rethink sustainability

Building portfolios around Eagles to deliver superior returns for our clients

An interview with Hubert Keller and Frédéric Rochat. 

Hubert Keller - Managing Partner<br/>CEO Lombard Odier Investment Managers

Hubert Keller

Managing Partner
CEO Lombard Odier Investment Managers
Frédéric Rochat - Managing Partner<br/>Co-Head of Private Clients

Frédéric Rochat

Managing Partner
Co-Head of Private Clients

You’ve just introduced this new terminology of Eagles and Ostriches. Can you explain more?

Eagles are companies that have evolved and are no longer just focusing on profits but also on whether these profits are sustainable in a world challenged by changing demographics, major environmental issues and inequalities. These companies have, today, expanded their focus to multiple bottom-lines – not only profit but also people and the planet.

Ostriches are best characterised by spending a fair amount of time with their heads in the sand. This refers to companies that do not realise the magnitude of the sustainability challenges and the speed at which they should react. They carry on with a business model that will be increasingly questioned. They are either oblivious to this transition, or actively in denial.

Eagles will be the winners in the Sustainability Revolution. Ostriches will be the losers.

Building our portfolios around Eagles and avoiding Ostriches will be our way to deliver superior returns for our clients.

 

Why do Lombard Odier say we are in the “midst” of a Sustainability Revolution?

Because it is a reality. We see it every day. With almost 8 billion people on the planet and heading to 10 billion, massive environmental challenges and the Western middle class increasingly squeezed, this economic model we live in simply doesn’t work anymore.

We cannot continue to focus purely on global economic growth at the expense of the environment and society at large. Companies failing to realise this will run the risk of disappearing. The rapid implementation of new rules and regulations will prevent them from operating. Their customers will no longer buy their products or services, while technological innovation may disrupt them altogether. And, last but not least, they will be starved of talent and capital.

We cannot continue to focus purely on global economic growth at the expense of the environment and society at large.

Fortunately, many companies are realising this and are moving swiftly to adjust their business models and the way they operate. Effectively, we are witnessing the transition to a more inclusive, low-carbon and sustainable economic model. This new economic revolution is likely to be similar in scale to the Industrial Revolution, but with the speed of the digital revolution.

It will create many more large and successful companies and force the extinction of major incumbents.

From an investment perspective, we believe it will create fantastic opportunities that will deliver great returns for our clients.

This new economic revolution is likely to be similar in scale to the Industrial Revolution, but with the speed of the digital revolution.

How do you identify the Eagles from an investment standpoint?  

It is all about DNA and mindset. We look for companies where management is truly convinced about the need to develop a business model that can deliver growth with minimum impact on the planet and society – even if this requires major changes. Specifically, this means apprehending sustainability issues across its whole value chain, not only in its own manufacturing process but also in those of its suppliers and customers. Furthermore, it means hardwiring sustainability into its long-term strategy, being willing to set concrete goals on sustainability issues, and regularly reporting transparently and comprehensively on progress. 

Of course, this must also mean an equal focus on delivering financial performance over the long-term; as otherwise, the business will not be sustainable.

Eagles are companies that relentlessly ask themselves whether HOW they do things or WHAT they do, helps to resolve the major sustainability issues that our world is facing.

These are the companies that are helping to resolve the major sustainability issues that our world is facing.

Eagles are companies that relentlessly ask themselves whether HOW they do things or WHAT they do, helps to resolve the major sustainability issues that our world is facing.

How can you be sure that Eagles will drive excess returns in the future?

Successful companies over the long term have always been those that are able to identify the major trends and adapt accordingly, even if this requires completely changing their business model. The Sustainability Revolution is creating a vast number of major trends that will completely change the shape of our economy. These companies are able to understand these new forces and adapt accordingly. Thus, they develop very successful and resilient business models, gain substantial market share and grow much more rapidly. They will become the winners in their industry and their share price performance should reflect this.

Successful companies over the long term have always been those that are able to identify the major trends and adapt accordingly, even if this requires completely changing their business model

How do you continue to assess Eagles once they are in portfolios? For instance, what if there is a controversy?

Being an Eagle is first and foremost about DNA and mindset and this should not really change in the short-term. Of course, sustainable companies might face some bumps along the road when transitioning to a more sustainable business model but this does not mean that their commitment to sustainability is altered. Environmental, social and governance (ESG) data alone cannot capture the DNA and mindset aspects that are essential to assessing the sustainability journey of any company.


You say that Lombard Odier avoids investing in Ostriches. Do you continue to assess Ostriches’ financial models and business practices? What if their future model improves and becomes more sustainable?

This is the miracle of the business world, unlike the scientific reality. Yes, an Ostrich can become an Eagle - and vice versa! Plenty of poorly positioned companies have re-invented themselves, with a management team that has the wisdom and the courage to do this. There are companies that have successfully accomplished this journey.


We know that things have to change. But how can we sustainably generate economic growth without damaging the environment?

Firstly, remember, it is not only about the environment. It is about how we cater for the needs of a rapidly growing population, without damaging the environment and without creating major social inequalities. We call this Decoupling, or in other words, promoting economic growth without a negative footprint on society and the environment.

[Generating economic growth] is about how we cater for the needs of a rapidly growing population, without damaging the environment and without creating major social inequalities. We call this Decoupling.

It will require fundamentally rethinking the way we feed ourselves, plan and power our cities, approach healthcare, organise our supply chains, and our approach to lifestyle and personal finances. It will affect literally all sectors of the global economy.
 

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A prime example is the transition to a “circular economy” where we move away from our current “take-make-waste” linear economic model to a circular economy that emphasises prosperity without waste, through increased resource efficiency, better material reuse and more recycling. The transition towards a circular economy is estimated to represent a USD 4.5 trillion1 global growth opportunity within the next 10 years, which concurrently works to restore our natural systems.


Is this just a marketing campaign or does Lombard Odier have real investment convictions?

By now, we hope we don’t need to dwell too much on this question… we are convinced that sustainability is driving a new economic revolution on a major scale, which will create phenomenal investment opportunities. This is a genuine investment conviction, which comes at a time where there is more volatility in markets and a greater need to differentiate the winners from the losers.

We ask ourselves the question: will the world be better or worse off if any given company was to sell more of its products or services?

How do you promote sustainability with your clients?

It is fair to say that there is a general awareness of sustainability from clients across both our businesses and an increasing desire to integrate it into their portfolios. There are different approaches, which will suit different clients:

Approach one - The lighter one will involve excluding certain sectors or sub-sectors from portfolios.

Approach two - Then comes the integration of financially material ESG criteria into existing portfolios, where ESG tools are used as a form of overlay on top of an existing investment process. This is where most of the action currently is in our industry and it is mostly relevant to address large universes. There are several approaches for ESG integration, but our asset management business is, probably more advanced than most of our competitors.

For each company, sector and industry we analyse, we are able to extract a variety of ESG information from various databases, clean it, analyse it, and assess its materiality in the company’s financial results. Materiality assessments are fundamental considerations to us. They enable us to connect ESG characteristics and price performance through future earnings comprehension and valuation.
 

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Approach three - Following this comes sustainability as the core conviction, where the investment process and the expected excess return relies primarily on sustainability. These portfolios are constructed on our conviction that only companies that are able to grow their businesses with zero negative impact on the environment and society will outperform.

We articulate this offering through three distinct portfolios:

  • Thematic portfolios2 consisting of companies mainly involved in a specific sustainability theme, such as sustainable food or sustainable urban systems.
  • Sustainable portfolios consisting of companies with strong ESG characteristics that also offer solutions to major sustainability issues or are transitioning to become part of a solution.
  • Impact portfolios consisting of companies that purely offer solutions to major sustainability issues.

Across all of our portfolios that are sustainably managed, we ask ourselves the question: will the world be better or worse off if any given company was to sell more of its products or services?


How do private and institutional clients respond to the conviction that Lombard Odier has on the Sustainability Revolution and the way you select companies?

It is a more impactful message for private clients as they are very receptive about convictions and like to see them reflected in their portfolios. It is more challenging on the institutional front because pension funds and insurance companies have largely moved away from active management3 and are looking more for systematically diversified or passive4 portfolios.

It is a more impactful message for private clients as they are still very receptive about convictions and like to see them reflected in their portfolios

On the asset management side, how do you speak to existing or prospective clients about sustainability?

We always start by sharing with them our view that the transition to a low carbon and more sustainable economic model is accelerating. Most of them would typically agree with this. We are then confronted with two different types of clients:

  • Those who would like to integrate sustainability into their existing portfolios without substantially changing their investment process. For these clients, there are essentially three main avenues: more actively engaging with companies in their portfolios, changing their benchmark to sustainability benchmarks thus forcing their asset managers to adjust, or relying on ESG tools to make more bespoke adjustments to their portfolio. Our offering here is concentrated on the use of ESG tools. 
  • Those who are willing to take active bets that sustainability will drive returns and are willing to integrate high conviction investment strategies in their asset allocation. For these clients, we offer enhanced thematic strategies, more sophisticated sustainability strategies, and pure impact strategies.

Have you seen a shift in thinking in recent years from your clients? Are they convinced by this approach?

Definitely so. Clients are very much aware of the overall sustainability challenge and are increasingly keen to engage with their wealth manager or asset manager on the topic. Again, different clients will follow different approaches.


Many banks and asset managers are now talking about sustainability. What makes Lombard Odier different?

It’s true that sustainability has become a very topical subject in our industry. But there are several things that distinguish us from the pack.

Firstly, we have a clear firm-wide message, which reflects a strong conviction that we are at the beginning of a new Industrial Revolution.

Secondly, we have had the courage to be bold and communicate this conviction to the outside world in a very impactful manner.

Thirdly, we think we are ahead of our peers in developing a comprehensive offering around sustainability. We have sophisticated tools that allow us to integrate sustainability into existing portfolios, and we will soon be able to offer our clients high conviction portfolios with sustainability as the main source of excess return.

We have a clear firm-wide message, have had the courage to be bold and communicate and are ahead of our peers in developing a comprehensive offering around sustainability.


How does Lombard Odier apply sustainable principles internally?

I think we always have. Whilst profitability is an essential element of our business model, being a private and independent company has given us the freedom and long-term vision to simultaneously focus on people, the community and solving the environmental challenges that we face. You can see evidence of this is in our recent B Corp certification and in the way we are approaching our new headquarters in Bellevue, Geneva.

1 https://www.weforum.org/agenda/2019/01/its-time-for-the-circular-economy-to-go-global-and-you-can-help/
2 Thematic portfolio construction applies only to Lombard Odier Investment Managers.
3 Active management is the use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund's portfolio, with the aim of outperforming the market. 
4 Passive management is a style of management associated with mutual and exchange-traded funds (ETF) where a fund's portfolio mirrors a market index. 

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This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (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 document. This document was not prepared by the Financial Research Department of Lombard Odier.

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