'Sustainable investing will be most important source of future returns', says Geneva banking figure Patrick Odier
As plans for Building Bridges, Geneva's flagship sustainable finance summit taking place later this year, get underway, we spoke to its president, Patrick Odier, about what's in store and why he's counting on sustainable investment being the key to future returns.
There’s a certain historical irony in the name of Geneva’s upcoming sustainable finance summit, Building Bridges.
In 58 BC, when Switzerland's restless Celtic ancestors tried to leave the region for the more fertile lands of Gaul, Julius Caesar had other plans and ordered Geneva's bridge – their best chance of exit – to be destroyed. He was not letting the Helvetians, who years earlier had killed one of their armies, get away so fast. They'd quite literally burnt their bridges with the Romans.
Today’s inhabitants of Geneva are less short-sighted. In fact, their focus on the long term made them leading wealth managers, and – according to one of the industry’s top honchos, Patrick Odier – positions them nicely as future leaders in sustainable finance. Because, after all, sustainability “has to do, by definition, with a long-term perspective,” he says.
We are in Lombard Odier's offices close to Bel-Air – not far from the scene where the Helvetians luck ran out – to discuss the second edition of Building Bridges, a reference to the strengthening of ties between Geneva’s finance sector on its left bank and the international sector on the right. The four-day hybrid summit will take place from 29 November until 2 December, just after the climate event of the year, Cop26.
A deliberate move? Not quite, but one Odier hopes will help “tip the agenda and perhaps also the nature of the discussions around the summit itself”.
Managing partner of Lombard Odier, co-founded by his family in 1796, and president of Building Bridges, Odier seems almost abashed when I describe him as one of the event's main voices and instigators. He is quick to stress that it is a collective effort, led by Sustainable Finance Geneva (SFG), an association that groups together the city’s main financial players, in collaboration with Swiss Sustainable Finance.
Geneva-based international organisations including the United Nations in Geneva, the World Business Council for Sustainable Development (WBCSD), and the Financial Center for Sustainability (FC4S), are also involved - as are three Swiss federal departments including economic affairs, the finance ministry, and the department of foreign affairs.
The ambition has been set, the bar raised high, and after already having to postpone the summit by a year there’s no time to waste. The organisers last Thursday launched a call for projects and want people from all relevant sectors to get involved in activities ranging from workshops to panel discussions, training sessions and networking events.
The three themes of this year’s event: impact and transparency, including the latest developments relating to ESG disclosure rules and taxonomies; supply and demand mismatch, or how to rethink mainstream investment and drive more capital into sustainable projects; and fintech solutions helping to advance the sustainable development goals (SDGs).
“We don’t want to be just one more conference,” he says. “What is key is to contribute to the priorities and the sustainable agenda in a way that corresponds to what the different actors interested in sustainable finance are thinking about currently, and – hence to organise events and a community week that can focus on the key priorities that will help accelerate this transformation.”
ESG investing: a pandemic reckoning
While the pandemic may have slowed discussions over the last year, the momentum to see the finance sector align itself with global efforts to respond to today’s urgent climate challenge has not, Odier says.
“The pandemic has certainly also played a role, as people have really realised that some of the sources of problems that we face today from a public health point of view might have some links with sustainability or lack of economic or societal models.”
People are becoming aware, for instance, that by managing their savings differently, they can be impactful, he says, while on the political side, governments have been moving forwards in defining frameworks to encourage more sustainable industries and economies.
Last year brought record inflows into sustainable investing, with over $152bn poured into funds focused on environmental, social, and governance (ESG) issues in the fourth quarter alone, according to Morningstar.
For Odier, there is no question that sustainable investment “will be the largest, most important, source of future returns in portfolios” and perhaps also the most effective ways of reducing risk for investors by avoiding the dreaded “stranded asset” syndrome – where values on a corporate balance sheet, such as oil reserves, are written down or become obsolete.
Five years after Cop21, the conference that negotiated the Paris climate agreement, the perception of sustainable finance has changed significantly: “We are seeing better performances at companies that do adopt a business model that fits the sustainability criteria,” Odier says.
He points to Lombard Odier’s Climate Transition strategy, a fund investing in companies that provide solutions to reduce, avoid or capture carbon, which returned nearly 67 per cent in its first year. In another step to shift its focus towards sustainable investing, the banking group last week launched four further equity and bond strategies designed to decarbonise investors’ portfolios.
“Market results show that performance is indeed going in the direction of showing additional, or excess returns for sustainable investment. As the regulatory framework pushes in that direction, it will create an additional push on demand,” he said.
How about critics that claim ESG returns are being artificially inflated or overhyped? Those companies or asset managers engaging in greenwashing will be eventually called out, says Odier: “We can see that companies facing difficulties because of the wrong policies or wrong business models will increasingly be penalised by investors. The valuation shocks are significant enough for investors to ensure they avoid such situations.”
On the other hand, those that do adopt more sustainable business models are seeing better performances, he says.
Nevertheless, transitioning companies to more environmentally and socially-focused business models remains new and rocky territory that can quickly cost a chief executive his position, as Danone’s former boss Emmanuel Faber recently discovered.
Where he famously succeeded in changing Danone’s status into a “purpose-driven company”, he also frustrated investors in not meeting financial targets. The yoghurt maker’s activist stakeholder Bluebell stated that Faber “did not manage to strike the right balance between shareholder value creation and sustainability”.
So does that balance between returns and sustainability exist or do investors have to manage expectations? “I believe you can only be credible in these issues if, beyond the message, there's materiality in the action you take,” says Odier.
“The biggest challenge today is how to ensure investments have a material impact on your future results without sacrificing immediate profitability, which will allow you to invest forcefully in sustainable direction long term.”
Take energy companies, for example: “How do you adjust the transition so that you benefit from this needed fossil oil source of energy while building the capacity to become the energy supplier of tomorrow without the negative impact of fossil fuel?” he adds.
External circumstances can help in this transition. “Today, you're not forced to price carbon into your business model. But the day you will have to do it, it will shorten your transition period very dramatically. The cost of production will increase tremendously,” Odier says.
Building new bridges
Back to the summit, its aim will be to address some of these unresolved issues and speed up the financial sector’s contribution to the SDGs, taking advantage of the proximity in Geneva of the UN, the NGOs, civil society organisations “and all those who contribute to defining the instruments”, metrics and other tools needed to redirect money into more sustainable activities, says Odier.
Supported by the Swiss public authorities, the ambition of the summit is also a political one – to continue to position Switzerland as a competitive financial centre, which in today’s world also means leading in the area of sustainable finance.
With the country’s banking sector grappling with significant challenges even before the Covid-19 crisis – including pressure to modernise, meet tighter regulations and increase transparency after decades of banking secrecy, Odier says sustainable finance is an opportunity for the sector “to make a point about its purpose”.
“The financial sector has two basic roles: one is to irrigate the economy and the second is to protect savings. Some of the exuberance of the last 50 years has shown that you can forget that very quickly,” he says.
“Sustainable finance is one way of putting finance back where it should be - at the centre of the economic model and facilitating what is right. And what is right today is to correct our global economic model to make sure that growth continues to be possible, while decoupling that growth from the negative impact it has had in the past.”
With its wealth management expertise and ecosystem of NGOs and international organisations, says Switzerland will be one of a few financial centres and countries where this can happen. “But this must be a concerted effort. It cannot happen only in Switzerland”.