Our sustainable investment framework
Lombard Odier's sustainable investment framework covers two dimensions of corporate sustainability: What businesses do (their business model and activities) and How businesses operate (their business practices). For each dimension, we focus on the most financially material issues to the sector and industry. We believe both dimensions are essential to better inform investment decisions 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, 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: 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.
Given the challenges the world faces today, we believe the analysis of sustainability-related risks in sovereign bonds is now essential. Although our macro criteria already incorporates some societal and political criteria, we incorporate ESG considerations into our investment process at the fundamental analysis level. Our sovereign analysts will look at the potential impact of environmental, social and governance issues in countries' ability to repay its debt. They use the UN's 17 Sustainable Developments Goals (SDGs) as a framework.
Based upon the intelligence and analysis gained from our dedicated sustainability teams, we address issues that are financially material 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 the sustainability factors we think are most material to their prospects and will seek to influence their sustainability positioning in areas we think are weak or where there is room for improvement.
We place great importance on being active stewards with debt issuers, and believe the characteristics of corporate credit lend themselves especially well to stewardship. In particular, engaging in dialogue with companies is critical to assessing creditworthiness because it improves our understanding of the issuer’s risk profile.
When it comes to exercising our equity voting rights, we will look to form an aggregated view across our asset classes as much as possible. As such, our voting is often reflective of the engagement views and objectives of our fixed income teams.
We have three levels of negative screening:
- Group-wide exclusions:
- Reflecting our Group policy on controversial investments, we systematically exclude: Companies involved in the 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 populations at risk. 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 any countries, companies, entities or individuals subject to sanctions by the UN, EU, US and/or Switzerland, as well as relevant local sanctions.
- SRI Restrictions: In addition to the above 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 approvals of the relevant CIO and are subject to regular risk review by internal committee. For active strategies, we would also normally look to exclude companies impacted by the most severe controversies from our responsible investment universe unless there are extenuating circumstances, with lower-level controversies subject to ongoing monitoring.
- 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.
The above mentioned figures and information are reflective of our asset management activities. Our private banking business applies the same criteria regarding Screening for discretionary managed and advisory portfolios.