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From policy to ‘pain points’ – Transition Investment Summit explores today’s sustainable investment landscape
key takeaways.
The sustainability transition is driven not by policy or ideology, but by an economics-led response to today’s ‘pain points’
The transition is underpinned by fundamental transformations of five key systems – energy, industrial, consumer, health and digital technology
Political headwinds may alter the shape of the journey, but they won’t derail the transition or change the destination – we are transitioning towards a net-zero, nature-positive, socially-constructive, and digitally-enabled economic end-state.
The third annual Transition Investment Summit, hosted by Lombard Odier in London’s Piccadilly, opened with strong a statement of intent. Welcoming delegates to the day’s event, Hubert Keller, Lombard Odier Senior Managing Partner, said, “At Lombard Odier, we remain fully committed to the sustainability agenda. We believe it is the most important investment return conversation we can have with our clients.”
He continued: “Despite political headwinds, the sustainability transition has become more certain than ever, because it is led not by policy or ideology, but by economics. The world is changing – for investors, now is a time for conviction.”
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Hubert Keller was joined in London by thought leaders from across multiple disciplines, including renowned academic Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at the University College London; institutional asset owners Mark Fawcett OBE, CEO of Nest Invest, Emma Wall, Head of Platform Investments at Hargreaves Lansdown, and David Thompson, CIO of Zurich Insurance; and members of Lombard Odier’s industry-leading team of sustainable investment experts.
Together they tackled four key questions that, the Summit heard, are top of mind for many sustainable investors today.
The longer people try to ignore the pain points, and ignore sustainable investing, the stronger our conviction becomes
1. Does Donald Trump spell the end of sustainable investing?
In recent years, government policies – such as tax and subsidy incentives – have been a key driver of the rollout of sustainable products and services, and the transition to sustainable business models.
Today, though, some governments appear to have turned against sustainable policy. This is clearest in the US, where President Trump has halted the provisions of the Biden-era Inflation Reduction Act – which supported sustainable business activities – and encouraged the oil industry to “drill, baby drill”. In the wake of Trump’s election, some financial sector firms have publicly rolled back their sustainability commitments.
However, Thomas Hohne-Sparborth, Lombard Odier’s Head of Sustainability Research, told delegates, “People can choose to stop focussing on sustainability or on climate change, but actually as you do that these topics only become more important, because the pain points – the challenges you’re facing – only get worse.”
“For example, in the US, some insurance companies are refusing to insure certain areas because of the risk of wildfires and flooding. Another example is soil degradation, where around 40% of land today is degraded, which is impacting productivity. These are real physical pain points, and they act a bit like an elastic band. If you ignore it you can stretch it out, but at some point it triggers an accelerated response. So, in fact, the longer people try to ignore the pain points, and ignore sustainable investing, the stronger our conviction becomes.”
Nest Invest’s Mark Fawcett acknowledged that President Trump has impacted the sustainable investing conversation, but explained that the market opportunity hasn’t changed. “For example, there are 600 million people in Africa that don’t have access to electricity. There’s a massive investment opportunity there,” he said. “So we can ignore a lot of the rhetoric in the US, and just focus on where we can make money for our members, and also have a positive impact on climate change.”
Zurich’s David Thompson agreed with this opportunity-first approach, noting that his “north star” when it comes to sustainable investing is “based on risk mitigation and investment opportunities.” At Hargreaves Lansdown, Emma Wall explained, sentiment hasn’t been affected. “Every one of our clients is a private investor, and the way they feel about the sustainable investment opportunity hasn’t changed just because there is someone new in the White House.”
2. Is there still a role for the public sector?
For Professor Mariana Mazzucato, despite the headwinds being created by the new Trump administration, there is an important role for governments and policymakers to play.
If we can catalyse public and private sector investment around the sustainability mission, economic growth will follow
“There is a false economics that there’s a trade-off [when it comes to public investment]. For example, ‘if we spend more on education then there’s less money for health.’ That’s simply not true,” she said. “The cost of inaction around health is much greater than the cost of action, just as with climate change. If we allow things to go bad, it’ll cost us much more to fix it later. This is why we need mission-oriented partnerships between the public and private sectors. If we can catalyse public and private sector investment around the sustainability mission, economic growth will follow.”
Thomas Hohne-Sparborth agreed, noting China’s huge success in electrifying the power grid, which has been catalysed by government investment initiatives in renewable energy, and been followed by significant economic growth1. However, he added, even without public involvement, global renewable energy capacity is being added at breakneck speed, for the simple reason that the electricity produced by renewables is cheaper. In Texas, for instance, the US’s leading energy-generating state, solar has, for the first time, overtaken coal for electricity generation.2 “These new technologies are gaining market share because they are outcompeting existing systems. It doesn’t matter that President Trump says ‘drill, baby, drill’, oil demand growth is slowing and new technologies are winning,” he concluded.
3. Why have sustainable investments underperformed?
Despite this clear growth story, the Summit acknowledged that sustainable investments appear to have underperformed in recent years. However, delegates heard, the true picture is more complex. Peter Burke-Smith, Portfolio Manager at Lombard Odier Europe, explained, “This isn’t necessarily about sustainability – it’s about thematic investing. High concentration of market value in just a small number of tech stocks – what’s been called the ‘Magnificent Seven’ – has meant almost all thematic strategies have underperformed, whether sustainability focussed or not.”
Nicholette MacDonald-Brown, Lombard Odier Head of Sustainable Equities, picked up on this point. “It’s no secret that market conditions have not been easy, with high concentration of value, but actually what we’re seeing now is a dramatic broadening of the market,” she said. “This perception of sustainable investments underperforming is really only based on a focus on active investments over just the last two years. According to Morningstar, the longer-term performance of sustainable funds (assessed since 2018) has broadly aligned with traditional funds. And if you look at the median climate-focussed fund year-to-date, actually it’s outperforming.”
Meanwhile, asset owners share this conviction, she said, highlighting significant sustainable climate, nature and social investment mandates from numerous major institutional investors. “We continue to see sophisticated investors stepping into this space. We’re seeing all these different themes – climate, nature, energy, social – and they won’t happen all at once, and they won’t necessarily happen in predictable patterns. But the alpha opportunity for investors – the chance to outperform the market – is really significant.”
4. Where are the biggest opportunities – should investors be focussed on climate change?
Where, then, should investors be looking for these alpha opportunities? For Thomas Hohne-Sparborth, the answer is clear. “Climate is very important, of course. But what is not always understood is that this is a much broader story. For instance, soil degradation and fragile value chains have led to cacao prices tripling. That’s a real pain point – so for investors this means we can also find opportunities to invest in nature.”
When it comes to where investors should be looking, yes it’s climate change and net zero, but it’s also in the move to a nature-positive economy
“New technologies will be a big part of the nature story,” he added. Noting that the cost per kg for launching satellites has fallen by 99% since 19803, he said, “Suddenly we can recycle rockets. That means massively reduced cost for geo-monitoring farmland and for tracking supply chains’ impact on nature. Then there’s a similar cost fall for industrial robots. It might not be obvious what this has to do with nature, but it means much greater resource efficiency, industrial processes that are more circular and waste less, so they minimise their impact on nature.”
Investors will also discover opportunities in the social side of the transition, he explained, noting that healthcare spending as a proportion of GDP has risen markedly in many developed countries. “These are real pain points. Our current health systems aren’t affordable, they can’t deal with today’s demographic pressures. All sorts of opportunities will open up as we move from ‘sick-care’ to a system where we prevent people from getting sick in the first place. And technology will have another big role to play. So when it comes to where investors should be looking, yes it’s climate change and net zero, but it’s also in the move to a nature-positive economy, it’s in what we call a socially-constructive economy, and then of course there are the opportunities in the technology side, in digital enablement.”
Superior economics, technological advancements and corporate innovation have together become an unstoppable force, creating deep system changes that are reshaping the global economy
Investing in system changes
The overall message from the Summit was clear. The sustainability transition may have hit political headwinds, but superior economics, technological advancements and corporate innovation have together become an unstoppable force, creating deep system changes that are reshaping the global economy.
At Lombard Odier, we believe these opportunities are most likely to emerge in five key systems – energy, industrial, consumer, health, and digital technology. Through science-based analysis, and partnerships we have formed with external experts across numerous disciplines, we build an understanding of how these system changes will impact business models and long-term profitability.
Our strategy is to first identify the firms set to benefit from the transition – those that offer sustainability solutions that cut across industries, or those with credible roadmaps to become sustainability leaders within their sectors.
Next, we narrow down the field by uncovering price dislocations, deploying fundamental analysis to find firms that have been mis-priced by markets not yet alive to the system changes taking place beneath their feet.
We believe this is the route to generating long-term returns in a transition that is now inevitable. As Hubert Keller concluded, “Investors can debate many things, but we can’t debate the ‘end-game’. It is simply inevitable that we are moving towards an economic end-state that is fully decarbonised, has a neutral to positive footprint on nature, will be socially constructive, and also will be digitally enabled. At Lombard Odier, this is an investment conviction, and it’s what drives our investment thinking.”
This is a marketing communication issued by Bank Lombard Odier & Co Ltd (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 marketing communication.
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