working towards a net-zero world.

The transition to a net-zero economy is one of the greatest challenges of our time. There will be many casualties but there are also massive investment opportunities. 

In order to reach the goals set by the Paris Agreement to limit global warming to 1.5°C, CO2 emissions need to reach net zero by 2050. It is a daunting task but it remains the single most important component of the sustainability transition across all companies and industries. Across sectors, companies must wean themselves off fossil fuels. 
 

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This transition offers extremely fertile ground for investors. We believe that companies that are on the pathway to creating a net-zero economy will thrive and those who are left behind may not survive, while demand for climate-relevant solutions, products and services will escalate.

We believe that companies that are on the pathway to creating a net-zero economy will thrive and those who are left behind may not survive

why is it so important?

At Lombard Odier, we believe we are at the dawn of the next great economic revolution, one where sustainability will be at the core of all investment decisions.

At present, we live in a Wasteful, Idle, Lopsided and Dirty (WILD) economy. One where 92 billion tonnes of natural resources5 are extracted from the planet every year to feed an ever-hungry model of consumption. From this comes pollution, greenhouse gas emissions and great inefficiencies. The need to convert to an economy which is Circular, Lean, Inclusive and Clean (CLIC™) grows ever greater.

Reaching net-zero carbon emissions by 2050 is the lynchpin of that transition. While almost three decades may seem like a long time to reach this target, the scientific community says we must first cut our emissions in half by 2030 – which is less than nine years away.

 

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Net zero is the only solution to prevent the bathtub overflowing6

Efforts are gathering pace. Over 125 countries have committed to net-zero targets, the United States has re-entered the Paris Agreement under the Biden administration and COP26 (The UN Climate Change Conference), which will take place in November 2021 in Glasgow, will lead to more ambitious governmental climate pledges and their translation into regulation.

The shift is coming from many directions as there are powerful forces creating momentum. Regulation wise, CO2 emissions are becoming more costly and there is a need for increased transparency. Consumers and employees are demanding that companies adopt sustainable solutions. Market forces are driving down the costs of technology and investors want firms to report on climate-related risks and effectively redeploy capital. The solutions to transition to a CLIC™ economy are becoming cheaper and more widespread.

The scientific community says we must first cut our emissions in half by 2030 – which is less than nine years away

the investor question.

The shift towards net zero is now becoming one of the most fundamental issues for investors. Can a company continue to perform its activity without emitting CO2? Can it run a profitable business model in a post carbon world or as it transitions to net zero?

Investors must now make the net-zero trajectory a condition for investment

Investors must now make the net-zero trajectory a condition for investment. At Lombard Odier, we use the Oxford Martin Principles - a rigorous, scientific net-zero framework that helps us decide how we engage with companies.

1

Company sets a net-zero goal.

2

Company outlines plan to remain profitable at net zero.

3

Company sets mid-term target (e.g. 50% reduction in emissions by 2030).

This tells us the extent to which a company is future-proofed in the face of The Sustainability Revolution. 

A company that satisfies the Oxford Martin Principles immediately becomes a significantly more attractive prospect than one that doesn't. To optimise the sustainability of our portfolios, we take all of this information into account as part of our decarbonisation process and adjust portfolios to ensure they are decarbonising in line with both a net-zero trajectory and the Paris Agreement's objectives to limit global warming. 

To optimise the sustainability of our portfolios…we ensure they are decarbonising in line with both a net-zero trajectory and the Paris Agreement's objectives to limit global warming

Low carbon strategies that avoid rather than address the problem, the excessive use of carbon offsets and shorting high emitters, will not solve the problem. While these represent some of the common approaches taken by investors today, it is only by investing in reductions in the real economy that the transition can be accelerated and that is where climate opportunities lie.

the net-zero trajectory.

We believe companies that are on a viable pathway to achieve carbon neutrality and manage transition risks will benefit from growth opportunities, premium valuations and cheaper and more plentiful access to capital.

We assess not only the current emissions of a company or portfolio, but the necessary level of decarbonisation the company must achieve, and whether a company’s own trajectory is sufficient to meet these objectives. What’s more, we take into consideration the evolution of internal, industry and regulatory pressure that may lead a company to accelerate its climate commitments.

But this doesn't mean we avoid high-emitting sectors. Companies in these sectors that are on the right trajectory have the potential to make particularly significant contributions to limiting global warming. For us, what matters is whether or not a company is moving in the right direction - and moving quickly enough. We believe this will be one of the most critical drivers of returns in the coming decades. It is our fiduciary duty to understand the risks involved in continuing to produce carbon emissions and the transition to net zero, whilst capturing the opportunities that come with embracing that transition.

We must look beyond a company’s footprint today, and understand its trajectory and alignment to the transition

Looking only at carbon footprints is never enough. A company in a high-emitting sector such as steel that is investing in clean technologies to produce carbon neutral steel is making a positive contribution and may unlock new commercial advantages. In contrast, a lower carbon company investing in energy-intensive technologies, not paired with renewable energy, may well be low carbon today – but moving in the wrong direction. We must look beyond a company’s footprint today, and understand its trajectory and alignment to the transition.

Companies in industries such as agriculture, cement, steel, chemicals, energy, materials, construction and transport, will be where the battle is won or lost. ‘Ice cube’ companies that have understood the urgency of the transition can disproportionately cool the economy. ‘Burning logs’, still generating huge emissions, may end up as stranded assets or risk being put out of business in a net-zero regulated world. 

We assess companies for our portfolios based on:

1

emissions

2

decarbonisation required

3

company's own trajectory

4

regulatory pressure

But this doesn't mean we avoid high-emitting sectors. For us, what matters is whether or not a company is moving in the right direction - and moving quickly enough.

building net-zero portfolios.

We aim to build portfolios resilient to any shocks as the shift happens and are positioned to benefit from them. 

Therefore, we classify companies into four categories.

Burning logs

Highly exposed companies with an urgent need to decarbonise, yet failing to do so.

Ice cubes

Companies in similarly-exposed sectors, but taking appropriate action and transitioning.

Solution providers

Companies whose products and services help enable the transition across the economy.

Companies insulated from climate risks

These companies may support diversification and other portfolio objectives.

In order to create net-zero aligned portfolios we use a forward looking approach in order to identify Climate Value Impact in a four step process:

  • We begin with an assessment of a portfolio’s carbon exposure, across scope 1, 2 and 3 emissions, recognising that transitional risks may be linked both to a company’s direct as well as indirect emissions.
  • Next, we consider how the portfolio’s emissions are likely to evolve as a result of investees’ decarbonisation strategies, using our proprietary implied temperature rise (ITR) methodology, which assesses alignment of companies to the Paris Agreement.
  • As part of this analysis, we consider a company’s own commitments, as well as exposure to internal, industry and regulatory pressure that may lead a company to accelerate its climate commitments.
  • Finally, we continually review our positions in the portfolio, updating our climate analysis on a monthly basis.

where we are.

Our heritage is Swiss, yet our outlook and mind set are resolutely international. With over 25 offices globally, we are able to serve our clients all over the world.

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1 https://www.lombardodier.com/contents/corporate-news/investment-insights/2021/june/carbon-costs-and-the-g7s-fossil.html
2 World Resources Institute; excludes land use change.
3 https://www.clientearth.org/latest/latest-updates/stories/fossil-fuels-and-climate-change-the-facts/#:~:text=In%202018%2C%2089%25%20of%20global,source%20of%20global%20temperature%20rise.
4 Lombard Odier calculations
https://www.resourcepanel.org/sites/default/files/documents/document/media/unep_252_gro_2019_summary_business_leaders_web.pdf
6 Bill Gates: My green manifesto | Financial Times (ft.com)

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