Progress on clients’ assets
As an investor, our biggest impact lies in how we manage assets on behalf of our clients.
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, the vast majority of the assets we actively manage for clients (private and institutional) are held in portfolios that integrate ESG factors. Going forward, we will continue to improve and deepen this integration into our investment and risk processes.
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.
Responsible products and solutions
We have always believed that facilitating the green economic transition represents a significant investment opportunity.
With a range of strategies that direct capital towards companies providing environmental solutions, Pictet has been a pioneer in responsible investments. These include our Global Environmental Opportunities, Water, Clean Energy Transition and Timber funds, which raised CHF 6.8 billion in 2021 to reach CH 33.7 billion in total at the end of 2021. Through active ownership, our Global Utilities strategy is another key contributor to the climate transition. In addition to growing these products, we continue to launch new products focused on the low-carbon transition, such as our Climate Government Bonds, Positive Change and private equity Environment funds in 2022.
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 limiting 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 society’s resilience and adaptation to climate change.
As part of our Vision 2025, we will continue to develop innovative investment strategies that provide capital to companies that have a positive impact on the environment and society. We are convinced this is the right thing to do for people, planet, and our clients’ portfolios.
As active investment managers, our role in helping build a green economy extends beyond channelling 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 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 practice active ownership, which includes both engagement and proxy 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 issuer’s willingness to adopt accepted standards of best practice, we may divest from an investment.
For some companies, such as electricity producers, the low-carbon transition is particularly critical, given that power generation represents around 25%1 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.
This is already the reality for nearly all of the developed-market companies we invest in, although we continue to monitor and track their progress. For those based in emerging markets, which have a more challenging path to decarbonisation, we work collaboratively with their managements to agree a credible timeframe for transition.
Given the scale of the climate challenge, we believe the investment community can be more effective if its members work together to achieve common goals. As a result, we actively support and participate in:
- The Institutional Investor Group on Climate Change since 2013 (supporter);
- Climate Action 100+ (signatory and participant), an investor-led initiative to ensure the world’s largest corporate greenhouse-gas emitters take necessary action on climate change;
- Farm Animal Investment Risk & Return (FAIRR) Initiative (member) engages with companies active in livestock production as they are also large contributors to greenhouse gas emissions;
- Centre for Education and Research in Environmental Strategies (Ceres, supporter and signatory to the Valuing Water Finance Initiative) to prepare collaborative engagement on the critical topic of water. In the context of the climate challenge, water is a critical element of adaptation.
1Source: Project Drawdown, 2020
Where relevant data are available, we strengthen reporting on the ESG characteristics of client portfolios and the impact of active ownership activities. Where data are missing, we encourage issuers to report according to international standards. When relevant, we report on our strategies’ exposure to the United Nations Sustainable Development Goals and Planetary boundaries.
More details on this can be found in our business line responsible investment policies and reports:
In addition to what we can disclose for our investments, we also strive to provide clients we service through custody with more transparency. More can be found here:
Research and thought leadership
The more data and knowledge we have, the better equipped we are to take effective action. To that end, we leverage our internal resources and expertise and external partnerships to advance climate research to raise awareness and capital for the net-zero transition.
Sustainable buildings: investing to tackle the 40% challenge for a climate-resilient future, at the 2022 Klosters Forum
Biodiversity: why investors should care in partnership, with Mistra Finance to Revive Biodversity research programme
Climate change adaptation: the key to living on a warmer planet, by Dr Nicolas Gruber, Professor of Environmental Physics at ETH Zurich
A new twist in the US clean energy saga, by Michael Gerrard, Professor of Environmental and Energy Law