Our impact on climate as an investor
Irrespective of what we are doing to reduce the environmental impact of our own operations and investments, we know our biggest impact relates to how we actively manage our clients’ assets and the commitments we make in this regard.
Our actions and commitments
The world has to come together around a common ambition to limit warming to 1.5˚C by 2050 or earlier to mitigate the worst effects of climate change. In this context, Pictet has aligned around a shared investment philosophy concerning the topic of climate and developed a set of actionable climate investment beliefs – underpinned by robust research and following months of iteration across investment teams. The result of this work is two-fold.
We believe that climate change has a material impact on the price of assets. In the spirit of pursuing investment leadership, we aim to understand this impact to support performance.
We believe that as part of the asset manager/owner community, our investment activities have an impact on climate change outcomes. We therefore have a responsibility to understand how to foster positive impact and mitigate negative impact.
Net Zero Initiative and SBTi Business Ambition
A natural part of this journey has been joining the Net Zero Asset Managers Initiative and the complementary SBTi Business Ambition for 1.5˚C ensuring we set science-based and verified 2030 targets in the course of 2022.
Transparency and independence
As a privately held firm, we have the strength of independence and a governance that holds us accountable to the next generation. While this unique structure does not require the same level of reporting as publicly listed firms, we are especially committed to transparency when it comes to climate and other environmental factors. Transparency will be key to solving the climate challenge. As investors, we depend on the transparency of the issuers in which we invest. Material environmental and social disclosures help us make better capital allocation decisions, and ultimately contribute to the transition.
Task Force for Climate Related Financial Disclosures (TCFD)
This is also why we have endorsed the Task Force for Climate Related Financial Disclosures (TCFD). We use it to strengthen our governance, strategy, and risk management, to measure climate related risks and to assess green investment opportunities. We will progressively incorporate material-TCFD aligned disclosures in our annual reporting.
Signatory of UN Principles for Responsible Investment and for Responsible Banking
As a signatory of both the UN Principles for Responsible Investment and the UN Principles for Responsible Banking, we will continue to drive change within the financial services community and strengthen our policy work around the topic of climate. Locally we support the Swiss CEO4Climate initiative, which calls on the Swiss government to take more meaningful legislative action in support of achieving the Paris Agreement goals. Beyond our borders, we have signed the Global Investor Statement on the Climate Crisis, which is the strongest ever call by global investors for governments to raise their climate ambitions and implement meaningful policies to support investment in solutions to the climate crisis.
We strongly stand behind these commitments. Our close monitoring of the actions being undertaken by the companies we invest in makes us confident that “net zero” greenhouse gas emissions, while difficult, can be achieved by 2050. As active managers, our role is to understand how companies and countries will transition, to track the credibility of their promises and to engage with them to drive progress.
Our interactions with clients
The following four aspects of our interactions with clients and the assets we manage for them underscore how we are concretely addressing the above commitments.
Driving positive change
We have always believed that facilitating the green economic transition represents a significant investment opportunity. In fact, since long before the Paris Agreement was signed, Pictet has been a pioneer in sustainable investments with a range of specific strategies that direct capital towards companies providing solutions to environmental problems. These strategies raised CHF 6.3 billion in 2020 to reach CHF 22 billion in total at the end of 2020. Recently, the Financial Times recognized three investment funds managed by Pictet as either the largest or second largest globally in the categories of “sustainable” and “climate.”
Concretely, these strategies allow our clients to invest in technologies, innovation and infrastructure - such as wind, solar and energy efficiency solutions - that are instrumental in accelerating the transition to a low carbon economy and maintaining global warming to 1.5˚C. In the water industry, where we are an investment leader, the technologies and resource management companies we invest in are absolutely critical to increasing the resilience and adaptation of our societies to climate change.
As part of our Vision 2025, we will continue to develop innovative investment strategies that provide capital to companies which have a positive impact on the environment and society. We are convinced this is the right thing to do for people, planet, and the portfolios of our clients.
Fostering the transition
As active investment managers, our role in helping build a green economy extends beyond channeling capital to environmental technology. It also involves bringing about positive change in corporate behaviour, where a transition to low carbon is possible and needs to be accelerated. This also means ensuring that our natural, economic, and societal systems are resilient to the impacts of climate change if, and when, they arise.
This is why, throughout our investment activities for private and institutional clients, we deploy active ownership, which includes both engagement and voting, with the aim of improving the ESG performance of the companies we invest in.
We continue to scale our engagement for maximum impact. When the companies we own fall short of our expectations in their management of climate matters, we engage either directly or by collaborating with other investors.
We use our voting rights to support these engagement efforts and, where necessary, we escalate our concerns to Board representatives, vote against management or support shareholder resolutions. Depending on the severity of the concern and the issuers’ willingness to adopt accepted standards of best practice, we may divest from the investment.
For some companies, such as electricity producers, the low carbon transition is critical given that power generation represents around 25% of global greenhouse gas emissions. As a result, for our actively managed assets, we expect energy companies to meet the following minimum standards in order to remain investible:
- They may not make new investments in coal-fired power stations
- They must have a credible plan for decarbonisation
- This plan must be compatible with the ambition to contain global warming to 1.5˚C
For nearly all the developed market companies we invest in, this is already a reality, although we continue to monitor and track their progress. For those based in emerging markets, which have a more challenging path to decarbonisation, we are working collaboratively with their management to agree a credible timeframe for transition.
Given the scale of the challenge, we believe the investment community can be more effective if its members work together to achieve common goals. As a result, we have actively supported the Institutional Investor Group on Climate Change since 2013, and are part of Climate Action 100+, an investor-led initiative to ensure the world's largest corporate greenhouse gas emitters take necessary action on climate change. We are also a member of the Farm Animal Investment Risk & Return (FAIRR) Initiative, which engages with companies active in livestock production as they are also large contributors to greenhouse gas emissions. And finally, we support and are working with the Centre for Education and Research in Environmental Strategies (Ceres) to prepare collaborative engagement on the critical topic of water. In the context of the climate challenge, water is a critical element of adaptation in the face of impending climate change.
Adressing climate risks
Addressing climate change is not only the right thing to do for the planet, it is also the prudent thing to do as an investor. We have been integrating ESG factors, of which climate is a key pillar, into our investment process and risk management framework for many years. Today, 75% of the assets we actively manage for clients (private and institutional) are held in portfolios which integrate ESG factors. We will raise that proportion to 100% by 2025.
We are continuously expanding the range of asset classes and indicators we track to better evaluate the threats climate change presents to our portfolios. This enables us to improve the way in which we monitor and control risk and allows us to offer clients greater transparency on how ESG factors affect their investments.
Another way to address climate and other ESG risks is by excluding specific activities from our portfolios. As a matter of principle, we do not believe that exclusion is the best way forward in all cases. Engagement can offer better outcomes in many instances. However, excluding activities that are most harmful to society and the environment can be a useful tool when there is no path to transition or when these activities are incompatible with our core values.
In the area of climate, we categorically exclude companies that generate significant revenue from thermal coal mining from all actively managed assets. This sector has a limited ability to decarbonise and is at high risk of becoming a stranded asset. We also have put in place certain product-specific and firm-specific exclusions.
Overall we believe that exclusion is most useful in conjunction with failed engagement efforts. It serves as a motivation for active participation and improvement from other issuers. A credible threat of exclusion is crucial to successful engagement efforts.