Patrick Odier, Senior Managing Partner at the Lombard Odier Group, presented an investor perspective on “Finance and the Green Transition” at this year’s SFI Annual Meeting. He proposed asset management to be the starting point for sustainable economic change.

Transforming the economy through investments

Lombard Odier’s investment approach regards the current economic model as WILD:
-    Wasteful because less than 27% of end-of-life traceable waste materials re-enter the economy,
-    Idle because material stocks are growing by 31 Gt per year,
-    Lopsided because the bottom 64% of all adults account for just 1.9% of global wealth,
-    and Dirty because 37% of throughput ends in emissions or untraced losses.

The WILD economy is dysfunctional and self-destructive as it fails to price carbon correctly, fails to meet the climate targets, and destroys natural capital - our most valuable productive asset - which leads to serious damage. Transitioning from a WILD to a CLIC economy does not just mean moving to a better economic version, but it actually constitutes an economic necessity.

What is the CLIC economy though? A Circular, Lean, Inclusive, and Clean economy that targets zero waste and emissions, healthier diets and a regenerative use of natural resources, dematerialization as well as a more efficient use of infrastructure and products, and a fair, secure society offering access to financial as well as health care necessities for everyone. Such an economy will be adaptive and resilient to environmental change. 

The change to move from value-destroying to value-creating economic processes is being enabled by digitization, which offers smarter solutions. Furthermore, the world economy must be de-carbonized. This creates investment opportunities in companies that base their business model on reshaping the economy and embracing the green transition. Such companies respond to changing consumer preferences by offering new solutions, increasing efficiency or adapting to climate change, hence creating growth opportunities and competitive advantages based on which they will likely outperform their peers.

Move on to a “butterfly” economy

Our economy is part of the biosphere and vitally depends on the natural ecosystem. However, as a consequence of our WILD unsustainable economic model, we are putting our planet’s natural capital at risk. 51% of our GDP actually relies on it, yet, we treat it as a free and unlimited resource. The economy is cannibalizing itself due to its unsustainable practices. Technological progress and innovation should lead to the use of more renewable resources and natural-based material so that waste can be used to produce bio-energy, and nature can regenerate. Lombard Odier follows a natural capital investment strategy targeting a sustainable, bio-based, and circular “butterfly” economic model with as one wing regenerative inputs and nature-based solutions, and the other wing a more streamlined, efficient form of industry.

A need for ESG metrics – especially forward-looking ones

The green transition is primarily about how companies need to adjust going forward, but most ESG measures are backward looking. Therefore, Lombard Odier has entered into various research partnerships to develop forward looking metrics. The new tools will help to align with the Paris Agreement. As part of this agreement, a general benchmark of 1.5 – 2°C for global warming was set in 2015, but while regulatory policies overall now target 2.5 – 3°C, real economy projections in total lie even above. 

So, while the real economy needs to substantially adjust its projected emissions just to meet the policy objectives already in effect today, more ambitious policies need to be put in place. This results in substantial transitional risk, but also great opportunities which means that evaluating the actual position of a company within the green transition is crucial for investing. Is the company aligned with the Paris agreement and regulatory policies? Where does it stand with regards to transitional risk?

To analyze this Lombard Odier uses:

•  Carbon footprints: looking at the status quo and being used to assess how important a company or an industry is to the overall climate issue as well as how financially material the question of de-carbonization is to that particular company or industry. 
• Temperature alignment: fundamentally new and forward-looking. It shows where large companies’ emissions are trending to, whether they are going up, staying stable or going down, and if so whether they are trending down fast enough as well as whether the company is doing enough relative to its industry benchmarks.

Whereas temperature alignment states if there is transitional risk, carbon footprint states how material the risk is. Additional interesting aspects can arise of analyzing whole sectors and geographical regions. The combined analysis of carbon footprints and temperature alignment allows to categorize companies as “ice cubes” - significantly reducing global warming, “low carbon” - neither increasing nor reducing global warming significantly, or “burning logs” - significantly increase global warming, and allocate capital accordingly.

Capital allocation has a high impact on the green transition. Helping clients understand the impact of their investment decisions and monitoring individual companies with regards to that transition is vital. This is why more and better data is needed to support the investment decision process.

“The biggest investment opportunity of all times”

Patrick Odier concluded his speech stating that the sustainability revolution would be the biggest investment opportunity of all times, fundamentally reshaping risk and return dynamics across all sectors and asset classes.

Interested in more? Find other contributions around our SFI Annual Meeting 2020 on here:
-    SFI Roundup: Finance and the Green Transition
-    Report on SFI AM 2020