investment viewpoints
Building better supply chains
2020 has been a historic year in terms of highlighting the urgency of many sustainability-related challenges. What trends are you seeing in how companies are responding to the COVID pandemic?
Supply chain resilience has clearly emerged as a key focus area for many companies. COVID-19 laid bare the weaknesses created by increasingly long and complex supply chains. This has been exacerbated by trends in supply management, such as just-in-time delivery. But now we are beginning to see companies thinking more about the resilience of supply chains and not just about finding the lowest cost solution.
And what about the devastating implications of natural disasters like Hurricane Laura and the wildfires in California.
Clearly it’s not only the pandemic that is creating a focus on resilience, but also the increasing physical manifestations of climate change. Earlier this year we saw the devastating images of Australia on fire, just before the pandemic took hold. Now, over the summer, climate damage has come back onto the agenda strongly with Hurricane Laura, Sally and the Californian wildfires. We believe this is making it even more important for companies to understand their full supply chains, both upstream and downstream, in order to have the best visibility on their physical assets.
Some commentators have been hopeful that one key positive impact of global lockdowns would be to cut carbon emissions and help align the economy towards the Paris Agreement. However, a report from the United Nations this month1 has made it very clear this is not the case - concentrations of greenhouse gases in the earth's atmosphere actually hit a record high this year. The economic slowdown from the coronavirus pandemic has had little long-term effect on the stock of emissions. Therefore it is vital for companies to prepare for ongoing climate damage, as well as focus on cutting emissions across their supply chains.
It is vital for companies to prepare for ongoing climate damage, as well as focus on cutting emissions across their supply chains
What can companies do to improve their supply chain resilience?
Interestingly, many companies are recognizing the interconnected nature of sustainability challenges and taking a more holistic approach, using their power and influence to drive change in many areas, including climate change and the circular economy.
A growing number of mega-caps, for example, are pushing net-zero targets across their supply chains, focusing on upstream and downstream Scope 3 emissions. Companies are waking up to the interrelation between sectors and that the only way to transition to a zero-emissions economy is to move towards a Paris-Aligned trajectory across all scopes of emissions.
Can you provide some examples of what specific companies are doing?
Apple’s2 carbon neutral supply chain commitment for 2030 focuses on product recycling, material recovery, smart materials (such as carbon-free aluminum), as well as energy efficiency and carbon removal, for example. Google has similarly announced its lifetime net carbon footprint is now zero, albeit relying in part on carbon offsets3.
Tesla also made a plea over the summer for responsibly mined nickel for its electric cars and the automotive industry as a whole continues to focus on sustainably sourced cobalt and lifecycle emissions of vehicles – including afterlife of batteries and reusable materials. Reuters reports that Tesla is in discussions with Canadian miner Giga Metals about helping to develop a large mine that would give the electric vehicle maker access to low-carbon nickel for its batteries, extracting the mineral in a way that is sustainable and carbon-neutral with hydropower4.
Why is this focus on supply chain resilience good news for investors?
Going forward, we expect this focus on total supply chain sustainability to continue across all industries. With so many companies (and countries) moving in the same direction, we expect this trend will create significant growth opportunities in multiple sectors across full lifecycle supply-chains. Investors can be the ultimate beneficiaries of these opportunities.
For example, green technology costs are falling in many areas - notably in electric vehicle batteries and industries exposed to sustainability challenges such as building, agriculture and heavy industry. We see investable opportunities in new fuels and technologies, which today are more costly than their more carbon-intensive alternatives, but are increasingly becoming cost competitive and investable. Economies of scale, and a supportive regulatory environment, could see many alternative technologies replacing demand for existing ones.
How is Lombard Odier looking to capture this opportunity?
At Lombard Odier, we believe the transition to a CLIC™ Circular, Lean, Inclusive and Clean) economy will provide significant investment opportunities across all industries. The pandemic has forced many companies to adapt their supply chains and investors to start focusing more on the resilience and adaptability of company business models. We are focusing on these behavioral shifts and the use of technology as a key enabler of a greener return to a “new normal”.
We believe our focus on sustainability, along with a preference for high quality businesses with superior financials, will help us seek out the highest returns for our clients. Our research focuses on forward-looking, judgement analysis of the resilience and adaptability of companies’ business models to key sustainability challenges, including climate change, circularity and supply chain risk, which help us identify industries and companies that are well placed to benefit from these growth opportunities and outperform.
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