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Lombard Odier

PRI reporting framework 2020

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ESG issues in asset allocation

SG 13. ESG issues in strategic asset allocation

13.1. Indicate whether the organisation carries out scenario analysis and/or modelling, and if it does, provide a description of the scenario analysis (by asset class, sector, strategic asset allocation, etc.).

Describe Our dedicated sustainability teams map 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. Expanding this capability is a key priority for 2020.
Describe Our dedicated sustainability teams map the exposure of different sectors and industries to physical and transition climate-related risks & opportunities using a series of scenarios. This is used to provide actionable intelligence for some investment teams. Expanding this capability is a key priority for 2020.

13.2. Indicate if your organisation considers ESG issues in strategic asset allocation and/or allocation of assets between sectors or geographic markets.

We do the following

13.3. Additional information. [OPTIONAL]


SG 13 CC.

13.4 CC. Describe how your organisation is using scenario analysis to manage climate-related risks and opportunities, including how the analysis has been interpreted, its results, and any future plans.

Describe

In 2019 we started our assessment of scenarios related to climate-related risks. We will expand this analysis dramatically in 2020 and have identified specific scenarios based on a number of scientific studies. Over time we aim to quantify for each individual company its exposure to risk and opportunities at each temperature scenario and will employ stewardship based on the Oxford Martin Principles to analyse company understanding of the pathway to Net-Zero. However, in 2019 we employed detailed ESG and financial analysis to understand company by company exposure to near-term climate-related risks and also judgmental analysis of business models to understand longer-term exposure. 
In 2020, we are developing pathways built on our internal proprietary pathways by industry towards net-zero. Our models look across sectors and combine to build detailed scenarios for different pathways of how industries interact with one another on the route towards net-zero. We will use a third-party (SystemIQ) to verify the calculations in our models and scenarios and use these models to reach company-by-company specific exposure to risks and opportunities at a granular level. 

Describe

We use scenarios related to climate-related risks to inform active ownership, drawing directly on our scenario analysis to identify best-in-class companies related to both climate adaptation in a climate-damaged world and climate mitigation in a carbon-constrained world. We use our analysis to help with active portfolio construction and we do not shy away from hard-to-abate, carbon intense industries but try to select the companies in these industries that are doing the most to ensure an appropriate transition to a lower carbon world, based on our proprietary climate scenarios.

13.5 CC. Indicate who uses this analysis.

13.6 CC. Indicate whether your organisation has evaluated the potential impact of climate-related risks, beyond the investment time horizon, on its investment strategy.

Describe

In 2019 we started building models and scenarios for climate-related pathways out to 2050. We had previously relied on judgemental analysis of company exposure to climate within investable time-horizons but we are now focused also on longer-term scenarios and how each company is addressing the need to reach net-zero by 2050. Again we will include information gathered from our active engagement and dialogue with companies within our analysis to ensure that we can identify not just those companies making the most ‘noise’ around net-zero, but also those companies quietly delivering results and with action plans to show how they will progress towards net-zero in the medium and longer-term. We will analyse each company’s ability to remain profitable in a net-zero world. Our analysis looks at companies' exposure over the short, medium and long term and we are building fully granular, proprietary models which can be skewed to various temperature scenarios to assess industry and company exposure. 
We combine top-down, judgemental analysis of macro challenges relating to climate with bottom-up company analysis of the susceptibility of each business to those challenges and their consciousness of the need to react. We are looking to invest in companies that are already aligned with a net-zero world but also those in carbon-intensive sectors that will remain vital to future economic growth, which need to successfully transition to a lower-carbon world. We believe the necessary climate transition cannot be achieved without these carbon-intense but transitioning industries.

This information is reflective of our asset management activities.

13.7 CC. Indicate whether a range of climate scenarios is used.

13.8 CC. Indicate the climate scenarios your organisation uses.

Provider
Scenario used
IEA
IEA
IEA
IEA
IEA
IRENA
Greenpeace
Institute for Sustainable Development
Bloomberg
IPCC
IPCC
IPCC
IPCC
Other

Other (1) please specify:

          Stockholm Resilience Center
        
Other

Other (2) please specify:

          Bank of England policy scenarios
        
Other

Other (3) please specify:

          Lombard Odier internal scenarios
        

SG 14. Long term investment risks and opportunity

14.1. Some investment risks and opportunities arise as a result of long term trends. Indicate which of the following are considered.

other description (1)

          Resilient and fair society
        

other description (2)

          Responsible consumption and production
        

14.2. Indicate which of the following activities you have undertaken to respond to climate change risk and opportunity

Specify the AUM invested in low carbon and climate resilient portfolios, funds, strategies or asset classes.

Total AUM
trillions billions millions thousands hundreds
Currency
Assets in USD
trillions billions millions thousands hundreds

Specify the framework or taxonomy used.

Specific to Lombard Odier Global Climate Bond strategy.

14.3. Indicate which of the following tools the organisation uses to manage climate-related risks and opportunities.

14.5. Additional information [Optional]

In mapping the investment landscape, we have identified ten sustainability dynamics that we believe will shape risk and return, and corporate success for the next decade:

  1. Human development: Keeping up with a growing, changing world
  2. Digitalisation: Enabling smarter solutions
  3. Zero waste: Embracing re-use, repair and recycling 
  4. Regenerative nature: Living within nature’s boundaries 
  5. Dematerialisation: Moving to a service-based economy 
  6. Resource efficiency: Achieving more with less 
  7. Fair society: Ensuring a just transition 
  8. Secure society: Navigating social and political turmoil 
  9. Zero emissions: Achieving the Paris Agreement 
  10. Adaptive and resilient: Adjusting to environmental change 

This information is reflective of our asset management activities.

 


SG 14 CC.

14.6 CC. Provide further details on the key metric(s) used to assess climate-related risks and opportunities.

Metric Type
Coverage
Purpose
Metric Unit
Metric Methodology
Carbon footprint (scope 1 and 2)
          
        
          
        
          
        
Carbon intensity
          Identify intensive emitters and evolution on the pathway regarding targets
        
          Tons equivalent CO2 per revenues per year or (per Production Units for the most intensive activities)
        
          SDA, GevA and other in line with GHG protocol
        

14.8 CC. Indicate whether climate-related risks are integrated into overall risk management and explain the risk management processes used for identifying, assessing and managing climate-related risks.

Please describe

Risk management (internally managed funds): Our Operational & Counterparty Risk teams consist of experienced professionals covering counterparty risks and operational risks and are completely independent from the portfolio managers. We have a three layered-process for risk-management oversight related to sustainability:

SRI Restrictions on tobacco, thermal coal, and unconventional oil & gas and the most severe controversies – We have introduced restrictions related to investments in companies whose revenues derive from tobacco, thermal coal, or unconventional oil & gas above certain thresholds for their actively managed public funds. The same approach is applied to companies impacted by a severe controversy. The list of companies affected by these restrictions is updated daily, and the risk management team discusses and reviews these holdings with portfolio managers on a weekly basis. These holdings are also subject to review by the Stewardship Committee, which includes a senior representative from the risk management team.
Monitoring exposure to stocks ranked in the bottom two ESG quartiles on a GICS sector level 2 basis – Additional scrutiny is given to holdings with ESG ratings in the third or fourth quartiles relative to their GICS sector level 2 peers. The risk management team discusses holdings with below-average ratings with portfolio management teams to ensure the appropriate mitigation of ESG-related risks are being taken within the fund.
Monitoring overall portfolios compliance with the investment process using internal benchmarks to compare holdings. The internal benchmarks screen out names that are considered Low ESG as well as the most severe controversies. The risk management team uses this to encourage managers either to improve their ESG rating or to engage with companies for change or improved sustainability disclosure.

This information is reflective of our asset management activities.

14.9 CC. Indicate whether your organisation, and/or external investment manager or service providers acting on your behalf, undertake active ownership activities to encourage TCFD adoption.

Please describe

Climate change is a key area of our collaborative efforts because we believe it presents a clear and present systemic risk to investment portfolios and is being widely underestimated and mispriced in the market today.  Climate change will affect all agents in the economy (businesses, governments and households), across all sectors, asset classes and jurisdictions, in our view. The risks will likely be correlated with, and potentially aggravated by, tipping points, in a non-linear fashion. This means the impact of these risks could be much larger, and more widespread and diverse than those of other structural challenges and developments.
We have to tackle this risk head on across the entire investment value chain from the overarching macroeconomic analysis, to security selection, through to our stewardship of client assets.
In 2019, Lombard Odier was a signatory to the Global Investor Statement to Governments on Climate Change, which calls on global leaders to strengthen their efforts to ensure they meet the Paris Agreement goals, accelerate private sector investment into the low-carbon transition and commit to improve climate-related financial reporting in line with the final recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosure (TCFD). We continue to promote the objectives raised in this letter through our ongoing stewardship efforts.
Lombard Odier also supports the final recommendations of the TCFD. As asset managers with fiduciary responsibility, it is vital that we have as full an understanding as possible of companies’ ability and willingness to transition to a more sustainable economy. The TCFD recommendations will improve our ability to analyse material risks companies face and how well they are positioned for the transition to a decarbonised economy. The TCFD recommendations will be a key focus point for our own stewardship, but we believe it is critical that governments also commit to improving climate-related financial reporting by publically supporting the TCFD recommendations.
We also believe that stewardship plays a vital role in informing the investment process and enhances the value of clients’ assets. We use the Oxford Martin Principles as the guiding framework for our stewardship to ensure companies have understood and incorporated the required global path towards a net-zero economy in their strategy and practices. Our dialogue with companies also informs our investment decision making by seeking disclosure of additionality-based footprint metrics and TCFD-aligned reporting. 
We continue to develop our research and analysis capabilities around climate-related risks and opportunities as well as temperature alignment.

One of our key priorities over 2020 will be to integrate this new information into our investment process and ensure our reporting frameworks are fully aligned with the recommendations of the TCFD.


SG 15. Allocation of assets to environmental and social themed areas

15.1. Indicate if your organisation allocates assets to, or manages, funds based on specific environmental and social themed areas.

15.2. Indicate the percentage of your total AUM invested in environmental and social themed areas.

0.41 %

15.3. Specify which thematic area(s) you invest in, indicate the percentage of your AUM in the particular asset class and provide a brief description.

Area

Asset class invested

0.23 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

Our Climate Bond strategy aims to provide a diversified portfolio that seeks to create a positive environmental and social impact, while aiming to provide a higher yield and lower turnover than a typical investment-grade portfolio.*

*There can be no assurance that the investment objective will be achieved, that there will be a return on capital or that a substantial loss will not be incurred.

 

 

Asset class invested

0.12 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

Our LO Gateway Development Finance strategy invests through private debt in companies that provide essential goods to low-income communities in developing countries (in particular: access to finance)

          Responsible Consumption
        

Asset class invested

0.2 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

This strategy seeks to support the visible shift in consumer and producer behavior by investing in business models that contribute and enable the generation of sustainable products and services. It is designed to invest in listed companies across Sustainable Food, Urban Systems, Supply Chains and Sustainable Lifestyles, and addresses the topic across the whole value chain by targeting companies throughout the product lifecycle, ultimately providing investors with diversified sector risk.

There can be no assurance that the strategy's investment objective will be achieved, that there will be a return on capital or that a substantial loss will not be incurred. 

15.4. Please attach any supporting information you wish to include. [OPTIONAL]



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