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ESG strategies may help investors beat market returns: Lombard Odier

London

ESG strategies may help investors beat market returns and spark a revival in active management, according to Hubert Keller, head of Lombard Odier & Co's asset-management business.

"We think we'll move towards a different economic model. We call it Clic - clean, lean, inclusive, circular," Mr Keller, the incoming senior managing partner of Geneva's oldest private bank, said in London. "This model will create new avenues of growth and major sources of alpha."

Asset managers that focus on stock picking are struggling as investors move to low-cost passive investments. Persistent fee pressure in the industry in Europe has sparked a wave of reviews of bank-owned asset managers and mergers in recent years.

Increasing demand for environmental, social and governance investing by institutions, private investors and the ultra rich may help reverse the fortunes of struggling firms, he said.

"Whether it is in fixed income or equities - if you want to apply sustainability you need judgment, which means more research, which means active investing," said Mr Keller. His unit at Lombard Odier manages 51 billion francs (S$70 billion).

While consolidation will continue for firms trying to compete by scale and offer products in all major asset classes, those who double down on sustainable investments will escape the fee challenges prevalent in the industry, he said.

"Will this trend towards passive investing continue? I think sustainability could alter it," he said. "'We are at the beginning of a major transition in our economic model and passive investing will not capture this shift."

Competition from firms such as BlackRock Inc and Vanguard Group is cutting margins and forcing firms to get bigger or combine. Rising regulatory costs are further complicating matters.

Seeking growth, asset managers are investing in ESG by hiring research staff, adding technology and creating proprietary data. The trend is even leading to deals. Earlier this year Schroders, which manages roughly £450 billion (S$812 billion), bought a majority stake in Blue Orchard Finance, an impact investing fund manager.

"For us, sustainability or ESG is an alpha source and it will be a major source of returns over the next two to three years and beyond," Mr Keller said. "However, today, for a large part of our industry, sustainable investing is mostly about integrating ESG factors into existing investment strategies without changing the investment process too much."

Mr Keller, who currently runs Lombard Odier Investment Managers, will replace Patrick Odier as the senior managing partner by 2023.

Geneva's oldest private bank, established in 1796, managed 287 billion francs in total at the end of June. All of the assets are managed in accordance with the bank's own sustainability criteria.

While assets in sustainable investment strategies rose to US$30.7 trillion in Europe, the US, Japan, Canada, Australia and New Zealand, the most popular approach is still negative screening, which means excluding so-called offenders from funds.

Funds that take ESG factors into account in their investment decisions perform better than those that don't with 73 per cent of ESG indexes outstripping their non-ESG equivalents since their inception, according to Morningstar Inc. BLOOMBERG