Putting Sustainability At The Core Of Strategy – In Conversation With Lombard Odier

Tom Burroughes

9 October 2023

It may seem hard to believe, given the pace of news and enthusiasms these days, but the discipline known as ESG investing has been around for more than two decades. And for all the controversies out there, such as how soon governments can realistically banish cars powered by fossil fuels, ESG appears to be entrenched.

An organisation that says that sustainability is in its corporate “DNA” is Lombard Odier, the Geneva-headquartered private banking group. This news service caught up with Duncan MacIntyre, UK CEO Lombard Odier, on a hot afternoon in London and when temperatures in Europe were unseasonably high. The state of the climate was very much front of his mind.

“We are absolutely committed to the sustainability agenda… we are at a moment of environmental transition. We are clear that sustainability equals investment performance,” MacIntyre, who leads teams across London, Geneva, Zurich and the Bahamas, said.

The bank uses a particular approach when it includes sustainable investments in clients’ portfolios. It has a two-dimensional sustainable investment framework. Referring to a chart, MacIntyre described how, on a vertical axis, is a measure of whether an investment has the potential to make money or not; the horizontal one measures how aligned it is with the sustainability goals from a regulatory point of view.

“We can use two examples to illustrate this. One could be an electric vehicle company, which is both making money and is well-positioned on the regulatory alignment axis. This would make it a `green/green’ stock,” he said. “However, green cement could be a `green/grey’ stock; the horizontal axis may be `green’ from a sustainability point of view, but as far as the market is concerned, financial performance is not yet convincing or commercially viable.”

“We are able to do this across our investment convictions held in our client portfolios,” MacIntyre said.

The term “sustainability” is very much in the air, not least because of political controversies. WealthBriefing spoke to Lombard Odier a few days before UK prime minister Rishi Sunak postponed the ban on selling new internal combustion engine cars by five years, until 2035. In Germany, the country is re-starting defunct coal-fired power plants to keep the lights on over the winter . In the US, the Biden administration has showered trillions of dollars on “green” investments. Russia's invasion of Ukraine in February 2022 threw some assumptions about energy security into the air. Scorching hot weather in Europe and other places, for example, was a reminder of what is at stake.

Propriety tools
As with its approach to IT, Lombard Odier likes to develop its own in-house approach to ESG, although it does draw on external advice. Lombard Odier does not try to do everything, MacIntyre said. “Wealthy people understand the value of specialisation and that’s a good place to be.”

Even so, having one's own approaches to areas such as ESG can be a differentiator – an important quality as banks compete for HNW and UHNW business.

Lombard Odier has developed its own methodology for investment. For example, three years ago Lombard Odier explained its approach to ESG: “All our portfolios focus on sustainable financial models and integrate companies that provide excess economic returns, capital efficiency and cash flow generation. We have a preference for structural growth over cyclical growth, which enhances the robustness of our portfolios to key sustainability challenges and the associated upside opportunities. We also prefer stocks with strong ESG ratings and perform our own reweighting of ESG based on a proprietary CAR model.”

Current events continue to provide tailwinds for ESG.

MacIntyre said that policy action such as the US Inflation Reduction Act, EU changes and reforms, and investment in China are building momentum in the environmental transition.

Is there a need, however, to reconsider the very term “ESG” as it can confuse some clients?

MacIntyre agreed that the term is problematic: “It seems to be quite an outdated metric, based on a simplistic scoring grid. ESG is about 20 years old.”

Levels of quality
Away from the ESG/sustainability area, MacIntyre reflected on the big changes happening in Swiss and wider private banking and wealth management. And while he did not refer by name to specific firms , he was at pains to stress that Lombard Odier sits at the most prestigious end of offerings.

The gap between “high-end” investment houses like Lombard Odier, which offer a truly tailored service, and other private banks is getting wider, he said, adding that if Lombard Odier were a watch brand, it would be a premium, bespoke one such as Patek Philippe.

The British-Swiss connection
With the UK and Swiss governments continuing to enhance free trade arrangements – both countries are outside the EU – it was a chance for MacIntyre to reflect, as a UK citizen, on the benefits his bank had by having a strong connection with both nations. “This axis is good to be in and we are seeing that very strongly. We aren’t in competition with our Swiss colleagues but operate as one team,” he said.

There is a battle for talent in wealth management, particularly as intergenerational asset transfers of billions of dollars and the equivalent are often on the agenda. And that means banks such as Lombard Odier must grow their own talent.

MacIntyre talked about the firm’s associate banker programme. “The graduate training programme offered by Lombard Odier is specifically designed to develop the relevant skills and experience to preserve and grow our clients’ wealth over the long-term. This requires close collaboration with our clients’ wider network of advisors, including lawyers and accountants.”

With associate bankers, the firm takes people from a variety of work backgrounds; they must understand the investment proposition and are trained in all parts of the bank's operations.

However bankers are trained and developed, they must learn to work in a highly regulated environment where professionalism is expected as the norm.

MacIntyre thinks that there is a convergence in rules around the world. There has already been an agreed equivalence of qualifications between the UK and Switzerland in some sectors, for example.

A decade ago, the UK enacted the retail distribution reforms, which pushed advisors towards fee-based service and away from trail commissions to make the sector less biased and subject to conflicts of interest. The thrust of those regulations could be to reinforce the notion that “we are coming back to the point that my word is my bond, with individual responsibility,” MacIntyre added.