Patrick Odier is Senior Managing Partner of Lombard Odier. Founded in 1796, the Geneva-based private bank has been committed to sustainability for generations. Sustainability is not only one of the many investment strategies of Geneva’s private bankers, it is also deeply rooted in their philosophy.
Lombard Odier has a strong focus on sustainability. How did this happen?
At Lombard Odier, we have a long and successful history of thinking sustainably. This was built into the foundations of our bank, and is a large part of why, 223 years later, we are still going strong. Our independent, partnership structure gives us the flexibility to think in generational terms, not quarter to quarter. Instead, we can focus on serving our clients for the long term. Consequently, if we want to set priorities and invest in certain business activities, we have the resources, flexibility and the agility to do so. We believe this makes us uniquely positioned to generate returns for our clients as the Sustainability Revolution continues to unfold.
When did you take the first steps to establish a sustainable investment process?
In the 1990s, we saw growing demand from investors for sustainable and at the time ethical investment products. Clients wanted to better understand in particular the governance of the companies in which they were invested. That is when we initiated the creation of the Ethos Foundation, an organisation focussed on sustainability for institutional investors. We felt it was our responsibility to address a growing concern from the investor community and thereby promote sustainable investing. We had no direct commercial interest in this project. From the mid-1990s to around 2005, we developed our own sustainable investing methodologies. At the same time, international standards, such as the UN Principles of Responsible Investing (PRIs), which we signed quite early, developed.
After these initial steps, we wanted to offer specialised investment strategies in certain asset classes, the most logical of which was in equities. We then began our collaboration with Generation Investment Management, a company founded by Al Gore and David Blood, which was a pioneer in the field of Global Sustainable Equities. Lombard Odier has now had an exclusive partnership with this company for 12 years.
What about other asset classes?
There was strong interest in fixed income as well, and we therefore signed a partnership with Affirmative Investment Management (AIM), in order to develop our offerings in ‘green bond’ strategies. In order to widen the investment universe and include bonds from climate-aligned companies who are not strictly pure players, we launched an innovative ‘climate bond’ solution.
Finally, three years ago, we decided to embed sustainability across our entire investment processes, as we are convinced that sustainable investments will drive higher portfolio returns in the mid-term.
At Lombard Odier, we aim to make no distinction between portfolios that are sustainable and those that are not. Sustainable investing is not a matter of product; it is a matter of investment philosophy. Acting as fiduciary for our clients’ wealth, we are convinced that sustainability will be the best source of future returns for all investment portfolios, and therefore investing along these lines will be in their best interest.
What does your sustainable investment approach look like today?
When it comes to integrating sustainability into portfolios today, we take a three-pillar approach. We believe these pillars are interlinked and interdependent – take one away, and the whole system is much more vulnerable. Our first pillar assesses the sustainability of the financial model. Can a company continue to generate excess economic returns? Is it likely to maintain its credit quality and solvency?
The second pillar looks at the sustainability of their business practices. How well is the company run in the context of its broader ecosystem of stakeholders? This is where environmental, social and governance (ESG) criteria is employed. In this respect availability and quality of data is of the essence. The more non-financial data, and the more robust it is, the easier it becomes to root out biases in the system, and get a true understanding of whether companies are genuinely transitioning to more sustainable business practices.
But sustainability goes beyond just ESG. This is why our third pillar looks at the sustainability of companies’ business models. As our economies continue to transform, how are the different sectors likely to benefit? How do they need to change? Can coal continue to compete in a world where the cost of renewables is rapidly decreasing? How big is the stranded asset risk incurred by the company? What are the energy sources of the future?
Given the scale and pace of the Sustainability Revolution, we are constantly reviewing and improving our processes in order to identify the business models best–placed to benefit as our economies continue to transform.
How do you see Switzerland in terms of sustainability? Are we on the right track?
We naturally want to contribute to Switzerland and its financial industry being able to assert themselves, and take the lead in anticipating future sustainability developments. I believe this is currently the case. In Switzerland, we are privileged to have a strong and well-qualified talent base as well as easy access to capital. Combining and leveraging these in the context of sustainability will ensure there is an additional return opportunity. Switzerland, as an export–oriented economy, can benefit and enhance its global competitiveness by balancing public policies with business practices concerning sustainability. Therefore, both micro- and macroeconomic initiatives are essential.
In which areas would Lombard Odier not invest because it would violate the principles of the bank?
Exclusion policies by institutional investors, especially in North America, were a key first step in the evolution of sustainable investing. In our view, a more holistically sustainable approach contributes much better to the risk profile of the portfolio. However, at Lombard Odier, we also have group-wide exclusions on unconventional weapons and essential food commodities. This is due to considerations of business ethics .
While exclusions are a very efficient way of expressing an investor’s values, they do not necessarily support and drive change within a sector. For us, the three-pillar approach discussed earlier should bring better results.
Lombard Odier was founded in 1796 – how do you ensure that it thrives in the next one hundred years?
Well, we want to retain our independent ownership model, which helps us avoid some of the conflicts of interest in the financial world today. We do this by concentrating on one business only – wealth management. We do not cross-subsidise from one business to another. We avoid taking decisions as a firm that are not in the direct interest of the clients. We behave as responsible entrepreneurs, aligning their interests with ours with a long-term view.
Additionally, we want our top management and experts to serve clients personally. By doing so, we ensure that our weekly Managing Partner meetings allocate priority time to client’s experience and needs.
How can Lombard Odier implement the ‘white money’ strategy and ensure that the bank knows its customers and that their money is properly taxed?
In the past decade, there has been a change from one world to another. Personally, I was convinced very early on that the paradigm change of fiscal transparency had to be carried out. Lombard Odier benefitted from an advantage during this period of change, as we were not dependent on a specific type of clientele.
Our business model was, and still is, focused on providing investment expertise and holistic advice, while we were able to diversify across business lines and geographies early in our history. Lombard Odier enjoys a broadly diversified clientele of entrepreneurs, families, institutional and technology clients across Switzerland, Europe and the rest of the world.
Together with the Financial Times you have produced a video series called “FT Rethink”, where you discuss topics like “Micro Homes”, “Recycling” and “Deep Sea Mining”. What does Lombard Odier hope to get out of this?
We want to ensure that there are insightful contributions being made to sustainability issues. We do not see ourselves as specialists in all of these areas. However, we would like to find experts who can explain the ideas on these topics. By sharing these faster, changes should be possible, including in the way we invest. We have consciously made our commitment to sustainability public, in order to encourage the financial industry to join us on this journey.
You mentioned earlier that sustainable investment has been very attractive in recent years. Why don’t all companies do this, in your view?
Firstly, demand for sustainable investing is not yet properly aligned worldwide. Some financial institutions may be active in areas where demand has already developed; others operate in markets where this is not yet the case.
Secondly, not all players were able to develop the appropriate expertise in this area. It requires substantial investment, and much more than this – a fundamental change in mind-set. Also, I believe science, politics, industry and the financial world must all work together in order to achieve results. This is not yet the case.
This being said, in Switzerland, a number of leading financial institutions are taking the lead in this area – and we are proud that Lombard Odier is one of them. We recently received the B Corp certification, which demonstrates our leadership and commitment to sustainability among global wealth managers.
Would regulation in this field accelerate the transition to a more sustainable economy?
Regulations in this area should be balanced and therefore create positive incentives. This takes time, experience, and substantial resources.
Personally, I think there will be increased regulation in this field. What is important, in my view, is that the industry leads the agenda, to avoid regulations that do not reflect the realities of our industry. At Lombard Odier, we are fully committed to contributing to the regulatory decision process in sustainability.
What are your personal expectations of university graduates who start work at Lombard Odier?
Investing in talent is extremely important to us, and the good news is that we have attracted a record amount of top talent to Lombard Odier since we made our commitment to sustainability public.
Both analytical skills as well as conviction are needed. The young generation has embraced issues around sustainability much earlier, and this is an advantage. We also want people who have investment experience and who can bring us new methodologies and tools. Data management expertise is becoming increasingly important.
Sustainable investing also means having answers to the qualitative and not just quantitative aspects to a company or issuer. A critical mind as well as strong judgemental capability are highly desirable qualities.
Therefore, we look to complement legal, economic, technological or quantitative backgrounds with competencies in history or philosophy. These skills can bring valuable perspectives on how companies will adapt, where and how consumer demand will emerge and how sustainability will be communicated. The right blend of personality, mind-set and experience is more important than holding a specific degree. We want to integrate the “managers of tomorrow” into Lombard Odier as quickly as possible.