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Analysing business practices is about much more than applying third-party ESG ratings. Our experience has taught us the importance of collecting, verifying and enhancing large amounts of raw data through careful analysis and information exchange with companies. We use our own methodology to score com- panies, study their alignment with best practice in terms of ESG matters, and consider whether they are transitioning to more sustainable business practices.
We have also developed a proprietary ‘CAR’ methodology, which breaks ESG data down into con- sciousness, action and results. In our opinion, this is more valuable than relying on external aggregated ratings because it helps identify companies making genuine progress towards more sustainable busi- ness practices. Using our proprietary ESG/CAR analysis enriches our process because it gives our convertible bond specialists a framework of non-financial information alongside their financial analysis. In turn, this improves the ability to assess the risks and opportunities associated with a company, ultimately leading to better-informed decisions.
Impact measures Lastly, we look at what impact measures the company is undertaking by analysing, for instance, a com- pany’s carbon emissions and water consumption. This helps us to assess how companies are trying to reduce their economic risk in a carbon- and water-constrained economy. In turn, this gives us a better understanding of their resilience to the future path of regulation.
This third pillar homes in on a company’s ability to take advantage of transformative structural trends, or sustainable business models. We see demographics, climate change, natural resources, the digital revolution and inequality transforming the global economy. These trends are particularly relevant in the context of assessing the equity option of a convertible bond as they speak to the likely long-term growth of the issuer’s share price, and thus the value of the option.
Drivers of investment risk and return continue to evolve. At Lombard Odier IM, we strongly believe that all three pillars need to be combined to deliver a better investment outcome for clients. Sustainability considerations cannot be optional when making investment decisions. We have implemented our sus- tainability approach across a range of disciplines from equity to fixed income, in each case in a manner that we believe best suits each strategy.
Contacts: Ritesh Bamania (Head of UK institutional clients and solutions) +44 20 3206 6277 Marek Siwicki (Head of global consultants) +44 20 3206 6106
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May–June 2019 portfolio institutional roundtable: ESG 21
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