Sponsored article
Sustainability considerations cannot be optional – a practical example
Nathalia Barazal, CIO of fixed income and head of convertible bonds at Lombard Odier IM, and limited partner of Lombard Odier Group
What is sustainability in investments? The definition itself continues to evolve. We see sustainability encompassing financial factors, the running of organi- sations and the viability of the organisation’s business model, to name a few areas.
Market reaction to sustainability issues is also evolving. For us, it is clear that sustainability will impact risks and returns, and it must be incorporated in the investment process. We believe equipping our investment teams with a clear, consistent framework to help evaluate all investment aspects including
sustainability will better inform their decisions; which, in turn, may improve investment outcomes. We set out one example below.
Lombard Odier Investment Managers has been investing in convertible bonds since 1987, with expertise across bull and bear markets. Convertible bonds provide investors with the ability to participate in equity market rallies with a bond floor protection were equity markets to fall - making them an attractive invest- ment in the current market environment.
Our goal has remained steadfast over the decades: to capture the risk-return asymmetry inherent in convertible bonds. Incorporating sustainability helps deliver this goal.
Our philosophy is that companies with a combination of sustainable financial models, sustainable busi- ness practices and sustainable business models will deliver sustainable excess risk-adjusted returns over the long-term. As such, we evaluate issuers relative to sustainability metrics in these three areas, or pillars, in order to maximise the asymmetric return profile inherent in the asset class. For convertibles, this means we incorporate sustainability criteria into evaluating the bond and equity option aspects of convertibles, in order to maximise risk-adjusted returns.
Financial viability We firstly assess issuers based on their financial models. Here, we consider a company’s financial viability and if it represents an attractive opportunity to generate returns. Convertibles embed exposure to a company’s share price, therefore our assessment focuses on the potential for the company’s share to generate excess returns. The bond element of convertibles, meanwhile, exposes investors to that company’s credit risk. This means we must consider an issuer’s creditworthiness. As such, we conduct fundamental analysis on credit quality, looking at a company’s leverage, the upcoming maturity of its debt, its capital structure, its cash-flow, sources it can tap for repayment and how it remunerates inves- tors for the risk taken.
For the equity portion of exposure, we look at the attractiveness of the sector, the equity price, the share volatility, the management strategy and the company’s positioning for competitive advantage. We also seek the most balanced (or asymmetric) bonds according to strict technical factors - therefore we exam- ine the convertible’s convexity, its yield and how the equity optionality is priced.
Delivering long-term value The second pillar addresses how businesses behave in relation to their broader ecosystem of stake- holders. We believe business practices can drive operating performance in the same way as costs and revenue. In our view, companies that show solid performance on environmental, social and governance (ESG) issues will benefit from stronger growth over the long-term, not least because they can avoid the pitfalls of potentially value-destructive controversies.
20 May–June 2019 portfolio institutional roundtable: ESG
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32
