Eagles and Ostriches: the future of sustainable investment

investment viewpoints

Eagles and Ostriches: the future of sustainable investment

Didier Rabattu - Head of Equities

Didier Rabattu

Head of Equities

In a world where sustainability increasingly determines corporate outcomes, we believe there are two main types of companies: Eagles and Ostriches.

 

What is an Eagle?

Eagles will be the winners of the transition to a more sustainable economic model. These companies are forward-looking, responsive and resilient to changes in their environment. They will have moved beyond the traditional approach of focusing on short-term profits, to realise that adopting intelligent, responsible business practices benefits their bottom-line and can also bring positive environmental and social impact. Management of these companies will recognise both the risks inherent in outdated business models, as well as the myriad opportunities the sustainability revolution presents for companies willing to embrace it.

Implicit in this is a clear ability by the governance of a company to identify major trends and adapt accordingly, even if this means completely rethinking their business model. Importantly, the most decisive issues will be different across sectors, regions and even between companies. It is vital, in our view, that companies are focusing on the sustainability issues that are particularly material to their ability to prosper over the long term.

 

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What is an Ostrich?

Ostriches, by contrast, are the companies that have not yet recognized the central importance of sustainability to the future success of their business. These companies are failing to adapt to the sustainability revolution and are either oblivious to the speed and scale of the transition, or are simply in denial. In other words, these companies have their heads in the sand. Companies that remain ignorant to the social and environmental risks they face are likely to be caught off-guard and be ill-prepared to deal with controversies, technological innovation, supply chain disruptions, and evolving consumer demands.

 

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Knowing the difference is fundamental to returns

We believe the ability to differentiate between Eagles and Ostriches will be fundamental in delivering superior returns to our clients in the future.

At Lombard Odier Investment Managers we believe being an Eagle is first and foremost about a company’s core mission and mind-set. These aspects are critical to determine the sustainability journey any company is on. We therefore look for companies where management is absolutely focused on developing a business model that can deliver growth, but in a manner that prudently manages the firm’s social and environmental footprint.

We look for clear evidence that a firm understands how sustainability issues affect its value chain, from its own manufacturing process through to its suppliers and customers. We assess the extent to which firms have hardwired sustainability into their long-term strategy, whether they have set clear objectives to address the most material issues to their success, and whether they are providing comprehensive and transparent reporting on their progress.

We also analyse companies’ business practices because, in our view, they are also intrinsic to financial performance. We look at a wide variety of detailed and granular information relating to environmental, social and governance (ESG) matters for each company, industry and sector. We then look at which of these issues are most material to the economic performance of a specific sector, industry or company to get a full understanding of the link between those issues, future earnings potential and company valuations.

Of course, we also look for companies that are equally focused on delivering financial performance over the long term. Without that foundation, the business will not be sustainable.

Importantly, Ostriches can become Eagles and vice versa. Companies that have been poorly positioned have had governance structures and management teams with the vision and courage to reinvent themselves. We see this happening in the energy sector today. We also believe financial institutions, like ours, are agents for change and, through pro-active engagement and dialogue with companies, can play a role in helping support this process of Ostriches becoming Eagles. We use this philosophy to further inform the investment process, improve outcomes and deliver measureable impact.

The sustainability revolution, as we see it, is creating a large number of major, structural trends that will reshape our economies. Eagles will recognise these new forces and understand their implications, no matter how complex. They will be able to develop resilient business models that are built to thrive. They will gain market share and grow much more rapidly. Ultimately, we believe they will become industry leaders, and outperform their peers.

important information.

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