The Green Recovery: a unique opportunity to generate sustainable returns

global perspectives

The Green Recovery: a unique opportunity to generate sustainable returns

Christopher Kaminker, PhD - Head of Sustainable Investment Research & Strategy

Christopher Kaminker, PhD

Head of Sustainable Investment Research & Strategy
Kristina Church - Head of CLIC™ (Sustainable) Solutions

Kristina Church

Head of CLIC™ (Sustainable) Solutions

The COVID-19 crisis presents a “once-in-a-lifetime” opportunity to accelerate the transition to a CLIC (Circular, Lean, Inclusive and Clean) economy through a green recovery. We believe it is essential to “Build Back Better” to ensure a more resilient economy, and to secure quality, sustainable risk-adjusted returns for investors.

It is becoming increasingly evident that sustainable economic growth can only be achieved by investing towards net-zero. Initial global emergency packages bore little focus on sustainability, but there is now mounting pressure on governments from many different quarters to ensure recovery packages are linked to a greener recovery.

A group of 178 investors representing €12 trillion in assets have now signed the letter to EU leaders calling for a sustainable recovery in the EU. Lombard Odier is a signatory to this letter, and has also endorsed the Energy Transitions Commission letter calling for “7 Priorities to Help the Global Economy Recover”. In June, the International Energy Agency (IEA) published its World Energy Outlook Special Report entitled “Sustainable Recovery”, calling for recovery packages to support more resilient and cleaner energy systems. 

Given the strong scientific link between the devastating health implications of COVID-19, air pollution and biodiversity loss, we expect regulation to increasingly focus on the current climate crisis and on other key sustainability challenges such as Regenerative Nature, Dematerialisation, Zero Waste and building a more Secure Society. Even at the peak of the COVID-19 crisis, countries including South Korea and Denmark unveiled accelerated commitments towards climate transition.

We have already seen low-carbon stimulus packages in France and Germany for electric vehicles and €9bn set aside in Germany to finance a “green” hydrogen economy. In France, the KLM-Air France bailout contained stipulations for more sustainable short-haul transport. However, at the same time, the airline industry as a whole was given a green-reprieve in June when the International Civil Aviation Organisation agreed to shift the base year for the CORSIA emissions offsetting scheme from 2020 to 2019.

We see the next round of recovery packages (such as the EU Green Deal) focusing on the powerful economic growth and labour market “multiplier effects” of green infrastructure, including clean energy, hydrogen, green buildings, and low-emissions transport, as well as the circular economy and more sustainable use of land and agriculture. In July, the EU Commission set out plans for energy system integration and the deployment of hydrogen technology, launching the European Clean Hydrogen Alliance.

We believe it is essential to proactively shape sustainable investment outcomes through robust, forward-looking and science-based research and analysis, and engagement with the companies we invest in

We also expect further low-carbon policy developments will have a significant focus on the decarbonisation of hard-to-abate industries, with a renewed focus on carbon pricing and low carbon regulations. The EU Commission has already signaled its intention to revise EU rules on energy taxation to remove implicit subsidies for fossil fuels – and the low oil price creates an opportunity to reform inefficient and wasteful fossil fuel subsidies, which has been a goal of the G20 since at least 2009.

A growing number of companies are also moving in the same direction, including Microsoft, BP and Shell, who have announced new targets aligned with the Paris Agreement. Notably, this comes as Shell and BP announced multi-billion-dollar “stranded asset” write-downs.

Consumer and investor pressure for better social responses from corporates during the current crisis are also emphasising the growing importance of a triple bottom line – People, Planet, and Profit.

The coincident rise in pressure from policy makers, the corporate sector, consumers and investors with the increasing financial materialization of climate-related risk in the corporate sector, highlight the significant risks the transition to a CLIC economy can create for investors. But we believe it will also magnify an already significant investment opportunity.

At Lombard Odier, on a top down, macro, sustainability level we are also focusing on behavioural shifts as lockdowns ease, and the use of technology as a key enabler of a greener return to a “new normal”. Technology advances allow greater connectivity for remote working, more seamlessly integrated transport systems and help monitor any future spread of the virus. In our view, this presents multiple investment opportunities in the sustainability space.

We believe assessing the adaptability and the resilience of business models to key sustainability challenges – whether the challenge is climate-related; dematerialisation and shifting supply chains; or a global pandemic – is essential to identifying industries and companies that stand to outperform as the green recovery unfolds.

We also believe it is essential to proactively shape sustainable investment outcomes through robust, forward-looking and science-based research and analysis, and engagement with the companies we invest in. This dialogue and knowledge-sharing is essential to build a deeper understanding of companies’ business models and the positive additionality they can create across their value chain. Importantly, this two-way dialogue also signals our willingness to provide patient capital to companies at the forefront of the transition. We believe this is a critical factor in supporting the transition to a CLIC economy, and providing quality, sustainable returns for savers.

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