investment viewpoints

return with good conscience.

return with good conscience.

sustainability has evolved from a niche to a mainstream topic. 

For Hubert Keller, head of the asset manager Lombard Odier Investment Managers, the matter is clear: “We are convinced that sustainability will be the key to excess economic returns in the markets. For us, this is the essential value driver of the future.” The Swiss money manager sees sustainability as "the greatest investment opportunity in recent history.”

The Swiss are not only clearly committed to sustainability. They are also marking a megatrend in asset management. After all, sustainability had long been regarded as a niche market in asset management. However, this status is about to change fundamentally.

By 2020 at the latest, the EU wants to ensure by means of regulation that sustainability issues must be given greater consideration than before in the asset allocation of asset managers. Many traditional firms are already reacting now. For example, sustainable investments are evolving from a niche theme to an important investment trend that hardly anyone can ignore.

Jens Ehrhardt, CEO and founder of DJE Kapital, is also aware of this development. He recently said at a conference: "We used to do this for special customers such as churches. Today we do it for everyone.” The ESG principles, i.e. the consideration of environmental and social criteria as well as the principles of good corporate governance, provide an important orientation for sustainability.

93 percent of the world's institutional investors today say that the long-term value of their company depends on both financial performance and ESG criteria, according to the study "Institutional Investor Trust 2019 Outlook" by communications agency Edelman.

In Germany, 96 percent of professional financial managers would in fact invest even more long-term if sustainability criteria were taken into account. 

The investment house Lombard Odier has developed a three-pillar approach to filter out companies that have benefited from the "sustainability revolution": The first pillar concentrates on the sustainability of a company’s financial model, the second on its business practices, and the third on its core business model - the latter being examined to see whether it is still sustainable in view of the megatrends in sustainability. The challenges include not only climate change and the scarcity of natural resources, but also demography, digitalisation and inequality in society. 

"Sustainability is a clear trend among institutional investors. The annual growth rates of our sustainable assets were recently around 40 percent," says Janne Werning, ESG analyst at Union Investment. At Union, 42 billion euros out of a total of 330 billion euros are currently invested strictly according to ESG criteria.


warning against empty words.

The agency Edelman believes that this is a subject that requires leadership from the top of the company. "This agenda must be anchored at the very top, otherwise the company's sustainability strategy will not be credible for investors," says Alexander Schmidt, Head of Capital Market Communications at Edelman Germany.

However, Bert Flossbach, co-founder of the asset manager Flossbach von Storch, points out: "Sustainability is unfortunately often misused as an empty phrase that can be filled at will".
For the much criticized financial industry, this can offer the opportunity to greenwash. "There is no uniform definition, often ethical moral exclusion criteria or a one-sided fixation on combating climate change which are used instead of a holistic view," he criticises.

Lombard Odier Investment Managers estimates that there are around 1,000 companies that could meet the challenges of sustainability. "These are established companies that are already making the transition to more sustainability, companies that are already offering solutions, and disruptors that are already developing new more sustainable business models," says Keller. The investment managers then focus on assessing the sustainability of the financial model and business practices, reducing the field to between 300 and 400 public companies. In the end, around 45 to 55 stocks will be left, which compose a "high conviction" portfolio.


returns still have upside.

These stocks remain under lock and key, there are no recommendations to buy or sell, but at least the firm [LOIM] mentions three companies "that could benefit from the sustainability revolution": Novo Nordisk, the world leader in the treatment of diabetes, should benefit from the demographic challenges. Air Liquide, manufacturer of oxygen and hydrogen, which helps increase energy efficiency. And the pan-Asian insurer AIA, which should grow with the increasing importance of private savings and insurance business in Asian societies.

In fixed income, Keller and his team focus on the quality of the issuer, not on the amount of outstanding debt. "Otherwise, there would be a structural overweighting of highly indebted countries - such as Italian and Japanese government bonds," the 51-year-old manager points out. The application of sustainability criteria to government bonds is still much too little practised today. 

However, Keller – whose firm manages around 49 billion Swiss francs - is cautious about return expectations. "Currently, pension funds and other institutional investors in Germany would be happy to generate a net return after all costs of three to four percent."

This article originally appeared in Handelsblat

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