“The transition is an industrial revolution” – Hubert Keller, Senior Managing Partner

Interview published in Le Temps, 01 May 2023

For several years, Lombard Odier has focussed its communications on sustainable finance. This still-emerging form of investment is considered by some as essential for saving the planet, while others see it as nothing more than a marketing theme. For the Geneva-based private bank, it is a source of additional performance for investments – provided that it bets on the winners of the environmental transition, explains Hubert Keller, Senior Managing Partner since the beginning of 2023, a position he shared with Patrick Odier from 2020. The banker also describes the essential role of oil companies in this transition and asserts that a bank should not have a prescriptive or moralising role when it comes to sustainable finance.

What does sustainable finance mean to Lombard Odier?

For us, sustainability, and more specifically the environmental transition, is a very strong investment conviction. The global economy is shifting as this transition evolves. We believe that we are facing the biggest industrial revolution my generation will ever see, and probably the biggest in history. The scale and depth of this transformation, which is often underestimated, will completely change the investment landscape.

In what sense?

We believe that we will move from a fossil fuel-based economy to a renewable energy model. A new economic relationship with our natural capital is developing, and a new economic model is forming around the extraction and use of materials. In addition, carbon markets could become very important.

What will the decisive factors be?

The primary objective is to identify companies, regardless of their size, that are positioning themselves for this new economy. We are trying to understand what technological solutions will be needed to achieve the environmental transition. Today, around 90% of these solutions exist, and many of them may soon be adopted on a large scale. As these solutions develop, they are transforming entire economic sectors and changing their profit structures.

As an example, how will the automotive industry evolve?

If you think that the car industry will make the transition to electric vehicles, this means that its revenues could increase by 30% by 2030. Manufacturers will no longer just make vehicles, which will all be electric, but they will also sell batteries on a larger scale and may become energy producers or distributors.

What do you analyse in a company? How it operates or what it produces?

It is important to distinguish between the “how” and the “what”. Broadly speaking, the “how” is what interests ESG management, which takes into account the environmental, social and governance practices of companies. However, we believe that this “how” approach does not identify what will make the difference in delivering investment performance for our clients.

This performance depends on a company's business model and strategy for capturing the opportunities associated with this economic transformation. We call this the “what”. As a responsible investor, we look at the “how”, but the “what” is what determines our investment decisions.

What do you do if a client tells you that they love oil companies?

To allow our clients to assess the sustainability of their portfolio, we classify the companies we invest in according to two key questions: do they contribute significantly to the environmental transition or do they undermine it? Today, an oil company simply cannot be seen as accelerating the climate transition. But the speed of its potential transformation means it could contribute to a greater or lesser extent, it depends on each company.

Does this sector have an important role to play?

An absolutely essential role. Firstly, the financial strength of the oil giants enables them to play a role in the deployment of renewable infrastructure. This activity could completely transform their business models. They could play a major role in creating a reverse oil industry; one that is no longer extractive, but that puts carbon dioxide that needs to be removed from the atmosphere back into the ground, to achieve the goal of net zero greenhouse gas emissions.

According to SSF, the umbrella association for sustainable finance in Switzerland, the two styles most practiced by Swiss managers are exclusions and the integration of ESG criteria. What value do you see in these approaches?

Even if I have reservations about large-scale exclusions, these criteria are perfectly valid for responsible investment, but not for generating performance.

There is a lot of confusion surrounding sustainable finance. Instinctively, we may think that it is about investments that are good for the planet, but this is not necessarily the case. Isn’t there a risk of diverting attention and resources away from real needs?

It’s even worse than that. Oil companies with little commitment to the transition but which skillfully play the “how to” card – i.e. sound business practices – often receive high ESG ratings. Portfolios built according to ESG ratings are therefore more exposed to the risk of greenwashing.

Would you agree with some observers that ESG is a scam?

Unfortunately, our industry has often pushed the integration of ESG criteria within corporate practices too far as a model for sustainable management. This is a major source of disappointment for many clients, as they realise that with this approach they remain invested in companies whose activities and business models do not support or accelerate the environmental transition. Furthermore, it is now proven that integrating ESG criteria into corporate practices does not generate additional performance.

This would mean choosing between responsible engagement and financial performance – precisely what we do not want to do, as it is essential to achieve both.

What proportion of the assets you manage are sustainable?

If you look at sustainability from a “how” perspective, i.e. ESG criteria related to corporate practices, it represents a significant proportion of the assets we manage, approaching CHF 200 billion. If we consider sustainability from a more specific “what” perspective, i.e. companies that are well positioned to capture new sources of profit from the transformation of our economy towards a sustainable model, we are looking at around 5 billion. However, our ambition is to rapidly grow this asset base through new investment products across asset classes, in private and public markets. We have launched several funds in recent months, notably on the circular economy, the future of food systems and carbon. More will follow soon.