Sustainable Finance Disclosure Regulation (SFDR)
What are sustainability risks ?
Sustainability risk is the risk arising from any environmental, social or governance events or conditions that, were they to occur, could cause a material negative impact on the value of the investment. Specific sustainability risks will vary for each investment, and include but are not limited to the following:
Environmental risk: The risk posed by the exposure to issuers that may potentially be causing or affected by environmental degradation and/or depletion of natural resources. Environmental risk may result from air pollution, water pollution, waste generation, depletion of freshwater and marine resources, loss of biodiversity or damages to ecosystems. Environmental risks may negatively affect the value of nvestments by impairing assets, productivity, or revenues, or by increasing liabilities, capital expenditures or operating and financing costs.
Transition risk: The risk posed by the exposure to issuers that may potentially be negatively affected by the transition to a low carbon economy due to their involvement in exploration, production, processing, trading and sale of fossil fuels, or their dependency upon carbon intensive materials, processes, productsand services. Transition risk may result from several factors, including rising costs and/or limitation of greenhouse gas emissions, energy-efficiency requirements, reduction in fossil fuel demand or shift to alternative energy sources, due to policy, regulatory, technological and market demand changes. Transition risks may negatively affect the value of investments by impairing assets or revenues, or by increasing liabilities, capital expenditures or operating and financing costs.
Physical risk: The risk posed by the exposure to issuers that may potentially be negatively affected by the physical impacts of climate change. Physical risk includes acute risks arising from extreme weather events such as storms, floods, droughts, fires or heatwaves, and chronic risks arising from gradual changes in the climate, such as changing rainfall patterns, rising sea levels, ocean acidification, and biodiversity loss. Physical risks may negatively affect thevalue of investments by impairing assets, productivity, or revenues, or by increasing liabilities, capital expenditures or operating and financing costs.
Social risk: The risk posed by the exposure to issuers that may potentially be negatively affected by social factors such as poor labour standards, human rights violations, damages to public health, data privacy breaches, or increased inequalities. Social risks may negatively affect the value of investments by impairing assets, productivity, or revenues, or by increasing liabilities, capital expenditures or operating and financing costs.
Governance risk: The risk posed by the exposure to issuers that may potentially be negatively affected by weak governance structures. For companies, governance risk may result from malfunctioning boards, inadequate remuneration structures, abuses of minority shareholders or bondholders’ rights, deficient controls, aggressive tax planning and accounting practices, or lack of business ethics. For countries, governance risk may include governmental instability, bribery and corruption, privacy breaches and lack of judicial independence. Governance risk may negatively affect the value of investments due to poor strategic decisions, conflicts of interest, reputational damages, increased liabilities, or loss of investor confidence. Consequent impacts to the occurrence of sustainability risks can be many and varied according to a specific risk, region, or asset class. Generally, when a sustainability risk occurs for an asset, there will be a negative impact and potentially a partial or total loss of its value. However, the integration of sustainability risk analysis should mitigate the impact of such risks on the value of the investments and could help enhance long-term risk adjusted returns for investors.
How does Pictet integrate sustainability risk?
The Pictet Group entities integrate sustainability risks in the investment decision-making process, in investment advice and insurance advice for products they actively manage, subject to product and service specificities and to locally applicable regulations. Across research, investment activities, risk management and advisory services, we place emphasis on the inclusion of high-quality environmental, social and governance data when evaluating corporate issuers. To this extent we have developed a proprietary ESG Scorecard that provides a focused view of both ESG risks and opportunities. Our ESG Scorecard is based on a curated set of the most material data points, across four pillars: Corporate Governance, Products & Services, Operational Risks, and Controversies.
Similarly, for external-manager selection we systematically address ESG issues with our investment partners and encourage improvements of current practices, if necessary. We have developed a dedicated ESG questionnaire that covers our investment partners’ engagement to ESG, the level of ESG integration in their processes or operations as well as reporting and transparency issues.
Bank Pictet & Cie (Europe) AG and branches apply the core tenets of good company ownership, with a focus on the investee company’s corporate strategy, the company’s management team and its effective leadership, its financial strength, its capital structure, the fair valuation of issued securities, sustainability risks & opportunities and adverse impacts of investments on society and/or the environment.
Bank Pictet & Cie (Europe) AG has adopted a Responsible Investment Policy that describes how the Bank integrates sustainability risks in its investment process (ESG Integration), implements responsible investing strategies and performs its active ownership responsibilities on behalf of its clients, in full acknowledgement of their rights as investors and for their benefit. This includes the monitoring of investee companies, proxy voting and issuer engagement.
How does Pictet integrate sustainability risk in remuneration policies?
The remuneration policy integrates sustainability risks by way of the policies and procedures which Pictet employees are bound to respect. Compliance with internal (Policies & Procedures) P&Ps form a part of an employee’s annual review, which may include ESG limitations and taking into account sustainability risks based on the type of products or services selected by clients served by that employee. In addition, Pictet employees are held to the Group’s general engagement on sustainability and responsible investing, as relevant to their function.
How does Pictet integrate Principal adverse impacts?
Bank Pictet & Cie (Europe) AG considers the principal adverse impacts of investment decisions on sustainability factors in its portfolio management and advisory activities, where relevant, through a combination of portfolio management decisions, active ownership activities and the exclusion of issuers associated with controversial conduct or activities. Consequently, Bank Pictet & Cie (Europe) AG and its branches are working to enhance the internal framework in line with Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector by gradually integrating the consideration of adverse impacts on the environment and society in their due diligence processes together with the relevant financial risks and relevant sustainability risks. Therefore, further policy information on the identification and prioritization of principal adverse sustainability impacts will be published in line with the finalization of the applicable Commission Delegated Regulation. This will include information such as the carbon intensity of investments and the severity of social and environmental controversies. Ultimately, this will help reduce these adverse impacts over time.
The Pictet Group has committed and adhered to a number of international and Swiss codes for responsible investment. In addition, as outlined in the Group’s Sustainability & Responsible Ambitions 2025, it is our intention not only to consider but also, where possible, to mitigate material adverse impacts that may exist through our investments and operations. In the area of climate change, arguably the defining issue of our time, the Group has taken a number of steps aimed at driving positive change, fostering the transition, addressing climate risks and excluding issuers. A description of these steps can be found here. We are currently in the process of ensuring all Pictet Group entities are effectively covered by, and adhere to, these commitments. We are also reviewing the data available and defining material metrics for disclosure. We expect to be able to comply by the end of 2022.
The Pictet Group’s EU entities other than Bank Pictet & Cie (Europe) AG and Pictet Asset Management (Europe) SA adhere to the objectives that Regulation (EU) 2019/2088 sets out with regard to principal adverse impacts but have chosen not to commit to comply for the time being. The main reason for not considering adverse impacts is the lack of sufficient data and data of sufficient quality to enable them to define material metrics for disclosure. The relevant Pictet Group entities intend to monitor the industry position closely and to update their approach in due course as the industry position evolves and further regulatory guidance is made available.
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Bank Pictet & Cie (Europe) AG
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