investment viewpoints

What constitutes a leading active equity approach to sustainable investing?

What constitutes a leading active equity approach to sustainable investing?
Pascal Menges - Head of Equity Investment Process and Research, Client Portfolio Manager

Pascal Menges

Head of Equity Investment Process and Research, Client Portfolio Manager
Christopher Kaminker, PhD - Group Head of Sustainable Investment Research, Strategy & Stewardship

Christopher Kaminker, PhD

Group Head of Sustainable Investment Research, Strategy & Stewardship

At a glance:

  • We believe a global active strategy focusing on sustainability should have two complementary strands: an opportunity to benefit from the climate transition and an opportunity to invest in natural capital.

  • Together, these focuses provide an opportunity for investors to achieve outperformance against the global equity market, a better alignment towards net zero, exposure to companies providing protection against the physical effects of climate damage, the ability to benefit from the power of nature and its productive biodiversity, and active engagement on key sustainability issues.



At Lombard Odier, our core conviction is that the current global economic model is unsustainable given its social and environmental footprint. We need to transition. We need to generate economic growth, but decoupled from its environmental effects. The recipe for this decoupling is the transition from a WILD (wasteful, idle, lopsided and dirty) economic model to a CLIC™ (circular, lean, inclusive and clean) model. This transition requires us to focus on the key sustainability challenges (including zero waste, zero emissions, regenerative nature, dematerialisation, adaptation and resilience…) Solving these sustainability challenges can provide exciting growth opportunities for companies with the right products and services, or which can adapt their business models to a more sustainable future.

We have articulated this transition from WILD to CLIC™ into two complementary themes, one that considers Climate Transition and the other focusing on Natural Capital.

In our view, putting sustainability at the forefront of an equity selection process is effective because sustainability is a growth opportunity in itself. By integrating ESG considerations as part of an investment process it is possible to go beyond basic ESG metrics and integrate the full spectrum of forward-looking, judgemental analysis on companies’ exposure to key sustainability challenges. While investment returns should be a key consideration for selection, investments into companies that benefit from bringing solutions, and actively engaging with companies regarding their sustainability exposures, can also help measure the scale of a portfolio’s positive contribution to society.

We need to generate economic growth, but decoupled from its environmental effects

Climate Transition opportunity

Increasing physical manifestations of an already damaged climate draw stark attention to the scale, scope and urgency of a climate transition. At current pathways, temperatures are on track to rise around 3°C this century. To maintain temperature rises well below 2°C, we need to reduce carbon emissions 50% by 2030 and to net-zero by 2050. By our estimates, annual investment needs to almost double to USD 5.5 trillion this decade and rise to USD 7.2 trillion in the 2030s to remain below a 2°C increase1.

At Lombard Odier, we believe the climate transition will continue to accelerate in a post-COVID-19 world, powered by a positive feedback loop of economic and market forces. In our view, this transition is already one of the most important drivers of risk and return. Capital should therefore be reallocated to both decarbonise and adapt to a carbon-damaged world.

We believe the urgency of the climate transition creates significant investment opportunities across multiple sectors. To capture growth opportunities in this area, it is key to focus on solutions, transition and adaptation candidates. In a carbon constrained world, regulatory forces and/or carbon repricing provide direct growth avenues for solution providers – the massive increase in energy efficiency solutions and renewables come to mind.

Through active management, we believe it is possible to overcome inherent limitations in passive strategies and focus at the same time on relevant industries such as hard-to-abate, but economically vital, carbon intensive industries that are transitioning e.g. cement producers. We seek to identify transition candidates with a lower-temperature trajectory in those industries, thereby building a long-term competitive advantage.

Finally, companies working to adapt to climate damage should also receive due consideration. For example, a carbon-damaged world facing crowded cities, rising sea levels and flood risks will necessitate civil engineering companies that can offer flood and water management services.

Many equity approaches focus solely of a narrow universe of solution companies, whereas we believe having a wider opportunity set of solution companies, transition companies and adaptation candidates is a strength. Accordingly, we focus on seeking a global pool of companies whose growth will benefit from regulations, innovations, services or products related to the global fight against or the adaptation to climate change.

The World Economic Forum estimates that USD 44 trillion, or over half of the world’s GDP, relies on ecosystem services, such as minerals, habitats, water and biodiversity

Natural Capital opportunity

Natural capital, the natural resources and ecosystem services our economy relies on, is a fundamental bedrock of growth. The World Economic Forum estimates that USD 44 trillion, or over half of the world’s GDP, relies on ecosystem services, such as minerals, habitats, water and biodiversity. Industries from pharmaceuticals to heavy industry rely directly or indirectly on natural capital. Yet, natural capital is often taken for granted and perceived as a free resource, resulting in growing waste, idle assets, lopsided distribution and unnecessary emissions.

The decline of natural capital poses a real economic risk; however, the good news is that natural capital is hugely productive and a highly regenerative resource. Recognition of the value of natural capital offers an immediate opportunity for growth. New business models are emerging that seek to use these resources as biological building blocks for a range of bio-based materials, replacing industrial alternatives. For example, nature-based materials – bio-based polymers and composites – are entering consumer products and will revolutionise sectors like construction, textiles, transport and the chemicals industry. If we can successfully leverage such materials, we can move to an economy built around these renewable resources.

Powerful regulatory, consumer, market and investor forces are driving an eco-friendly transition. The EU Green Deal, for example, has set policies and targets on a circular economy. The industry has identified some USD 440 billion needed a year to protect nature, but the current investment rate lags at only USD 55 billion p.a2. Private and illiquid investments in natural capital are certainly not new e.g. private green equity, owning physical land/forests, but we identify an untapped need to mobilise and scale public equity finance in this space.

We estimate the transition represents trillions of dollars per year of investable opportunities. We see policy and companies pushing towards a transition from a take-make-waste economy to what we might call the “butterfly” economy, with the two circular wings of this butterfly encapsulating two distinct growth avenues around natural capital:

  • harnessing the power of nature through the circular bio-economy and

  • protecting natural capital via a leaner, industrial economy.


As with the man-made impacts the world is seeking to redress with climate transition, we need to recognise and accelerate our transition from an unsustainable “take-make-waste” model to a sustainable bio-based economic model. This transition is already happening, made possible by innovation, technology and digitalisation.

We believe there are four core revolutions centred on the transition to an economy that uses more resources in a more sustainable, circular and regenerative manner:

  1. The circular bio-economy seeks out growth avenues nature-based solutions, ranging from  wood-derived biomaterials, to smart farming techniques and waste water solutions.

  2. Achieving resource efficiency focuses on doing more with less, through better materials, better processes, and longer-lived products, avoiding adverse impact on nature.

  3. The outcome-oriented economy recognises that we need changes both how we produce, but also in how we consume, extending product life through business models built around re-use, repair and the sharing economy, and the move towards more experiential forms of consumption.

  4. The transition to zero waste, finally, seeks to close the loop on our ecological footprint and maps out opportunities in less wasteful supply chains, recycling and remediation, and the urban infrastructure necessary to support these revolutions.


These revolutions present growth opportunities not only to providers of new technologies and solutions, but also to transitioning in champions in high-impact industries such as food retail, consumer electronics, capital goods and real estate. In these industries, industry leaders that are embracing these new models are discovering new ways to attain competitive advantage and opportunities for the growth of their brands.

Historically, opportunities in natural capital were accessed via private markets (for example, via funds investing in timber). However, we believe it is now possible to deliver a liquid, diversified global equity strategy that recognises Natural Capital as a unique investment opportunity.



Our core conviction is that casting a wider sustainability net can create strong alpha opportunities in global equities. To achieve this, we believe a focus on the transition to net zero and options in natural capital is required. We anticipate both these areas will create significant alpha potential for investors, demonstrate firm commitment towards achieving a net zero position and aim to highlight positive impact. Investors seeking the most diversified sustainability-led strategy should look at a combination of these opportunities.

At Lombard Odier, we have a deep expertise in sustainable investing. Our approach is deeply different from ESG-driven or carbon footprint-focused strategies that generally fail to identify opportunities brought by the transition from a WILD to CLIC™ economic model. By using a combination of sophisticated data sources, academic rigour and technical innovation to create leading-edge, science-based tools that provide unique insights, we have equipped our investment team to make forward-looking investment decisions with the highest level of information and, therefore, conviction.



1 Source: LOIM, Positioning a portfolio for climate transition, January 2020.
2 PwC, Nature is too big to Fail (2020).

important information.

This document has been issued by Lombard Odier Funds (Europe) S.A. a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, 1150 Luxembourg, authorised and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended; and within the meaning of the EU Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD). The purpose of the Management Company is the creation, promotion, administration, management and the marketing of Luxembourg and foreign UCITS, alternative investment funds ("AIFs") and other regulated funds, collective investment vehicles or other investment vehicles, as well as the offering of portfolio management and investment advisory services.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document 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. This document 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.
Neither this document  nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A prior consent. ©2020 Lombard Odier IM. All rights reserved.