. These choices must be made by the competent authorities. Finance can and should help, but it is not the responsibility of the financial sector to make such choices.
But the criticism continues and is increasing.
Finance needs to be clearer about what it is trying to do. The financial sector is one of the levers for accelerating the transition to a sustainable economy. The criteria for screening and directing capital to companies with sustainable commitments must be scientific and transparent. This is a complex area of research and requires dialogue between all stakeholders. This is precisely the mission of Building Bridges, a platform that brings together the expertise of the financial sector and of international Geneva, the place where tomorrow’s standards are forged.
Does it pay to invest in companies that are committed to a credible sustainability goal?
At Lombard Odier, we are convinced that sustainability and profitability converge. But the difficulty is that we are inheriting portfolios that were created in the past. They will have to evolve. Portfolios featuring companies that are not taking action will pose serious risks for equity or bondholders because these companies could lose their footing in the markets and even go bankrupt. We need to treat them as a priority. Equally, we need to seize the opportunities presented by those who have transformed their business models towards sustainability.
Let’s take a concrete case. The European taxonomy defines nuclear and gas as green energy. Is this not confusing because there is no consensus on the matter?
The taxonomy chosen by the European Union does indeed pose problems. We can debate the sustainability of gas and nuclear power today: for the latter sector, the future and research will tell us (and we can only hope) whether this industry manages to solve the problems it currently poses. Let’s say that we’re not there yet. At the moment, there are other problems inherent in not using this mode of energy.
As an entrepreneur, are you afraid of an electricity blackout?
Of course, we must do everything we can to avoid an electricity shortage, which would be catastrophic for everyone. We must continue to invest in our hydraulic capacities and energy infrastructure in general. However, as we have all seen, the liberalisation of the electricity market is being postponed. It may not be the right time to create a new disruption. The political signals worry me: the market is the best tool to stimulate innovation and ensure that investments are made in the right areas. Finally, we also know that Switzerland’s electricity security depends on our connection to the European market; scientific studies on the subject say so, including the Federal Council’s reports. Yet incredibly, at a time when Switzerland needs an electricity agreement, we are unable to implement it, even though it has been ready and negotiated for a long time! It’s unbelievable that we are in a deadlock in the middle of an energy crisis – the most crucial moment.
What happened?
Switzerland fell asleep. It’s high time we woke up. This crisis must spur us on to make the right decisions and speed up investments in renewable energies. Because if we don’t do it now, it would be an unforgivable political mistake and dangerous for the future of this country.
What must be done?
Reduce the barriers to investment and decision-making. It is at times like these that we must have the courage to unblock bottlenecks. I hasten to say that this is also true in areas other than energy. I am thinking of research and training. Today, people are pleased that Switzerland is at the top of the innovation rankings. But we cannot hope to maintain our position at the top by excluding ourselves from the EU’s major research programmes. Let’s wake up and find potential amongst current difficulties, rather than criticise certain sectors or finance and how it operates. Let’s focus on what we can do better and do it in an even more sustainable way.
Do you personally invest in renewable energy?
Yes, of course I do. But I don’t make a distinction between my personal investments and those of my clients. Lombard Odier doesn’t just invest sustainably because we think it’s the right thing to do for society. We do it because it is an investment conviction, it’s how to manage risk and how to achieve returns in line with the requirements of occupational pension schemes, for example. It is our fiduciary responsibility to our clients.
Shouldn’t we aim for degrowth?
No, we need to talk about a different kind of growth, one that is decoupled from its negative effects and that instead manages to regenerate nature and protect the climate. In concrete terms, we know today that we must return one fifth of the land occupied by industry or agriculture to nature in order to avoid the collapse of biodiversity, which is so important for our food systems. If we, by which I mean society, decide to make this a real priority, we will unleash a wave of innovation and investment comparable to that seen in the fight to preserve the climate.
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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