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Lombard Odier

PRI reporting framework 2020

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ESG incorporation in actively managed listed equities

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities; and the breakdown of your actively managed listed equities by strategy or combination of strategies.

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
19.8 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
80 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
0.2 %
Total actively managed listed equities 107%

01.2. Describe your organisation’s approach to ESG incorporation and the reasons for choosing the particular strategy/strategies.

Our sustainable investment framework covers What businesses do (business model and activities) and How businesses operate (business practices). For each dimension, we focus on the most financially material issues to the sector and industry. In our view, both dimensions are essential to better inform investment decision-making based on in-depth, forward-looking analysis of how well companies are positioned for the transition to a sustainable economy.

Assessing the What – business model and activities: This analysis, conducted by our Sustainable Investment Research Strategy and Stewardship (SIRSS) team, combines top-down, macroeconomic analysis with bottom-up approaches to assess:

  • The exposure of different sectors/industries to risks & opportunities arising from sustainability dynamics, including climate change scenarios, the macroeconomic world view, energy and mobility forecasts, for example;
  • The susceptibility of each sector/industry to those risks & opportunities, is conducted by analysts and portfolio managers, including what business strategies exist to mitigate the risks or capture the opportunities, climate mitigation & adaptation, new innovative/disruptive technologies, and company preparedness.

Assessing the How – business practices: This dimension looks at companies' business practices in relation to their broad ecosystem of stakeholders. This includes metrics relating to environmental, social and governance best practice. Our ESG Solutions team analyses 115 data points using our proprietary 'CAR' methodology (Consciousness, Action, Results), which 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 look at the same data points to assess alignment of business practices with the 17 UN Sustainable Development Goals. Our analysis of business practices also looks 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 and water intensity.

Stewardship:

Based upon intelligence and analysis gained from our dedicated sustainability teams, our asset management unit, LOIM, addresses issues financially material issues at the systemic-, sector- or company level through engagement and voting, either directly or through collaborative initiatives. We enter into a dialogue with companies to test and challenge their approach to material sustainability factors and seek to influence their sustainability positioning in areas we think are weak or where there is room for improvement.

Screening:

We have three levels of negative screening:

1. Group-wide exclusions

Reflecting our Group policy we systematically exclude:

  • Companies involved in production or distribution of controversial weapons. Lombard Odier does not invest in companies that produce, trade or store controversial weapons (anti-personnel mines, cluster weapons, biological and chemical weapons, depleted uranium, white phosphorus).
  • Financial instruments directly linked to essential food commodities. Stable food prices are a crucial component of food security for many at-risk populations. As we are concerned about the potential impact of commodities investments on the volatility of essential food prices, Lombard Odier has decided to permanently exclude all financial instruments (futures, options, swaps, indices, exchange-traded funds) that invest in essential foods (wheat, rice, corn, and soybeans).
  • Securities relating to countries, companies, entities or individuals subject to sanctions by the UN, EU, US, Switzerland or local sanctions.

2. SRI Restrictions

We believe certain companies and sectors are unsustainable in the long term and should be subject to exclusion in actively managed funds. Companies in the tobacco, thermal coal, and unconventional oil & gas sectors are subject to thresholds to determine whether they are excluded. These restrictions are imposed on a 'comply or explain' basis whereby a stock that falls within the threshold will be flagged to the manager. These exclusions can only be over-ridden with the approval of the relevant CIO and are subject to regular risk review by internal committee.

For active strategies, we also normally look to exclude companies impacted by severe controversies from our responsible investment universe unless there are extenuating circumstances, with lower-level controversies subject to ongoing monitoring.

3. Additional exclusions / Restrictions

In some cases, our strategies may apply additional values-based exclusions or restrictions that are individual to the fund, or to individual client mandates upon request.

For internally managed funds, sustainability is a cross-team collaboration between our investment teams and dedicated sustainability experts, allowing us to blend systematic and fundamental analysis at all levels of the investment process. It also enhances our ability to identify risks and opportunities, and turn them into actionable intelligence.

At Lombard Odier, we think about sustainability in portfolio management in two categories:

Sustainability integration:

This includes our high-conviction strategies where sustainability is not the primary alpha driver, but sustainability is integrated to mitigate risk and protect portfolios and enhance returns as the transition unfolds. This manner of positive selection is designed to identify 'best-in-class' companies (i.e. those that display superior management of significant risks and opportunities both in their business model and in their business practices).

For our systematic strategies, ESG and carbon factors are integrated in investment processes through screening, best in class, exclusion-based approaches.

Sustainability-themed:

For our range of sustainability-themed strategies, sustainability is the main driver of alpha. In these strategies our framework can be used for positive selection of a universe of companies that are providing solutions to sustainability-related challenges (such as climate change), and/or those that are transition leaders within their sector or industry. Our high-conviction managers then use this universe as the starting point for further analysis and stock selection.

Our high conviction strategies use common tools that enable the diffusion of extra-financial information provided by the ESG solutions team, for example. The team also benefits from our dedicated SIRSS team, which helps monitor and inform investment teams on top-down global issues associated with sustainability challenges and their potential impact on sectors/industries. This strong organisational support ensures that our investment team can make forward-looking investment decisions with the highest level of information and, therefore, conviction.

Our risk team provides additional oversight and has a good grasp of sustainability related issues and metrics.

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

The information provided above is reflective of our asset management activities. The approach described above under LEI 01.2 reflects the Group's approach, which is currently implemented at LOIM and in the process of being implemented within the private banking business with the relevant adaptations.


LEI 02. Type of ESG information used in investment decision

02.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

Indicate who provides this information  

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

02.2. Indicate whether you incentivise brokers to provide ESG research.

02.4. Additional information. [Optional]

At Lombard Odier, we believe understanding how companies are positioned for the transition to a more sustainable economic model requires a combination of forward-looking, scenario-based data and analysis, with a comprehensive view of the current status quo and historic trends.

We use a wide range of in-house and external research techniques and sources to collect, verify, enhance and analyse large amounts of raw data at the most granular level possible. This is critical in making sure our data and analysis is truly investment relevant so we can construct portfolios that seek to capture opportunities and mitigate risks created by sustainability dynamics.

Our in-house research includes using advanced/alternative technological methodologies to collect and aggregate data from a wide range of sources including geospatial data, governmental and non-governmental organisations, international organisations, data aggregation platforms and the media, for example.

We also work with a number of external providers to access raw data, including Exiobase, Sustainalytics, Trucost and Inrate. We constantly review external providers’ data given the dynamic and rapid evolution of this space. We believe it is important to maintain open and regular dialogue with our providers to ensure their data is as investment relevant as possible. 
 


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate whether your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

For our internally managed assets, our investment teams engage in frequent dialogue with companies based upon the intelligence and analysis gained from our Sustainable Investment Research Stewardship and Strategy (SIRSS) team and ESG Solutions team.  We address issues that have a financially material impact through engagement. We will enter into a dialogue with the company to test and challenge its approach to the sustainability factors we think are most material to its prospects and will seek to influence its sustainability positioning in areas we think there are weaknesses or room for development.

We use recognised global frameworks to guide our voting based on international best-practice (ICGN and OECD principles). We also use Institutional Shareholders Services (Europe) S.A. ("ISS") to provide operational, record-keeping, research and reporting services. ISS prepares written analysis and recommendation of each proxy vote, based on our custom voting guidelines.

We keep centralised data sources that facilitate information sharing and inputs arising from engagement and voting. Indeed, LOIM’s portfolio managers and analysts carry out the vast majority of our engagements, which inherently facilitates the feedback loop into the investment process.

This information is reflective of our asset management activities.


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

Negative/exclusionary screening:

Products:

  • Controversial weapons (all funds). Tobacco (specific funds only).
  • Essential food commodities: soya, wheat, rice and corn (all funds),
  • Products among other categories (specific funds only):  Firearms  and GM

Activities: unconventional oil and gas in activities corresponding to Artic Drilling, Shale Oil & Gas and Tar sands, stem cell research (screened for some specific accounts). We currently follow 10 different non-ethical sectors and are in the process of adding 15 more.

Countries: Securities relating to any countries, companies, entities or individuals subject to sanctions by the UN, EU, US and/or Switzerland, as well as relevant local sanctions.

Environmental and social practices and performance: Child labor and child labor through suppliers (specific funds), high and severe social or environmental-related controversies

Corporate governance: high and severe governance-related controversies

This information is relfective of our asset management activities. Our private banking business applies the same criteria on discretionary managed mandates and on investment recommendations (i.e. investments that directly depend on Lombard Odier).

Screened by

Description

  • Environmental and social practices and performance: exclusion of the last quintile of worst ESG-scored companies (specific funds)
  • Corporate governance: exclusion of the last quintile of worst ESG-scored companies (specific funds)

This information is reflective of our asset management activities.  Our private banking business applies the same criteria on discretionary managed mandates and on investment recommendations (i.e. investments that directly depend on Lombard Odier).

Screened by

          The Ottawa Treaty on landmines, the Convention on Cluster Munitions, the Biological and Toxin Weapons Convention, The Chemical Weapons Convention
        

Description

  • Exclusion of companies involved in serious breaches of UN Global Compact Principles (specific funds). These controversies are graduated according to the seriousness of the facts: evaluation of the incident's impact, degree of the incident exceptionality (sector specific), recurrence level, assessment of the company response, consideration of the company response etc.
  • Exclusion of companies involved in proven breaches of International Labor Organization Conventions: Child labor and child labor through suppliers (specific funds),
  • Other: Exclusion of companies involved in producing or distributing controversial weapons: The Ottawa Treaty on landmines, The Convention on Cluster Munitions, The Biological and Toxin Weapons Convention, The Chemical Weapons Convention (all funds)

This information is refelctive of our asset management activities.  Our private banking business applies the same criteria on discretionary managed mandates and on investment recommendations (i.e. investments that directly depend on Lombard Odier).

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

We notify clients when changes are made through monthly, quarterly or bi-annual SRI dedicated reports, including information related to scores, positive, negative and norm-based screening. Detailed comments are systematically provided with our reports, together with research and more detailed explanations about companies that went through significant changes.


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure ESG screening is based on robust analysis.

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]

The quality and robustness of our sustainability-related data is of paramount importance to us because it enhances our ability to identify risks and opportunities. We work with huge amounts of raw data and take the governance and maintenance of our sustainability datasets and tools very seriously. We are constantly working to ensure our research and analysis is based on robust, verifiable, cutting edge data and techniques to ensure we are fully capturing the complex, multi-faceted nature of sustainability dynamics, and using this to provide actionable intelligence to our portfolio management teams.

We use a wide range of in-house and external research techniques and sources to collect, verify, enhance and analyse large amounts of raw data at the most granular level possible. Our in-house research includes using advanced/alternative technological methodologies to collect and aggregate data from a wide range of sources including geospatial data, governmental and non-governmental organisations, international organisations, data aggregation platforms and the media, for example.

We also work in partnership with a number of external data providers to access raw data, including Exiobase, Sustainalytics, Trucost and Inrate. We are constantly reviewing the quality and scope of data available from external providers given the dynamic and rapid evolution of this space. We view this as a partnership because we also believe it is important to maintain open and regular dialogue with those providers to ensure the data they provide is as up to date and investment relevant as possible. Data from these providers is then fed into our proprietary frameworks and methodology.

Our proprietary technology platform, which is common to all our internal portfolio management teams, is used to aggregate sustainability-information and ensure all the necessary sustainability-related information is readily available to the portfolio management teams at all times. This information is also made available to the teams directly via their Bloomberg terminals. As a result sustainability is tightly coupled to our portfolio management and construction process: sustainability figures can be monitored precisely overtime and used to trigger investment decisions but also serve for reporting purposes.

Sustainability is a cross-team collaboration between our investment teams and our dedicated sustainability experts, which allows us to blend systematic and fundamental analysis at all levels of the investment process. This collaborative approach, and our innovative investment platform ensure that we are our investment team can make forward-looking investment decisions with the highest level of information and, therefore, conviction.

Our risk team provides additional oversight and has a good grasp of sustainability related issues and metrics.

These figures and information are reflective of our asset managment activities. Our private banking business is also able to leverage the information and inteligence produced by our dedicated sustainability teams. 


LEI 06. Processes to ensure fund criteria are not breached

06.1. Indicate which processes your organisation uses to ensure fund criteria are not breached.

06.2. If breaches of fund screening criteria are identified, describe the process followed to correct those breaches.

For our internally managed assets, we have strict policies and procedures in place with respect to the monitoring of funds criteria and restrictions, including ESG limits if any, across the funds and segregated mandates under our management.

Our compliance teams makes sure that all our investment teams respect our Group policy on controversial investment through the pre- and post-trade monitoring of the investment objectives and guidelines (both internal and external such as the fund prospectus and legal documentation).

Once an exception has been identified, it will be classified as either an active or a passive breach and escalated to the relevant investment team for correction.

In the event of a passive or active breach, the Investment Controlling team must notify the relevant portfolio manager of the breach via email, providing details regarding the fund and the violation (date, description, status, related rule). Typically, all passive breaches must be corrected within a 10-day period, whilst all active breaches must be corrected immediately. The Investment Controlling team monitors the breach until its correction, as well as potential reimbursements and the notification to impacted clients/ funds and/ or relevant regulators, where required. The Investment Controlling team will also document all instances of breaches in a log file used to generate statistics for management-reporting purposes, for identifying error trends and implementing corrective measures where applicable, or for reinforcing training within investment teams.

Where an active breach has occurred, this will be escalated to the following individuals within the Firm:

•           The Conducting Officer of the Management Company responsible for Risk and Compliance*

•           Head of Investment Controlling

•           Operational Risk Team

•           Head of Compliance

•           COO and General Counsel

*Only in case of French and Luxembourg based funds

 

06.3. Additional information. [Optional]

This information is reflective of our asset management activities.


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

For our internally managed sustainability themed strategies, sustainability is the main driver of alpha. In these strategies our sustainable investment framework can be used for positive selection of a universe of companies that are providing solutions to sustainability-related challenges (such as climate change), and/or those that are transition leaders within their sector or industry. We also apply exclusions and restrictions as outlined in our answer to LEI 1.2.

Our high-conviction managers then use this universe as the starting point for further analysis and stock selection.

Our investment team follows a systematic and high conviction disciplined approach by selecting sustainable companies within its proprietary thematic universe.

LOIM’s investment approach combines three pillars:

  1. A disciplined financial analysis of the investment universe,
  2. A dedicated review of business practices: the investment team considers extra-financial information provided by our internal ESG Solutions team’s analysis and conducts ad hoc additional investigation for companies with worst practices or worst controversies (or other ESG criteria). As part of this stewardship process, the investment team enters into dialogue with companies to better qualify our ESG-related concerns and monitor improvements.
  3. A fundamental in-depth analysis on business models, corporate strategies, exposure to long-term trends and economic cycles. By conducting in depth analysis, the investment teams assesses how companies defend their economic positions in the face of economic/market threats. We aim to select business models that benefit from strong and long-lasting competitive advantages with positive exposure to structural trends. The team also benefits from our dedicated SIRSS team, which helps monitor and inform investment teams on top-down global issues associated with sustainability challenges and their potential impact on sectors/industries.

This strong organisational support ensures that our investment team can make forward-looking investment decisions with the highest level of information and, therefore, conviction.

In the case of our internally managed sustainability themed strategies, the objective is to focus on companies whose business models and practices are aligned with a specific theme – for example, Responsible Consumption using a framework based on SDG12 (Responsible Consumption and Production). In this case, the strategy places a particular focus on sustainable food, urban systems, supply chains and lifestyle. We identify sustainable companies by considering the potential decoupling between their environmental impact and their economic activity: companies that we think are able to develop their activity and lower their impact  in the same time. We aim at identifying these companies in order to benefit from the potential competitive advantage and risk management they have built around what we expect to be a consumption revolution, expressed by the SDG12.

At the strategy level, sustainability considerations are applied at three levels:

  • Our investment universe systematically excludes the companies that we consider as having the worst ESG scores, based on business practices scores and the most severe controversies.
  • Then companies are individually and specifically selected for their positive exposure to SDG12 challenges. SDG 12 is about responsible consumption and production. In other words, it is about decoupling economic growth from environment footprint. We look for opportunities across Sustainable Food, Sustainable Urban Systems, Sustainable Supply chain and Sustainable Lifestyle.
  • In addition, the investment team will also undertake stewardship activities aligned with one of the key requirements of SDG12 (namely SDG 12.60), to encourage companies to adopt sustainable practices and to integrate sustainability information into their reporting cycle.

At the firm level, Lombard Odier has a non-negotiable, group wide exclusion policy under which investments in companies involved in the production, distribution and usage of controversial weapons are prohibited. Additionally, we will not invest in financial instruments (futures, options, swaps, indices, exchange-traded funds) that could participate in a price speculation of essential food commodities: wheat, rice, maize and soy beans. Also, we exclusively invest in jurisdictions with a clear rule of law. This approach is, of course, also applied to our sustainability themed strategies.

This information is reflective of our asset management activities.

 


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

These figures are reflective of our asset management activities.


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on robust analysis.

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

09.6. Additional information. [Optional]

The quality and robustness of our sustainability-related data is of paramount importance to us because it enhances our ability to identify risks and opportunities. We work with huge amounts of raw data and take the governance and maintenance of our sustainability datasets and tools very seriously. We are constantly working to ensure our research and analysis is based on robust, verifiable, cutting edge data and techniques to ensure we are fully capturing the complex, multi-faceted nature of sustainability dynamics, and using this to provide actionable intelligence to our portfolio management teams.

Our proprietary technology platform, which is common to all our internal portfolio management teams, is used to aggregate sustainability-information and ensure all the necessary sustainability-related information is readily available to the portfolio management teams at all times. This information is also made available to the teams directly via their Bloomberg terminals. As a result sustainability is tightly coupled to our portfolio management and construction process: sustainability figures can be monitored precisely overtime and used to trigger investment decisions but also serve for reporting purposes.

See our response to LEI 5.5 for further details. 

These figures and information are reflective of our asset management activities.

 


LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

10.3. Describe how you integrate ESG information into portfolio weighting.

​Our proprietary technology platform is used to aggregate sustainability-information and ensure all the necessary sustainability-related information is readily available to our portfolio management teams. This information is also made available via their Bloomberg terminals. As a result sustainability is tightly coupled to our portfolio management and construction process: sustainability figures can be monitored precisely overtime and used to trigger investment decisions but also serve for reporting purposes.

For our high-conviction strategies, our sustainability framework is used to systematically screen the investment universe for a given strategy to help identify companies with the strongest potential to generate future growth or gain competitive advantages as the transition to a sustainable economy unfolds.

Our high-conviction portfolio management teams can then use our sustainability-related information to further inform their analysis of companies’ exposure to sustainability-related risks and opportunities. It also informs their dialogue and engagement activity with companies. This intelligence can then be taken into account in the final investment decisions and portfolio weighting.

For our systematic strategies, ESG and carbon metrics are integrated into the investment processes through screening, best-in-class, and exclusion-based approaches, which affects the portfolio weighting.

 

 

10.5. Describe how you apply sensitivity and /or scenario analysis to security valuations.

Our dedicated sustainability teams analyse the exposure of different sectors and industries to a number of sustainability challenges using a series of scenarios. This is used to provide actionable intelligence on forward-looking risks and opportunities for some investment teams.

In our materiality mapping, we model the exposure of industries to climate change and other megatrends, under 3 different main scenarios:

(1) A business-as-usual scenario, based on current policies

(2) A middle of the road scenario, based on limited improvement in policy ambition (2.6C) with parameters included to adjust this scenario for a "delayed policy response"

(3) A sustainability scenario aligned with the Paris Agreement, based on a temperature increase of 1.8C

The interim conclusions from our materiality analysis highlight that transitional risks increase in the more sustainable, Paris-aligned scenario. Over the longer term, this scenario does, however, feature lower physical risks. In the business-as-usual scenario, transitional costs are lower, but this is offset by the creation of reputational and liability risks, that could pose an existential threat to responsible industries.

10.6. Additional information. [OPTIONAL]

The above mentioned information and figures are reflective of our asset management activities.


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