Sustainability – at the core of effective stewardship

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Sustainability – at the core of effective stewardship

Patrick Odier - Senior Managing Partner

Patrick Odier

Senior Managing Partner

Article published in KPMG Report, June 2020 edition, “Clarity on Sustainable Finance – Delivering impact without compromise”

Interview of Patrick Odier by Yvan Mermod, Partner, Financial Services and Bruno Beça, Senior Manager, Financial Services


At last year’s “Building Bridges Summit & Week”, there was widespread recognition that sustainable finance is an opportunity for the Swiss financial sector. What challenges do you anticipate in seizing this opportunity?

I see four challenges that need to be resolved. The first is precisely what Building Bridges was set up to achieve – fostering dialogue between parties without whom it will be difficult to find sustainability solutions. So many people have valid inputs, including regulators, civil society, industry and finance, that it’s important to engage with them all to understand the different perspectives.

The second challenge is also about communication, being the need to speak the same language if you want to get things done. The idea of common agendas, common priorities and a common taxonomy to clarify what constitutes a sustainable activity will allow goals to be achieved more quickly.

The third challenge is how to strike the right balance between encouraging and obligating parties to change. For instance, some countries have implemented binding measures such as carbon taxes. Incentives, meanwhile, can be helpful in targeting particular types of investors such as institutional investors or pension funds, sending the message that there are advantages and flexibility to be gained by investing in certain areas. Or they can be fiscal, with incentives for more active investment in sustainable investments and products.

…Capital is one of four crucial forces – together with regulation, technology and consumption – that determine the speed and extent of the sustainable transition

These all culminate in the fourth, and arguably biggest, challenge – how to deploy capital in the right way. Because capital is one of four crucial forces – together with regulation, technology and consumption – that determine the speed and extent of the sustainable transition. We estimate, for instance, that meeting the goals of the Paris Agreement will require investments of USD 5.5 trillion per year to 2030. While this is only 17% higher than what might be required prior to taking climate and other sustainability requirements into account that capital also needs to be reallocated to very different investment opportunities, such as renewables and the electrification of our economy.


Where does Switzerland stand internationally and could this be a chance to revitalize its private banking industry?

Switzerland is well placed to help lead this debate due to its exceptional cluster of competences. It is almost unique in this regard, with around 40 international organizations in Geneva alone, and across the country more than 600 NGOs, a strong financial sector, advanced industry, political authorities that are open to conversation, and a democratic process that encourages debate. The technology and research-intensive nature of our economy strengthens this position even further.

Switzerland is also one of the world's leading financial centers, managing 27 percent of the world’s cross-border wealth. This presents the country with a significant opportunity to play a leading role in setting the international agenda in critical areas such as the ongoing evolution of investment best practice, as well as sustainability-related metrics, transparency and reporting. As fiduciary managers, Swiss asset managers are well versed in the need to manage risk and spot opportunity. We can use these skills to inform clients and all our other necessary stakeholders about the fundamental importance of sustainability in driving future wealth.

As fiduciary managers, Swiss asset managers are well versed in the need to manage risk and spot opportunity

Speaking of business models, do banks such as yours have a role in encouraging companies to change?

Most definitely. It is fundamental to our fiduciary duty to act as stewards of the capital we manage on our clients’ behalf. Engaging in a dialogue with companies to communicate our expectations regarding the sustainability of their business practices and business model is key, but this dialogue also allows us to make more informed investment decisions by asking companies to disclose material, investment-relevant information. And, it allows us to engage in dialogue for change, where we explain the economic rational for companies improving their practices or moving to more sustainable business models. This dialogue is essential to our ability to protect and enhance the value of our clients’ assets over time, both to mitigate exposure to risk, and to pursue emerging investment opportunities. It is an integral part of the investment process and to delivering clients’ long-term financial objectives.

Interestingly, if you look at the largest global asset management players, they are often in a paradoxical situation. They are passively invested in market-capitalization-based indexes, but many of these indexes include companies that are the opposite of what we would be looking to invest in. This potentially threatens their ability to meet their objectives, but it can also contribute to systemic risk by sending the wrong signal to these companies and hindering our ability, as an investment community, to use our capital and influence to accelerate the transition to a more sustainable economy. Stewardship is arguably even more important for passively-invested assets because that is their main tool for addressing the risks and capturing the opportunities arising from the sustainability revolution, which will leave no sector, company or asset class untouched. Yet, so far, passive managers have not been effective enough, in our view, in carrying out stewardship. This is particularly important as it relates to systemic risks, like climate change.

I believe it is critical to integrate robust, science-based analysis into the investment process, and to engage in ongoing dialogue with companies to inform this analysis if we are going to fully understand the growth potential or competitive advantage a company has. These are critical factors in any long-term investment decision.

…It is critical to integrate robust, science-based analysis into the investment process, and to engage in ongoing dialogue with companies

What drove Lombard Odier to develop a sustainable finance service offering, and did you do so alone?

The days when we could clearly separate investment from social responsibility are well and truly gone. We are convinced that the transition to a low-carbon, sustainable economy is already having a major impact on the business world. We see this, for instance, in the evolving expectations and preferences of consumers and in the rapid fall of prices of new technologies such as wind, solar, electric vehicles and batteries. On the regulatory side, the landscape is also fast evolving, with a growing number of countries, states and cities committing to net zero emission targets.

These forces are already creating a wide range of investment opportunities, as well as significant physical, transitional and liability risks. Our role as investors is to manage these risks for our clients and help them take advantage of the potential upsides. We cannot do this on our own and, importantly, our clients are increasingly demanding that we integrate sustainability. In fact, just six or seven years ago, only five percent of clients had questions or expressed an interest in sustainability themes. Today it’s closer to 95 percent.

We are convinced that the transition to a low-carbon, sustainable economy is already having a major impact on the business world

Over the last two decades, we have developed a robust, proprietary, science-based approach to analyze material forward-looking transition risk & opportunity and enhance our understanding of expected returns. This means we are better able to calibrate risk and return expectations as the transition unfolds.

We have also forged alliances with partners where we perceive them to be highly innovative leaders in their field, including in areas like impact investment and green bonds. We have had an exclusive partnership with Generation Asset Management 12 years, for example. We also work with Affirmative Investment Managers (AIM), based in London, who are pioneering specialists in green bonds with a team that was at the center of the origin of the first green bonds.

Today, sustainability is at the very heart of our business, our portfolios, and our research focus. Because we have been pioneers in this space, we believe we are now in a strong position to align portfolios to the transition, and we are convinced this will give rise to the best investment opportunities for our clients in the long term.
 

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How about Lombard Odier’s own responsibilities? What motivated change within your bank?

Sustainability has always been a major concern for Lombard Odier. We understand the fundamental link between meeting the objectives of our clients, our employees, the communities and environment we operate within, and our own sustainability as a firm. Since the 1990s, we have contributed to the development of new concepts such as the Blue Orchard, which has grown into one of the main players in microcredit, and the Ethos Foundation, which is a leading sustainable investment organization for institutional investors.

Today, sustainability is at the very heart of our business, our portfolios, and our research focus…

We acknowledge the need to change the way economic models and business models are implemented. Clients, investors and the companies we invest in demand that we walk the talk. This is why we are proud to be a certified B Corp, for example, which demonstrates our alignment with sustainable development objectives. This is a leading international standard and is an important element both in our client relationships, but also in raising awareness among our employee base. Our ability to attract and retain the right talent is central to our continued ability to innovate and provide cutting-edge solutions to our clients. This same philosophy is reflected in the construction of our new global headquarters, which should set an important example in terms of our environmental footprint, enhance the productivity and quality of life for our employees, and foster better interactions with the local community.

Our ability to attract and retain the right talent is central to our continued ability to innovate and provide cutting-edge solutions to our clients

What approach do you need to apply in practice to effect these changes?

We have to invest in sustainability. We have developed an investment philosophy that captures the major challenges and trends that are already shaping our economy and society. Translating this effectively into portfolios requires significant investment in our people, our processes, our products and our ability to understand and interpret the transition. Importantly, we recognize the need to invest in a diverse workforce that reflects the multi-faceted and complex nature of sustainability challenges. This includes binging in people with expertise from outside of finance, including data science, earth engineering, lifecycle analysis, corporate governance, communications and policy making, for example.

We have developed an investment philosophy that captures the major challenges and trends that are already shaping our economy and society

This broad combination of expertise, a fundamental research based process and our collaborative approach to investment decision making, is key to developing a robust analytical framework, and to understanding the top-down and bottom-up effects of the transition on regions, sectors, companies, and asset classes. This underpins our calibration of expected risks and returns in our portfolios.

…We recognize the need to invest in a diverse workforce that reflects the multi-faceted and complex nature of sustainability challenges

What do you see as the end game for businesses with regard to sustainable finance?

We believe our current model of growth is fundamentally flawed, and is unlikely to withstand the test of time much longer. Our current approach to production and consumption is Wasteful, Idle, Lopsided and Dirty - we call this the WILD economy. To ensure the continued viability of our system and way of life, we must fundamentally rethink the way we live, produce, act and invest. The end goal of this transformation, in our view, is an economic model that is Circular, Lean, Inclusive and Clean– we call this the CLIC economy. Achieving this ‘CLIC’ model requires companies to revisit their business models and business practices, implies a decoupling of growth of its negative impact and business model, to assess whether they are fit for purpose in a more sustainable, net zero emissions, and minimal waste economy. In the end, companies that do not adapt well risk disappearing completely as they lose customers and are displaced by more innovative products and/or service offerings from competitors. They will also struggle to compete in an increasingly carbon-constrained and carbon-damaged world, and will find it harder to attract and retain both people and capital.

To ensure the continued viability of our system and way of life, we must fundamentally rethink the way we live, produce, act and invest

We are looking to identify companies that understand the profound impact of the transition on their entire value chain and are making measurable progress in addressing risks and capturing opportunities. These are the companies that will benefit from sustainable growth opportunities and competitive advantage, which translates into sustainable financial returns for our clients and to positive economic, environmental and social change over the long term.

Wichtige Hinweise.

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