investment viewpoints

    Proponent of the Climate Transition: 1 year of LO Funds - Climate Transition

    Proponent of the Climate Transition: 1 year of LO Funds - Climate Transition

    The Lombard Odier Climate Transition strategy recently marked its 1-year anniversary. The strategy has made a promising start in achieving a substantially lower long-term portfolio temperature than the benchmark, while also outperforming on current carbon-intensity metrics.

    The purpose of the fund is to unlock the opportunities presented by the transition from a WILD to a CLIC™ economy. The Fund therefore seeks to invest in companies that may benefit from the transition to both a carbon-constrained world, as well as a climate-damaged world. This requires focusing on three sets of opportunities when selecting companies, utilising thematic, activity-driven filtering with a high purity threshold: solution providers, transitioning companies, and climate adaptation. 

    The investment team benefits from the expertise and direct involvement of our dedicated Sustainable Investment Research, Strategy & Stewardship (SIRSS) team, as well as our materiality-weighted approach to curating ESG data. By integrating our proprietary methodology, Lombard Odier Portfolio Temperature Alignment (LOPTA), we plot the decarbonisation pathways of companies to determine a portfolio-level temperature outcome, which we believe is essential to ensure alignment with the Paris Agreement.

     

    2020 key metrics 

    Investing across all sectors in support of the climate transition, rather than focusing only on today’s low-emission companies, the fund returned 66.89%1 versus 68.40% for the benchmark while making great inroads in reducing GHG emissions and establishing a sustainable framework.

    We are proud to have marked a number of important milestones within this brief over the course of the year. USD 1 million investment in the Climate Transition strategy during 2020 translates to 336 tCO2e avoided - equivalent to a passenger flying from Paris to New York and back over 330 times. The 11 tCO2e captured as a consequence of the fund’s activities equates to that of more than four acres of mature trees. The cumulative emissions captured or avoided as a consequence of the aggregate investment in the strategy during 2020 is equivalent to the estimated annual CO2 footprint of 52,000 people globally.

    We have assessed the implied level of global warming that the Fund is aligned to, based on the expected, cumulative owned emissions of the Fund through to 2050. The estimated “temperature alignment” we calculate through this methodology is 2.3°C for this fund, which compares very favourably to the 3.1°C of reference index MSCI World.
    As an active manager, we engage companies to encourage positive business practices and ensure the long-term sustainability of their enterprises. Adopting the Oxford Martin Principles for Climate Conscious Investors, in 2020 we engaged 73% of companies on the climate transition, and 60% on ESG business practices. 

    We believe it is essential to focus on the ESG issues that are most relevant to the sustainability of business practices based on the industry specific companies operate in. We take a three-tiered approach to understanding the sustainability of a company’s ESG practices, considering long-term, short-term and impact metrics along our proprietary ‘CAR’ methodology. Our LO ESG Materiality Ratings reflect a higher concentration of highest-rated companies in the portfolio versus those of the benchmark.

    The UN Sustainable Development Goals (SDGs) are used by many sustainability focused investors as a useful tool for measuring positive contribution to, as well as corporate alignment with, globally accepted social and environmental objectives. All of the portfolio’s holdings have positive contribution to SDGs, with the highest exposure to Affordable and Clean Energy (SDG 7). More than half of companies in the portfolio are aligned with the goals of increasing substantially the share of renewable energy in the global energy mix, and doubling the global rate of improvement in energy efficiency.

    Metrics on sustainability performance.

    Metrics on sustainability performance.

    We monitor a range of positive contribution metrics as part of the assessment of positive outcomes the Climate Transition Fund helps to achieve.

     

    Click here to learn more about the LO Funds – Climate Transition fund

    Investment case study - Cummins 

    Cummins2 designs, manufactures, distributes and services powertrains (diesel, natural gas, electric and hybrid) as well as powertrain-related components (incl. filtration, fuel and control systems, batteries, etc.). Cummins has a history of innovation and adaptation and today is focused on transitioning to more efficient engines with mild electrification, heavy use of semiconductors and a digitalised offering. The company is also very active in the transition to a green hydrogen economy. The world’s first two hydrogen trains were powered by Cummins Fuel Cells. The trains successfully completed an 18-month trial in 2019 with over 180,000 km driven, a proven and economic success. Over 40 trains will be powered by 82 Cummins Fuel Cell systems by 2022.

    In terms of business practices, the company ranks among the best in its sector. It scores well in Environmental impact of products and services, the most material ESG dimension for Cummins, thanks to strong eco-design capacity and a green procurement policy. Cummins’ PLANET 2050 strategy is a visionary effort to design a long-term blueprint to achieve a net zero environmental footprint and carbon neutrality, with eight quantifiable targets already for 2030, namely: 

    • Reduce absolute GHG emissions (scope 1/2) by 50%. 
    • Reduce scope 3 absolute lifetime GHG emissions from newly sold products by 25% and from existing base in 55 metric tons.
    • Reduce volatile organic compounds emissions from paint/coatings by 50%, (v) redesign every part for circular lifecycle. 
    • Generate 25% less waste in facilities/operations (as % of sales), (vii) reduce absolute water consumption by 30%. 
    • Reuse or recycle 100% of packaging plastics and eliminate single-use plastics. 

    We also estimate Cummins to be aligned with a 1.9°C temperature outcome. The relevance of its emissions to the climate transition is higher than average, due to its higher-than-average carbon footprint. We estimate that the company’s projected reduction in emissions make it well-aligned with the Paris Agreement.

     

    sources.

    1 Past performance is not a guarantee of future results.
    2 Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document.

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