A sustainability revolution is underway, which will drive economic and investment outcomes over the long term.

On 12 March, the Lombard Odier Rethink Responsible Capital symposium brought together political, business and investment leaders to discuss how our world is changing in the face of significant social and environmental challenges, and how investors can gear their portfolios for this new paradigm.
 

As Al Gore, former US Vice President and co-founder of Generation Investment Management told the audience during his keynote speech: “The sustainability revolution is the single largest investment opportunity in history.”
 

Sustainability is central to economic and investment outcomes

In his opening remarks, Senior Managing Partner, Patrick Odier, spoke about the many challenges facing our global economy today, including demographic changes, climate change, scarcity of natural resources, inequality and the digital revolution. These challenges will have what Mr Odier described as a “transformative effect” on our economies and the businesses that drive them. He pointed to changing consumer behaviours and a more sustainable policy agenda, which is putting pressure on companies to adapt if they are to remain sustainable over the long term.

“Governments have taken a collective decision to fundamentally alter the nature of our economies over the coming decades,” he said, adding: “This creates great opportunity, but it also creates great risk.”

A new paradigm

The first keynote speech of the day was delivered by Christiana Figueres, former Executive Secretary for the UN Framework Convention on Climate Change, who was a formative figure in bringing global governments together at COP21 in 2015 to sign the landmark Paris Agreement.

Ms Figueres addressed the growing sense of urgency, and likely acceleration of regulatory action, to address sustainability challenges. She outlined how measures to tackle climate change, particularly around fossil fuels, are affecting business models in a range of industries and sectors.
 

“We are seeing the pull of technology and the push of policy at the international and national level, and we are benefiting from the use of digitalization to force the pace of change,” she said. Ms Figueres pointed to the “exponential fashion” in which the global economy is moving to decarbonise.

While the ambitious targets for renewable energy have been surpassed in many countries, Ms Figueres warned that a lot more needs to be done to achieve the objectives set out in the Paris Agreement. She warned investors should expect sustainability challenges to have a disruptive impact on investment portfolios, and called on companies to elevate their focus on social, environmental and governance issues to C-Suite level. “We need vision, courage and determination,” she said.
 

Taking the long-term view

The audience then heard from a group of top-ranking representatives from some of the world’s largest companies. The panel, which was led by David Blood, Senior Partner at Generation Investment Management, included Paul Polman, CEO of Unilever, Joerg Reinhardt, Chairman of the Board of Directors of Novartis, Sir Martin Sorrell, CEO of WPP and Carl-Henric Svanberg, Chairman of BP.

The panel called for an end to what one CEO described as “shareholder primacy” to allow companies to transition in response to the new operating paradigm. They urged investors to work more closely with the corporate sector to help address the conflict between short-term thinking and long-term sustainability.
 

The discussion also focused on the need for large corporations to take a leadership position on environmental, social and governance issues by influencing companies further down the supply chain to move towards more sustainable business models and practices.

The panel discussed how investors can use the United Nations’ 17 Sustainable Development Goals as a framework for setting expectations around sustainable business practices. They emphasized the need for better ways to define and measure social and environmental risks and returns.

A whole-portfolio issue

The debate then looked at sustainability from the asset owners’ point of view. Hubert Keller, Managing Partner and CEO of Lombard Odier Investment Management, led a group of five European investors in a lively debate focussed on integrating sustainability factors into portfolios.
 

The panel included Urban Angehrn, Group CIO of Zurich Insurance Group, Philippe Desfossés, CEO of ERAFP, Stefan Mächler, Group CIO of Swiss Life, Mark Mansley, CIO of the Brunel Pension Partnership and Michael Strobaek, Global CIO of Crédit Suisse.

The debate centred on three key considerations: how to protect portfolios from sustainability risks, how to gear portfolios towards the return drivers of tomorrow, and how to ensure the corporate sector transitions in an orderly fashion.
 

The discussion highlighted the varied motivations for investors to do so, with some citing the moral obligation as a key driver. Others pointed to environmental, social and governance (ESG) factors as “a risk, not a religion”, a phrase that punctuated the debate. Importantly, the group agreed that considering ESG was a key aspect of fiduciary duty, and emphasized that there does not have to be a conflict between moral and financial obligations.

The panel agreed the regulatory push was likely to accelerate, pointing to the European Commission’s Action Plan for Financing Sustainable Development. This framework draws particular attention to the need for long-termism, and the role the investment community can play in transitioning the economy to a more sustainable model.

Ultimately, the discussion concluded that sustainability challenges create risks and opportunities across the whole investment portfolio. As a result, investors may need to adopt more appropriate reference points or benchmarks for assessing risk and return.

The largest investment opportunity in history

Finally, to close the day, Al Gore delivered a second keynote speech. He talked of the increasing scale of climate change, the impact global warming is having on global sustainability, and the rapid pace at which some sectors and countries are already transitioning. He pointed to solar power as a particular success story.

Mr Gore emphasised the moral obligation to address climate change. He pointed out that humans have faced, and overcome, many such challenges in the past, including the abolition of slavery, the women’s suffrage movement, the civil rights movement in America and the ending of Apartheid in South Africa.

However, Mr Gore spoke of the transition towards a sustainable economic model as “the single largest investment opportunity in history”.
 

To end, Mr Gore pointed to Lombard Odier’s long heritage in responsible investing, referring to a warning issued by Alexandre Lombard in 1841 against investing in stocks from southern US companies relying on slave labour – an unsustainable business model.