Twenty years after launching our first responsible investment strategy, environmental and social factors are now embedded in decision-making as investors better understand the challenges the world faces.
Investing sustainably is a core part of Pictet’s ethos. Today we see more demand for our services and insights in this area than ever. The recent decision by the US Business Roundtable, a group of chief executives from major American corporations, to commit to stakeholder value in place of shareholder value is the latest example of environmental, social and governance (ESG) going mainstream. Obviously different people have different ideas about what it means to invest sustainably. Our job is to guide them.
Pictet set out on this journey in 1999, when we launched our first sus-tainable & responsible investment (SRI) strategy. These investments were driven by investors’ preference, moral values and desire to exclude some sectors and company types from their portfolios. As time has gone on, we have embedded a range of investment solutions. For example, in 2000 we launched a strategy that invests in water, the first of its kind.
“Now we help all investment teams to further integrate environmental, social and governance factors into their investment decisions.”
Four years ago we realised we could share the knowledge we had gathered through our SRI strategies with all of Pictet’s investment teams. Now we help all investment teams to further integrate environmental, social and governance factors into their investment decisions in addition to the financial analysis and management evaluation they have always carried out. We work as a support function to gauge the emerging science and data such as the exposure to climate risks. Today PAM integrates these criteria across 80 per cent of our asset management, rather than just operating on a product-by-product basis. Ultimately it is also about increasing transparency around the thought process our analysts and managers have when factoring non-financial risks and opportunities into their decision-making.
For institutional clients we offer strategies with binding com-mitments on ESG. For example, a portfolio manager will commit to investing in companies that provide solutions to environmental and social problems such as climate change, water scarcity or poor nutrition. Other strategies are only investing in companies that are ‘best in class’ ESG performers. These strategies are about 10 per cent of our assets. Non-binding commitments are slightly different and more widespread. Greenhouse gas emissions and employment standards can be used as a lens to identify ‘hidden’ risks. Portfolio managers might still invest in the worst-ESG-rated stocks but should be remunerated for the added risk and engage with problematic companies in an attempt to improve the situation.
In wealth management there is a different dynamic. In the past clients would invest with one hand and do philanthropy with the other – essentially putting some of their profit into good causes no matter where that profit had been made. What ESG breeds is collective understanding of the reality that there should be a strong alignment of how we run our businesses, our investments and the causes we support.
There is much better understanding of the systemic challenges the world faces. So rather than working towards creating a pile of money at the end of their lives, clients are conscious that major cities are choked with pollution, and algae blooms or ocean acidification are killing marine life and rising inequality is leading to social unrest. They are asking questions of themselves and their investments. Our next generation of clients are born into this concern and brought up with a much more pressing need to have a positive impact.
“Once it would have sounded like an odd thing for an asset manager to say, but clients don’t always put the financials first.”
Hence the importance of measuring and reporting back to clients the environmental and social impact of their portfolio and then starting the conversation about whether they would like to transition to a portfolio more aligned with their convictions.
Once it would have sounded like an odd thing for an asset manager to say, but clients don’t always put the financials first. One of the fastest-growing categories within sustainable finance is im-pact investing. This might involve backing a micro finance scheme that is supporting community projects in the developing world. Clients are willing to give up some of their returns if they know there are added benefits environmentally and socially.
However, our experience is that following an environmentally friendly strategy can also yield a superior track record. Because these stocks are linked to powerful trends such as sustainability, demographic development or technology development they can prove to grow faster than the wider economy. In addition, because these strategies are tangible to clients, they tend to stay in theme through difficult markets, benefiting from the rebound and avoiding locking in losses. It is important to appreciate performance over the cycle. Because we take a long-term view, ESG makes intuitive sense. And the benefit of taking a thematic approach is that our portfolio managers can drill down and become experts in a particular industry even if it operates globally. For example, in the water sector we have developed in-depth knowledge of national regulation over the last 20 years.
Since the Paris climate accord in 2015 and the agreement of a set of goals that include limiting global warming to 2 degrees, there have been government efforts that support our work. The European Commission’s action plan on sustainable finance, adopted last year, has three main objectives. It aims to redirect capital flows towards sustainable investment, manage financial risks stemming from climate change and foster transparency and long-termism in financial and economic activity.
Because investment in sovereign debt is widespread, the dialogue has also shifted from companies to countries. We can apply ESG dimensions at national level to support long-term economic growth, and we are not alone. In 2016 the World Bank’s International Finance Corporation arm launched a forest bond that raised USD152m to counter deforestation and gave investors the option of getting repaid in either carbon credits or cash.
“Active ownership is a natural extension of active management because we have the choice to vote with our feet, whereas passive strategies can’t do that.”
It is important that we can measure success. We have an established record for tracking the impact of our environmental strategies, even though there are still too many standards to follow. It can therefore be hard to compare indicators such as the carbon footprint of a portfolio. The truth is that we are only as good as the data we are able to collect, and company reporting standards need to be improved. That can be harder to source if we are looking to measure social benefit or a particularly local impact. As an industry we work together with the companies in which we invest to try to identify those material data points. Technology is helping us to capture and understand the relevant data. Satellites can track some environmental degradation for example – and that information can be collected independently of the company or country.
Active ownership is a natural extension of active management because we have the choice to vote with our feet, whereas passive strategies can’t do that. There has been a steady increase in the number of shareholders that engage directly with company management over recent decades. Pictet takes its responsibility seriously and votes its shareholdings at every annual shareholder meeting it can.
Sometimes if we think a com-pany could improve how it is go-verned or tackles environmental and socal risk, we are a lone voice. If the holding in a small or mid-cap stock is significant, it may make sense to act on our own because we have sufficient weight. But worse than being alone is not being effective.
We think it is important to exchange views with other investors, and that is where the benefits of collaboration come into play, especially for investments in larger companies.
Almost a year ago, Pictet took a public stand on weapons. In partnership with Swiss Sustainable Finance, an industry Group committed to advancing responsible investment, we called on index providers to exclude the makers of controversial weapons – such as cluster munitions and landmines – from global indices. Such investments already breach several national and international human rights conventions, but because the companies involved are members of various indices, index followers and passive strategies have no choice in the matter and are inadvertently contributing to their financing.
Our campaign has strong support, particularly in Europe. With 170 signatories representing more than USD9 trillion of assets, we think the index providers, including MSCI, S&P, Stoxx and FTSE, are listening. Now we need to attract more like-minded investors in Asia and North America to the cause. We think this campaign will step up by the end of the year.
“Our work in this area reflects how ESG issues have spread through Pictet over the last 20 years.”
Close followers and clients of Pictet will not be surprised by our stance. Since 2011 we have enforced a strict exclusion policy on companies involved in controversial weapons for all of our actively managed strategies. That ban extends to 60 companies today. But we knew that there was still more work to be done and a bigger campaign to be waged.
Our work in this area reflects how ESG issues have spread through Pictet over the last 20 years. They began in a modest way but have grown to impact most of our assets under management. Through advocacy such as the weapons initiative, but also through more targeted engagement with ‘problematic’ holdings, we can influence best practice in other firms too.
Executive pay continues to be a difficult issue to get right. We are mindful of the balance required to attract and retain high-quality executives, but we are also aware of the factors that drive bonuses. Are these factors based on long-term metrics or are short-term metrics providing an incentive to manipulate the accounts? For example, management might be tempted to increase earnings per share by reducing the number of shares through buybacks, but this does not always deliver long-term value.
Pictet is set up in such a way that we look to the long term. The average tenure of our partners is 25 years, which marries up well when we are thinking about sustainability. Compared to many other firms, our partners are still likely to be with the bank to see the consequences of their decisions over many years. We also try to practise what we preach in the way we run Pictet on a practical level. Our headquarters in Geneva has solar panels on the roof as well as beehives. This means, of course, that there is even more of a ‘buzz’ around sustainability.
Marie-Laure Schaufelberger began her career at Pictet in 2007 in the Media Relations and Public Affairs team. In 2014 she moved to Pictet Asset Management’s Thematic Equities team as a Product Specialist and later became Head of Stewardship, where she coordinates Group policy for Sustainability and Responsible Investment. She holds a Master’s in International Relations from the Graduate Institute of International and Development Studies in Geneva, and is a CFA charterholder.
Eric Borremans began his career in 1992 as an environmental consultant. Before joining Pictet Asset Management in 2013, he spent eleven years with BNP Paribas Investment Partners in Paris, where he was in charge of ESG research and proxy voting, SRI product development and Corporate Social Responsibility (CSR). Before that he was Head of Research Services with Sustainable Asset Management (Zurich) until 2002. Eric holds a degree in Finance from Solvay Business School (Brussels University) and an MBA in Environmental Management from Columbia Business School (New York).