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“The environmental and social crises are going to force change on the real economy” – Hubert Keller explores the importance of investing in sustainable businesses
“The environmental and social crises are going to force change on the real economy” – Hubert Keller explores the importance of investing in sustainable businesses
Since 1997’s adoption of the Kyoto Protocol, which put into effect the UN’s Framework Convention on Climate Change, the question of sustainability has largely been linked to climate change. Policymakers and headline-writers have focussed on greenhouse gas emissions (GHGs) and rising temperatures – at international conferences, other forms of sustainability have often been overshadowed. In recent years, however, this has changed, as the international community has come to recognise the need to take a holistic approach to sustainability.
As Hubert Keller, Lombard Odier’s Senior Managing Partner, explains, the environmental crisis is about more than climate change, it is also about our use of land and materials, the degradation of nature, biodiversity loss, and multiple forms of pollution. At the same time, we must face another, linked, crisis – the social crisis, with rising inequalities and demographic changes threatening political stability. “There are two macro forces that are going to challenge the sustainability of businesses across the entire economy – one is the environment and the other is social. These crises are going to force changes on the real economy,” Hubert Keller says.
“The good news is that we can see how these changes will unfold,” he notes. “The macro consideration is that we are going to end up in a decarbonised, nature-positive, more socially equitable economy.”
A sustainable future through five key systems changes
At Lombard Odier, we believe this sustainable future will be realised through five key systems changes:
In our energy systems, we will continue the uptake of renewable, zero-carbon energy, and innovate to achieve ever greater energy efficiency
In industrial systems, we will adopt circular production models and new, bio-based materials
In consumption systems we will move to superior products that have been made in harmony with nature, with shorter supply chains leading to greater transparency
In health systems we will see a rise in preventative care and technology-enabled cures that reduce health inequalities
Technology and finance will cut across these broad systems changes, enabling and accelerating them through cloud computing, artificial intelligence (AI), cyber security, and new and established funding mechanisms that will bring sustainable solutions to scale.
In a recent interview, Hubert Keller explored the investment implications of these systems changes.
The transition to renewable energy is happening faster than we think
Energy leads the way
Beginning with today’s energy systems, which are undergoing a rapid shift towards renewable electrification, he said, “Some of these systems changes will take more time. But in other parts of the economy, I think we will be surprised with the speed of these changes. My personal view is that we are vastly underestimating what’s happening in energy. The transition to renewable energy is happening faster than we think.”
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“I think China is an unbelievable example. China is marching very quickly towards powering most of what is, today, the second largest economy in the world, with electricity. And in doing so they are bringing down the cost of energy to an incredibly low level, which will allow them to compete and compete and compete.”
“The reality is that at first these big transformations can take a lot of time, and then they happen really quickly. Ten years ago nobody thought that China would have an automotive industry. But today there is a question in the EU whether the European automotive industry will be able to resist the wave of Chinese electric vehicles.”
The transition to renewably-generated electricity could have profound implications for business models and the competitiveness of incumbents, Hubert Keller noted. “In a decarbonised economy, energy costs are going to go much lower. The question we need to ask ourselves, as investors, is what happens to industrial companies in a net-zero, nature-positive world? What does it mean for large, listed firms such as General Electric for example? How do these business models change?”
The adoption of cheap, renewable energy will affect all sectors – in particular it will alter the industrial landscape
Circular industry
The adoption of cheap, renewable energy will affect all sectors – in particular it will alter the industrial landscape. So, too, will a new approach to extracted materials, as firms reduce waste by minimising their need for virgin materials, and move towards greater recycling, re-use and re-purposing of used materials.
Hubert Keller explained: “As we transition to a sustainable economy, industrial companies are probably going to extend significantly the life of their products, because they’re going to move from a very linear business model to one that is much more circular.”
Simultaneously, he said, firms will switch to using alternative materials (often bio-based, sustainable materials) in place of today’s unsustainable, extracted materials – such as laminated timber instead of steel in the construction of buildings, and biodegradable plant-based plastics.
For investors, he explained, it is essential to take “these macro considerations and try to understand what it will mean for companies – whether they have a strategy to adjust their business model so that it is fit for tomorrow’s economy.”
This switch to a more circular economy will also change today’s consumer systems, with the end consumer playing an increasingly important role in the ‘re-economy’
Consuming in harmony with nature
This switch to a more circular economy will also change today’s consumer systems, with the end consumer playing an increasingly important role in the ‘re-economy’. At the same time, consumers will see a profound shift in the origin of many of the products they buy – food, in particular.
Hubert Keller explained: “We have used too much of our habitable land, and we have used it in a way that is detrimental to the environment. That’s really important because it creates stress on biodiversity, on water usage, on climate. Through industrial agriculture and other activities we are destroying landscapes and ecosystems – terrestrial sinks that are absorbing roughly half of the flow of emissions that we’re putting into the atmosphere every year.”
Consumer systems, he notes, will transition towards regenerative agriculture, with food and textiles increasingly produced from commodities grown in harmony with nature.
What we try to understand is how food systems supply chains could be redeveloped to be nature positive. Regenerative farming could play a big part, for example
“It’s the food, land and agricultural sectors. That part of our economy needs to change very rapidly. What we try to understand is how food systems supply chains could be redeveloped to be nature positive. Regenerative farming could play a big part, for example.”
For investors, he explained, the implications are profound. “You’re going to potentially reconfigure a lot of food’s economic system. It means reconfiguring existing value chains. It means the potential for huge disruption. Who is going to be the next Tesla, but in food systems?”
“Some of these investable opportunities sit with some of the big names that understand that their products need to be decarbonised and nature-positive. There are a few among the big incumbents that really get it. We think these are going to be the likely winners. So, you can invest today in that new, socially fairer, green economy with some of the existing incumbents; and you can also deploy capital in some of the newcomers that are starting to disrupt existing value chains.”
Disrupting healthcare
The shift to regenerative agriculture will bring with it two significant benefits for broader society. In developing nations, where many of our commodities are produced, it will mean higher wages and better support for farmers and local communities, and food production that is more resilient to the physical threat from climate change. Hubert Keller explained that it will also mean better health.
“The social dimension around food is also very important, because the reality is that we have brought down the cost of food […], we’ve made food more accessible to less privileged people, but it’s been at the expense of producing unhealthy food and creating chronic diseases. So the future of the food system, in our view, is going to be around healthy food produced in harmony with nature.”
The healthcare system itself, he said, “is about to be completely disrupted. It has become unaffordable. We are facing a demographic issue with the ageing population, and an increase in chronic disease. We are treating symptoms instead of going to the root cause. We have a system that is becoming unaffordable even for richer countries.”
At Lombard Odier, we believe a fundamental shift towards preventative medicine is set to change the basis of our healthcare systems
At Lombard Odier, we believe a fundamental shift towards preventative medicine is set to change the basis of our healthcare systems. AI-powered genetic screening and image analysis, and wearable health devices, will enable personalised health plans and earlier medical interventions, lifting the burden on over-strained health systems. Good health, even into later years, will no longer be a preserve of wealthier individuals and nations. For investors, we believe this will create new opportunities in health innovations and the ‘silver economy’.
Technology and finance as ‘cross-cutting’ catalysts
Technology’s influence will be seen beyond the healthcare sector, however, as innovations in AI, cloud computing, and the ‘internet of things’ accelerate the transition towards an environmentally and socially sustainable model across all of our economic systems.
When it comes to AI, Hubert Keller says, “I think it’s still early to say, but there is a common view emerging that it will transform the way we live, our societies and it is also likely to transform our economy.”
Similarly, finance has an essential ‘cross-cutting’ role to play, with both traditional and innovative finance mechanisms – such as ‘green bonds’, biodiversity credit markets, and blended public-private investments – essential for catalysing innovation and bringing to scale sustainability solutions, including regenerative farming, forest and peatland restoration, and atmospheric carbon capture.
Taking the positive view
Here, Hubert Keller acknowledged that some sustainable investments have underperformed expectations. “I think there’s been disappointment from a number of investors […] because a lot of the funds that were invested in sustainability focussed strategies did not perform well in the last two or three years.”
Technology’s influence will be seen beyond the healthcare sector, however, as innovations in AI, cloud computing, and the ‘internet of things’ accelerate the transition
Firstly, he explained, too many investment firms have focussed on the energy transition at the expense of investing in recent rapid technological advances. And secondly: “Most investment firms who were focussed on sustainability perhaps did not go deep enough in trying to understand the depth and scale of these system changes. It’s a very complicated question because it depends both on how value chains get reorganised and it also depends on the demand side.”
However, he continued, “The notion that sustainable investing is over makes very little sense. Something that cannot go on forever will, of course, eventually stop [...] and investors will lose a lot of money. So as long-term investors we have to be completely obsessed with sustainability.”
“The world economy is not working for the environment and, frankly, parts of it are not working for people either. So the way we like to look at sustainability is to take a positive view, and say at some point – is it going to be in ten years, twenty years, thirty years? – but at some point we will end up in an economic framework which will be decarbonised, which will have a neutral to positive footprint on nature, and which will be socially more equitable. And this is why we are incredibly excited as investors, because we think that we are at the beginning of a very profound economic transformation.”
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