Sustainable Finance Disclosure Regulation

Sustainable Finance Disclosure Regulation

At Lombard Odier, we believe the current global economic model is unsustainable. It is ‘WILD’ - Wasteful, Idle, Lopsided and Dirty. We believe the economy is already transitioning towards what we refer to as a ‘CLIC™’ model that is Circular, Lean, Inclusive and Clean. This transition is fundamentally re-shaping risk and return dynamics across all sectors and asset classes. We believe this ‘sustainability revolution’ has already become one of the most important drivers of risk and return.

Sustainable investment means investing in strong and efficient companies that respect their ecosystem of partners, will withstand the current changes in the world economy, and will be able to participate in the emergence of a more sustainable societal model.

Sustainability goes beyond climate change and we want to embrace the opportunities the sustainability revolution will provide as well as help our clients to face the instability it will create.

For the latest thinking on Sustainability, please visit our dedicated Sustainability Portal


Our sustainable investment framework.

Lombard Odier's sustainable investment framework and policy covers two dimensions of sustainability: What businesses do (their business model and activities) and How businesses operate (their business practices). Based upon in-depth, forward-looking intelligence and analysis, we focus on the issues that are financially material at the systemic-, sector- or company level to assess how well companies are positioned for the transition to a sustainable economy. In addition, stewardship plays a vital role in informing the investment process and is an important vector in our endeavour to enhance the value of our clients' assets.

Following our Circular, Lean, Inclusive and Clean (CLIC™) process, and to guide our analysis of the alignment of companies, portfolios and investments with this emerging transition, we have defined a framework identifying 8 key sustainability challenges that we believe companies will need to address in order to remain fit for the future. These 8 challenges include the transition to zero waste, regenerative nature, dematerialisation, resource efficiency, a fair society, a secure society, zero emissions, while ensuring adaptation and resilience particularly in light of emerging climate risks.
 

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Assessing the ‘what’.

Our Sustainable Investment Research, Strategy & Stewardship Team (“SIRSS Team”) has been created with the purpose of identifying material sustainability factors that are likely to affect the financial viability and operations of investee companies. In order to reflect the complex and multi-faceted nature of sustainability challenges, the team brings together a diverse set of skillsets, including investment banking, macroeconomics, life-cycle analysis and data science. The team works closely with portfolio managers and the ESG Solutions team and supports our investments across all asset classes.

The team looks at companies' business models and activities and combines top-down, macro-economic analysis with bottom-up approaches to assess:

  • the exposure of different sectors/industries to opportunities and risks arising from sustainability dynamics, including climate change scenarios, the macro-economic world view, energy and mobility forecasts.
  • the susceptibility of each sector/industry to those risks and opportunities, including what business strategies exist to mitigate the risks or capture the opportunities, climate mitigation and adaptation, new innovative/disruptive technologies and company preparedness.

This process uses advanced data science and machine-learning techniques, as well as our proprietary LO Portfolio Temperature Alignment Tool, which allows us to analyse strategically the degree of alignment of companies, industries and portfolios with the decarbonisation pathways implied by the goals of the Paris Agreement, which seeks to limit global warming to well below 2°C.


Assessing the ‘how’.

The Environmental, Social, and Governance (ESG) Solutions team focuses on business practices of companies and sustainable policies of governments. It therefore conceives, develops and distributes various ESG assessment tools such as business practices scorings, controversy indicators and impact metrics. The ESG Solutions team also provides analysts and portfolio managers with material questions to ask their investee companies in order to assess the ESG risks of their business practices.

This element looks at companies' business practices in relation to their broad ecosystem of stakeholders.

Our proprietary 'CAR' methodology (Consciousness, Action, Results) enables us to differentiate between the 'talkers', 'doers' and 'achievers', and identify companies that are making measurable progress in the transition to more sustainable business practices

We also assess the alignment of business practices with the 17 UN Sustainable Development Goals (SDGs) and look at companies' exposure to controversies, which occur when companies breach internationally accepted standards or norms, as defined by the United Nations Global Compact Principles. In our view, controversies could have a major impact on a company's reputation and lead to lower market performance. Our assessment of business practices also looks at certain impact metrics, including companies' carbon-emissions and water-use intensity.


Business models.

Whereas ESG analysis of business practices (as described above) is an essential component of our analytical framework, we believe that a comprehensive sustainability assessment must take into account not only how companies operate, but also what their underlying business models entail and how these are aligned with emerging transitions.

We recognise, for instance, that companies in many troubled sectors may perform well when evaluated against their peers, and may often have undertaken concerted efforts to improve their working processes. However, we also recognise that regulatory, technological, environmental and consumer trends may nonetheless render the activities of such companies incompatible with the transition to a more sustainable economic model, necessitating further  bold and rapid action in order to transition and reinvent their business models.
 

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Stewardship.

Within the funds that are provided by Lombard Odier group, issues that are financially material at a systemic, sector or company level are addressed through engagement and voting activities, which are carried out either directly or through collaborative initiatives. Our fund managers within the group enter into a dialogue with companies to test and challenge their approach to the sustainability factors most material to their prospects and will seek to influence their sustainability positioning in areas in which we think they are weak or where there is room for improvement.


Impact on portfolios and advice.

At all levels, sustainability and/or ESG-based metrics (along with other factors as described above) are key in deciding if investments are part of our universe of acceptable products and our level of conviction regarding those products. Along with other client considerations, high conviction products provide the basis of decisions taken by our portfolio managers and advisors. We integrate these metrics and analysis through different strategies in our mandates according to clients’ targets and wishes.

We systematically exclude companies that manufacture or sell non-conventional weapons (such as cluster bombs and anti-personnel mines) and financial instruments directly linked to essential food commodities (i.e. soya, rice, wheat, corn). For some portfolios, we apply additional ethical screening criteria and can also apply bespoke filters for individual clients based on their own beliefs and objectives.

For specialised sustainable mandates (or where clients have stated a clear preference), and on a constraint basis, the investment team additionally carries out a thematic activity-driven filtering to assess each company’s activities using dedicated metrics and in-house industry/company level analysis. This is carried out to filter further our investment universe into a ‘sustainable’ universe of stocks/products which scores highly in our sustainability framework.  Further analysis of fundamentals and forward-looking analysis of business models is then used to come to a high-conviction portfolio.  We can also report to our clients regarding the exposure of the underlying assets to 26 sectors such as oil & gas, tobacco, gmo (genetically modified organisms), gaming, thermal coal, etc.

We believe companies making measurable progress towards sustainability are more likely to outperform

Combined with our multifaceted approach and inclusion of business models and locations, and the fact that sustainable business practices are often a sign of a well-managed and efficient business, we do not consider there to be any negative impact on portfolio returns due to our incorporation of sustainability metrics in our investment decisions.


Climate risk assessment and the impacts of investment decisions.

We recognise and assess the importance of physical, transitional, as well as reputational and liability risks of climate change as part our sustainability framework, as well as the impacts our investment decisions can in turn have on these factors.  Using the methodologies described above, we assess the exposure to these risks and opportunities at an industry level and our analysts look at susceptibility to these transitions at a company level. Our analysis covers more than 160 individual industries. Staff awareness and consideration of these factors are built into our performance and remuneration processes.


UN PRI commitment.

The Lombard Odier group has been a signatory of the six United Nations Principles for Responsible Investment since 2007 and LOIM is committed to developing its own business in line with these principles:

Principle 1 – “Incorporation of ESG issues into investment analysis and decision-making processes”: We support and promote the use of ESG criteria (Environmental, Social, Governance) as a key part of our sustainability philosophy.

Principle 2 – “Be an active owner with ESG issues incorporated in ownership policies and practices”: Our engagement policy is summarised below. We look at ‘engagement’ in its widest sense - not only in terms of voting or arranging for voting at shareholder meetings but also in terms of maintaining an open and continuous dialogue with a company throughout the investment lifecycle. We take the intelligence and analysis generated by our SIRSS and ESG Solutions teams to drive the dialogue and voting power with companies allowing for an informed discussions with companies and for the targeting of issues that are material to the long-term financial stability and performance of a company.

Principle 3 – “Seek appropriate ESG disclosure by the entities in which we invest”: We strive to invest in companies which include ESG issues and other non-financial information in their standard reports. This is one of the core areas of our engagement with companies where data may still be lacking.

Principle 4 – “Promote acceptance and implementation within the industry”: the Lombard Odier group been both a co-founder and active participant in many initiatives and associations that promote sustainability throughout the financial industry including the following:

Active member of Sustainable Finance Geneva (SFG) which promotes Sustainable Finance and positions Geneva as a sustainable finance centre

Founding partner and active member of Swiss Sustainable Finance (SSF)

Founding partner and active member of Global Impact Investing Network (GIIN) ’s Investors Council

Signatory of the 2014 Global Investor Statement on Climate Change

Signatory of the Carbon Disclosure Project (CDP) since 2004

Lombard Odier participates in numerous public events promoting responsible investing (Geneva Summit on Sustainable Finance as well as microfinance and impact investing conferences)

Principle 5 – “Work together for ever-better implementation”: the Lombard Odier group supports UNPRI collaborative initiatives and is actively involved with local, national and international regulatory and political authorities in order to promote a sustainable finance framework.

Sustainable Finance Disclosure Regulation – “Transparency on our own activity and implementation progress”: We complete the annual United Nations PRI questionnaire, the responses to which are available to the public on the UNPRI’s website.  Out of a commitment to transparency for our clients, we pay great attention to the quality of the non-financial reports that we prepare for them. Charts, detailed analyses, follow-ups on controversies, ESG scores, carbon intensity, temperature alignment, industry exclusions, etc., are examples of the type of information that enables our clients to have a clear view of the environmental and social profile of their portfolios.


Important note

It should be understood that the policies, processes, restrictions and methodologies described in this statement may change over time without notice and may be applied or dis-applied at the discretion of the relevant Lombard Odier entity.