Sustainable investing means many different things to many different people. We think about sustainability in portfolio management in two categories:
Sustainability as a core conviction: 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.
Sustainability integration: For 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).
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. 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: This dimension looks at companies' business models 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:
1. 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;
2. 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: This dimension looks at companies' business practices in relation to their broad ecosystem of stakeholders. This includes looking at 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 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.
Our sustainability and ESG data and analysis is shared with all portfolio management teams, and relevant data is made available through our innovative quantitative platform, and also directly via managers’ Bloomberg terminals.
Stewardship: Based upon the intelligence and analysis gained from our dedicated sustainability teams, our asset management unit, Lombard Odier Investment Managers (LOIM), 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 also apply negative screening techniques designed, for example, to exclude sectors that can be considered as ‘unsustainable’ or 'unethical’, as well as companies that breach internationally agreed standards or norms (i.e., child labour and other complicit violations of human rights as defined by the United Nations Global Compact principles) and are therefore subject to a high controversy rating.
We have three levels of negative screening:
1. 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.
2. 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.
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.