white papers
integrating sustainability into equities.
the sustainability revolution.
The next economic revolution is already underway. We believe it will drive returns in the next three to five years and beyond and we are committed to identifying those companies which are best positioned to benefit.
We are facing some significant long-term structural trends, which are already starting to have a material effect on the environment in which companies operate. In our view, this revolution stands to affect every corner of the globe and every asset class in every investment portfolio.
The key to a successful investment approach in this environment is the ability to identify companies whose ability to create excess economic returns is underpriced by the market. In order to effectively target companies which meet this requirement, and are more sustainable over the long-term, we have developed a three-pillar analysis approach.
This three-pillar approach examines the sustainability of companies’ financial models, the sustainability of their business practices and the sustainability of their business model.
The first pillar is concerned with the financial strength of the company and, when it comes to selecting equities, we look to identify companies with the ability to generate excess economic returns. To do this, we believe they must be capital efficient, cash generative and have a limited dependency on capital markets. We have no issue paying a premium for a company as long as it creates a disproportionally higher level of economic returns.
Pillar I – the sustainability of a company’s financial models within equity investments
The second pillar of our approach to sustainability looks at how businesses behave in relation to their broader ecosystem of stakeholders. We believe that, for a company to deliver long-term value, it needs to be focused on all its stakeholders, including regulators, shareholders, employees, clients, suppliers, the environment, and its local community. It needs to be as focused on its business practices as on its financial performance.
The third and final pillar concerns the sustainability of a company’s business model when subjected to long-term structural trends. We believe there are five mega trends that are driving the Sustainability Revolution: Demographics, Climate Change, Natural Resources, Digital Revolution and Inequality.
Within each of these mega trends, we map out the likely path of future development for a more sustainable outcome in order to better understand which sectors will be impacted, and how. This, in turn, allows us to identify opportunities that can be translated into investment themes and ultimately determine how well or bad a company is positioned to navigate the opportunities and challenges presented.
On top of our investment analysis, we also believe strongly in the importance of active ownership because we trust it can also improve investment outcomes. We engage in direct dialogue with the senior management of the companies in which we invest. This gives us greater insights into the quality of company management, their attitude towards shareholders and the extent to which they are addressing risks and opportunities material to their long-term success.
We believe sustainability will be the single largest engine of the global economy in the years to come. Just as we expect companies to adapt in the face of this revolution, we think it is our role as asset managers to rethink our approach to investment and provide innovative solutions for our clients that allow them to capture the opportunities within their portfolios.
important information.
This document has been prepared by Lombard Odier Funds (Europe) S.A. and is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393. This material is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. Past performance is no guarantee of current or future returns. This material is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
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