Wealth management: Lombard Odier leads an impact revolution
Lombard Odier may be a traditional Swiss private bank, but its investment in technology and impact investing has made it an example of a next generation wealth manager.
It has not been easy for the traditional Swiss private banks to find a home in an era where the terms ‘secrecy and ‘offshore’ are no longer popular sales pitches and where technology and modernity are.
Lombard Odier, however, is no stranger to reinventing itself to evolve with the times. It has had plenty of practice since 1796. Indeed, just two years after the bank was established, its founder, Jean-Gédéon Lombard, became one of the 11 signatories to a treaty ceding Geneva to Napoleon’s French Republic, requiring an entirely new set of rules for banking.
These days Patrick Odier is the senior managing partner at Lombard Odier and ‘Darier Hentsch’ has dropped off the bank’s name save for branding. The Lombards and Dariers retired a few years ago leaving Odier and Christophe Hentsch among the six managing partners. But the focus on long-term sustainability is one that the firm has retained.
It is this value that Odier says enabled the bank to manage the financial crisis and invest and innovate while others were distracted. There were 331 banks in Switzerland in 2006, now there are 266 – of which 228 were making a profit in 2015, according to the latest data available from the Swiss National Bank.
Lombard Odier has seen client assets increase. Last year it added SFr5.3 billion ($5.32 billion) in new client assets and reported profits of SFr124.5 million. The bank is also one of the best capitalized banks globally. At the end of the year its Basel III common equity tier-1 ratio stood at 29.3%.
Odier says there are challenges facing the whole private banking industry and not just that of Switzerland: “The industry needs to give better advice. Banks need to have a view and a conviction on what is happening. We need to focus on how we interact with clients – how do we listen, what questions are we asking? At the same time, we are all tackling how to integrate technology into the day-to-day service offerings and looking for greater efficiency that benefits the clients and not simply our businesses.”
He says that tackling these challenges is nothing new for Lombard Odier. “We’ve been in existence a very long time; sustainability is part of our fabric.”
It took a while to develop the skills to be able to find investments where risk and return were not compromised in the name of impact or sustainability - Patrick Odier, Lombard Odier
Odier however points to several factors that have enabled the bank to weather storms, including the latest crisis. One of these is that its business is simple. “We all know the financial sector has numerous situations where conflicts occur, but we have always left well alone any of those areas and aligned ourselves with our clients’ interests.”
This kind of rhetoric is not unusual among private banks, but it is a claim that Lombard can make with some justification; it has confined its businesses to wealth management. “We don’t consider retail banking or even banking for the super affluent, which means we can focus on wealth management only, and clients like our own families,” he says.
How to diversify revenues within a focused business line, however, was key for the bank, so it welcomed the technology revolution years ahead of many of its competitors. In 2000, the bank opened a wealth management technology business, where it provides a turn-key platform for smaller wealth managers.
“We had developed a reputation for our strong proprietary front-end technology system, so when turbulence from the markets was pushing middle-sized and smaller banks to either invest in their platforms, to buy, to look for standardized platforms, or to merge with other banks, we decided to open up and provide an alternative,” says Odier. More than a dozen institutions now use Lombard Odier’s platform and SFr69 billion of its total SFr224 billion assets are from technology and banking service clients.
“That gives us additional revenue, but also it pushes us to be better,” says Odier. “When you’re serving clients that have some of the most complex wealth management clients themselves, then you need to adapt and develop the functionality. It becomes a benefit to us, to our private banking and asset management clients as well as to our technology clients.”
It is not just in technology that Lombard Odier has been investing, however. When Odier speaks about sustainability, it has another meaning, because the bank has steadily been building up a presence as a leader in impact investing.
“It started perhaps 20 years ago. We noticed our own families and clients wanted to be more idealistic in their investments, excluding certain industries from their portfolios,” says Odier.
So in 1997, the bank introduced a methodology for environmental, social and governance (ESG) screening. A year later, it began microfinance. From there, it continued to build on client demand, with triple bottom line investment criteria, adding qualitative metrics specifically designed to rate and select portfolio companies’ policies with regard to ESG issues. When sustainable investing began to emerge, Odier says the bank sat down with clients to hear how they wanted to allocate their capital differently.
“It took a while to develop the skills to be able to find investments where risk and return were not compromised in the name of impact or sustainability, but now we have the capabilities to find such investments within even the more-traditional asset classes of equity and fixed income,” he says.
In April this year, the bank launched a global responsible equity fund. Lombard Odier also recently developed credit analysis to incorporate positive screening and sustainable investing within its credit portfolios. “In the recent past, we have seen the role of fixed income instruments change from providing liquidity, diversification and returns, to a role of simply trying to diversify risk and that is all, yet many portfolios still have large portions of bonds. So, we started to think about how we can more deliberately look at credit and began to look to the green bond market,” explains Odier.
Green bonds are now a fast-growing market, and this year the bank formed a partnership with Affirmative Investment Management (AIM). AIM launched in 2014 as the first fixed income asset manager dedicated to offering strategies that target positive climate and social impact. Together the two firms launched the Global Climate Bond Fund, which identifies investments that provide positive climate-related outcomes in renewable energy, resource efficiency, land management, water resources, physical infrastructure and the marine environment.
Bertrand Gacon heads Lombard Odier’s Impact Office, which was started in 2016 and now has five employees. He says that the private banking industry is in a unique position to help propel impact investing and sustainable investing: “If we want to move the needle in social and environmental finance, then we need to develop solutions that can be adopted by a large number of clients.
"Private banks play a key role in having access to asset owners like families that want this type of investment, as well as the capabilities to identify those solutions on the ground.”
Gacon feels it is the biggest trend in the private banking industry. “Impact investing is no longer a niche but becoming mainstream. We are moving towards a place, in perhaps 10 to 20 years, where an entire portfolio will be an impact portfolio. Investment strategies will comprise risk, return and impact.” He says that while Europe has typically been the domain of socially responsible investing (SRI), impact investing and environmental finance have found appeal across the globe. “As the next generation, who care deeply about having a positive impact, inherit wealth, the demand is going to grow exponentially,” he says.
Sensing that ESG ratings were no longer sufficient in measuring a firm’s impact, Lombard Odier developed its own layer of analytics called CAR (Conscious/Actions/Results). “It helps us understand what companies are doing to move towards environmental goals,” says Gacon. “There’s a large amount of greenwashing that goes on; we wanted to be able to drill down and find the companies that are really making changes and not the ones who just talk a good game. Are they measuring carbon emissions? But also, are they taking action – such as changing their fleet of vehicles to electric vehicles?”
It is challenging to create standardized metrics and develop research that can truly capture a firm’s environmental efforts. Even in the selection of environmental funds, Gacon says there is a lot of digging that has to go on to ensure the manager is being sincere. “Some fund managers, for example, will wait until the last week of a year to remove high-carbon-intensity stocks so they can report a clean portfolio. We check how long those stocks were kept in the portfolio, so we can then make an informed decision. This is what we want to give our clients: the power to make impact decisions.”
Gacon says that the bank is attracting new clients because of its experience and commitment to impact investing. “At the moment, many private banks are talking about impact investing, but not offering a way for their clients to invest. As an industry, we’ve been talking about it for too long and have too few products to show clients. Those with concrete solutions will be the ones that clients seek out.” Over the last three years, the bank’s ESG and SRI assets have grown 31% on an annual basis.
More than just a trend, Odier says it is almost a responsibility for wealth managers to direct assets into investments that are socially and environmentally responsible. “As an industry, we need to rethink private banking. Our purpose has been lost. Really, we are allocators of capital. If we can ensure that we are allocating capital to what is wanted or needed for tomorrow’s society, then that will give the financial sector a role it has not played for a long time.”