Investing for our children’s century

This short-term thinking is particularly evident in finance. As investor Esther Dyson once observed, in politics, the dominant time-frame is a term of office; in fashion it’s a season; for corporates it’s a quarter; and on the financial markets, mere seconds. Companies find it hard to plan for the long-term when analysts focus purely on quarterly results. In November 2018, Apple announced it would stop publishing quarterly sales figures for its iPhones and Macs, saying they did not reflect the underlying strength of the product lines. Investors sent its shares down 6.6% that day. Yet this myopic focus can have profound effects, resulting in inefficient capital allocation, lower returns for investment funds and pension pots – and ultimately, lower prosperity for everyone.

Acting for the Next Generation

How do we move towards an economic model that rewards long-term performance, and efficient wealth transfer to future generations? At Lombard Odier, our independent ownership has allowed us to focus consistently on the long term, through two centuries and seven generations of family history. We have always recognised that companies need to adapt and rethink the world around them.

Back in 1841, our partner Alexandre Lombard advised clients against investing in southern US companies reliant on slave labour. Today we are the first global wealth manager to have received B-Corp certification, one of the world’s most advanced sustainability ratings, and we are hardwiring sustainability into all our investment processes. Why? Because we believe a new economic revolution is on our doorstep. The next generation needs us to build a more sustainable future.
 

The Sustainability Revolution

At Lombard Odier, we believe that sustainability will drive higher investment returns. To us, this is intuitive. If a company considers the lasting consequences of its actions, its chances of surviving to earn future revenues increase. It is also demonstrable: when looking at 41 different studies of sustainability and returns, Oxford University’s Smith School of Enterprise found that 80% showed good sustainability practices boosted share price performance. Young people are among the key drivers for change: witness global protests from schoolchildren in March demanding that politicians wake up to climate change, and student protests last year for universities to divest holdings in arms and fossil fuels.

But in a world of patchy data and Public Relations spin, can we really pick companies that are making a difference? There is a big leap from investing responsibly to a genuinely sustainable strategy, one that truly acts for the future. An energy company might have a strong commitment to gender equality, and pay the Living Wage, but if its business model revolves solely around contributing to greenhouse gases, it is not sustainable. All too often, such companies score well on traditional ESG metrics, because data on business organisation and operation is plentiful, but data on the real-world impact they exert is poor. 
 

A three-pillar approach

That’s why at Lombard Odier, we believe in proprietary analysis that goes well beyond standard ESG analysis. We use a three-pillar approach to embed sustainability into all our investment decisions. This is because we recognise that companies with a combination of sustainable financial models, sustainable business practices and sustainable business models will be the long-term winners.

Our first pillar considers traditional financial viability – looking at metrics like capital efficiency and cash-flow generation. The second asks if we can get beyond empty talk and ‘greenwash’ to identify truly sustainable companies. We use forward-looking metrics to identify whether companies have taken concrete actions to improve their practices and seen measurable results. We also look at a company’s exposure to controversies, its carbon and water consumption.

Our third pillar takes the truly long-term view, identifying five ‘mega trends’ shaping the future economy: climate change, demographics, natural resources, the digital revolution and equality. These help us identify investment themes and opportunities. In the case of climate change, they might include renewables, energy storage and electric cars. We use the UN’s 17 Sustainable Development Goals (SDGs) as a way to analyse companies’ performance against these trends. We believe companies that fulfil our three criteria should ensure a sustainable future for the next generation.

The future of long-term prosperity

All too often, investors are so out of breath dealing with the present that there is no energy left to imagine the future. Young people have more stamina here, since the stakes are higher for them. A recent survey found 70% of millennials would choose sustainable companies and funds to invest in over non-sustainable ones, versus 21% for the ‘Baby Boomers’ generation¹.

That’s why we offer our private clients truly personalised sustainability solutions. We can build portfolios that reflect what is important to them – a purely ‘green’ bond portfolio perhaps, or one that scores highly on diversity. Young people are in the driving seat here too. I recently received a call from a client’s daughter, asking us how sustainable her mother’s portfolio was. I was impressed by her determination to make a difference. Thanks to our technology platform, I could share some very detailed analysis with her, including how every holding in that portfolio scored against our three pillars, the megatrends and the SDGs, and how the scores had evolved over time.

At Lombard Odier, we believe the future of long-term prosperity lies in shifting your perspective. Solving the huge problems in today’s unsustainable world is undoubtedly daunting, but it is also an opportunity on a global scale – perhaps the greatest investment opportunity in modern history. For our children, and our children’s children, there is no greater imperative.

¹ Source: Legg Mason Global Investment Survey 2018, published 11 February 2019