Lombard Odier’s Natural Capital fund, which launched on Monday, offers investors a chance to invest for the first time in a fund whose sole focus – aside from generating an outsized return on equity – is to profit from the regenerative power of nature.
Created in partnership with the Circular Bioeconomy Alliance (CBA), a pan-European initiative, and with the support of His Royal Highness the Prince of Wales, the fund’s main aims are simple enough.
Nature is an efficient machine, absorbing inputs and emitting outputs in an efficient cycle. Humanity interferes and messes up that elegant mechanism.
The fund raised $400 million in seed capital on its launch. It was dreamed up by the CBA and Christopher Kaminker, who joined Lombard Odier Investment Managers (LOIM), the asset management division of the Swiss wealth and asset manager, in July 2019 as its first head of sustainable investment research and strategy.
Analysts and portfolio managers at LOIM began by identifying 4,000 publicly traded companies. That number was whittled down to 550, which the research team covers in its thematic universe of stocks, which in turn has been refined to what Kaminker describes to a “high-conviction” roster of 40 to 50 firms.
Natural Capital will be listed in Luxembourg as a Ucits (Undertakings for the Collective Investment in Transferable Securities) fund.
These are what might be described in ecological terms as the ‘best of the best’: mid-cap companies with an ethical worldview and production record, capable of offering a return on equity many times higher than the main index.
“The focus is on firms that significantly outperform their peers, and who will disrupt competitors in the mid-cap and ultimately the large-cap space,” Kaminker says.
The key here is that mainstream capital markets are only starting to pay attention to this shift to the circular bio-economy
Christopher Kaminker, Lombard Odier
He believes that what this select group of stocks offers, is “not priced in yet by investors. The key here is that mainstream capital markets are only starting to pay attention to this shift to the circular bio-economy.”
Underlying this is the simple but compelling notion that most investors focus on innovators who disrupt traditional models or supply chains – think of Airbnb or Amazon – and in the process generate outsized and accelerating profits.
But the next big disruptive moment, logic demands, will come in the grey area where humans and nature interact and overlap, as we seek ways to undo damage wrought on the environment and find more efficient uses of capital and natural resources.
Kaminker notes that while so-called ‘natural capital’ funds, which invest directly in the likes of primary forests, already exist, Lombard Odier’s offering is the first public equity fund of its kind.
Making the grade
His team has clearly sweated over the final short list of chosen stocks, taking care to choose firms that are widely dispersed, both geographically and sectorally.
Borregaard, a Norwegian company that makes bio-materials and bio-chemicals that replace oil-based products, made the list. So did Cascades, a Canadian packaging firm founded in 1964 that pioneered the ‘circular economy’.
Hexagon, headquartered in Stockholm, makes precision measuring equipment, while Advanced Drainage Systems, in Ohio, makes industrial pipes and tackles water management and pollution problems. Both made the grade.
Fund managers took care to include a few larger-cap firms undergoing a shift toward a lower-impact corporate life. Among the chosen is Groupe SEB, a French conglomerate that owns cookware brands Moulinex and Rowenta.
Groupe SEB has put repair – making its products easy to fix and to find spare parts for, rather than seeking to sell the consumer a new product – at the heart of its operating model. Many of products now come with a 10-year warranty.
There seems to be a dawning realization among incumbent or legacy companies, particularly those poorly positioned in the face of the new market forces, that they “could have the rug pulled out from under them” by investors, notes Kaminker.
Again, the point is not just that each of these firms has a model that is sustainable and that meets the demands of environmental, social and governance rules, however rigorous. That is assumed. Rather, the chosen few are innovators and disruptors who have found ways to harness nature to make consumption less wasteful.
They might pioneer regenerative forestry, fishing or farming practices, specialise in bio-materials, or are simply companies that generate zero waste. Hence their position at the heart of a circular economy, one that people, companies, lenders and governments have to move to being a part of.
New models
As Kaminker puts it, moving to a new economic model is “not about finding new sources of capital to fund growth. It’s about shifting capital from where it is today to these new growth opportunities – and then backing them.”
It’s where the world is heading anyway. There is no global agreement on biodiversity, but one is likely to be in play – and likely signed – at the rescheduled UN Convention on Biological Diversity, to be held in the Chinese city of Kunming in May 2021.
Biodiversity is at the heart of the European Commission’s new €1 billion ($1.18 billion) green deal. A new plastics tax is scheduled to come into effect across the European Union on the first day of 2021.
“A lot of policy and market forces are pushing in this direction,” notes Kaminker.
What of profits? This is a question often and rightly raised by investors concerned that being good means ceding returns.
Kaminker pushes back against this. He tips Lombard Odier’s Natural Capital fund to generate not lower but “higher returns: the target 2.5% to 3% per annum over the reference index, with an expected tracking error of 5% to 6%”.
He adds: “Nature has had a two billion-year head-start on us, but we are finally starting to catch up.”
Not before time.
