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ASSET MANAGER

Sustainability at the heart of business

In the midst of the hot topic of global warming, Lombard Odier Investment Management has taken steps to save the environment

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SUSTAINABILITY has become even more of an imperative, particularly since the release of the UN Intergovernmental Panel on Climate Change’s report showing that the pace of global warming has picked up markedly and with dire consequences. We speak to Lombard Odier Investment Management on what steps the firm has taken to boost sustainability.

Why is sustainability a key issue in asset management, and what do you see as the biggest drivers of this commitment for LOIM?

The next economic revolution is already underway. We believe it will drive returns in the next three to five years and beyond, and we are committed to identifying those companies which are best positioned to benefit.

We are facing some significant long-term structural trends, which are already starting to have a material effect on the environment in which companies operate. In our view, this revolution stands to affect every corner of the globe and every asset class in every investment portfolio.

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How does LOIM incorporate sustainability into its investment process; does this approach apply to all LOIM funds?

We believe sustainability will be the single largest engine of the global economy in the years to come. Just as we expect companies to adapt in the face of this revolution, we think it is our role as asset managers to rethink our approach to investment and provide innovative solutions for our clients that allow them to capture the opportunities within their portfolios.

We have developed a three-pillar approach that examines the sustainability of companies’ financial models, the sustainability of their business practices and of their business models.

The first pillar is concerned with the financial strength of the company. In the case of equities, for example, we look to identify companies with the ability to generate sustainable excess economic returns. To do this, we believe they must be capital efficient, cash generative and have a limited dependency on capital markets.

The second pillar of our approach to sustainability looks at how businesses behave in relation to their broader ecosystem of stakeholders. We believe that for a company to deliver long-term value, it needs to be focused on all its stakeholders, including regulators, shareholders, employees, clients, suppliers, the environment, and its local community. It needs to be as focused on its business practices as its financial performance.

The third and final pillar concerns the sustainability of a company’s business model when subjected to long-term structural trends. We believe there are five mega trends that are driving the sustainability revolution: demographics, climate change, natural resources, digital revolution and inequality.

Within each of these mega trends, we map out the likely path of future development for a more sustainable outcome in order to better understand which sectors will be impacted, and how. This, in turn, allows us to identify opportunities that can be translated into investment themes and ultimately determine how well or how poorly a company is positioned to navigate the opportunities and challenges presented.

On top of our investment analysis, we also believe strongly in the importance of active ownership because we trust it can also improve investment outcomes. We engage in direct dialogue with the senior management of the companies in which we invest. This gives us greater insights into the quality of company management, their attitude towards shareholders and the extent to which they are addressing risks and opportunities material to their long-term success.

The firm’s Global Climate Bond strategy is an example of how fixed income assets can be channelled towards impact objectives. What do you see as the major impacts this strategy has made or is making on communities and the environment?

Fixed income, in the form of impact bonds, allows us to make a direct positive impact on the environments and societies we all live in.

Climate change is one of the biggest challenges of our time, putting the sustainability of the global economy at risk. We have a role as investment professionals to direct investment towards those who seek to mitigate and adapt to climate change. We believe the companies that are implementing this transformation today will be the best performers of tomorrow, and significant economic impact can be generated in parallel with good investment performance.

Climate bonds ring-fence assets for environment-related projects, which means the outcome of the investment can be more easily measured. This is a rapidly growing asset class. The Climate Bonds Initiative estimates that the market for climate-aligned bonds has nearly tripled over the last five years to US$1.4 trillion in outstanding bonds.

This gives us a much more diverse and liquid opportunity set and allows us to make a meaningful positive impact. For example, in 2017, this strategy in total avoided over 78,000 tonne of CO2 per annum, equivalent to taking nearly 17,000 passenger vehicles off the road for a year.

It also provided low-carbon transport for nearly 6,000 passengers every day. The strategy supported 75 MW of renewable energy installed capacity and over 244,450 MWh of electricity generated annually, enough to power 19,644 homes in the US for one year. It invested in issuers who made disbursements for green buildings in over 30 countries, resulting in 5,670m² of area built to higher levels of energy efficiency. Its impact bonds have supported 6,893m³ in wastewater being treated daily – the equivalent of more than two Olympic-size swimming pools per day.

In addition, it also supported 5,687 SME loans (including micro loans) in 17 countries, 4,713 of which were to women-owned businesses in emerging markets.

One of the reservations investors may have is whether returns are compromised in any way by a sustainability orientation. What are your thoughts on this?

Our approach differs depending on what our clients require. For high-conviction approaches, we believe sustainability will drive future return potential and fully integrate our three-pillar approach across our equity, fixed income and convertibles solutions.

We also offer a sustainable long/short equity strategy. By integrating this three-pillar analysis into the high-conviction approach, our portfolio managers are able to make more informed decisions regarding the risks and opportunities a company presents.

On the passive side, we focus on tilting the portfolio towards companies with better business practices. This allows us to improve the ESG metrics of the portfolio and reduce carbon emissions within a limited tracking-error and without compromising returns. Because we rely on the most granular level of non-financial data possible, which is verified and enhanced by our portfolio management team, we are able to reflect the values and preferences of our individual clients using bespoke tilts in the portfolio. W