Re-imagining the future: the case for engagement

In the push for a more sustainable economy, it is tempting to avoid “dirty industries” altogether in favour of clean, green, new ideas. But divestment may not disincentivise companies, when alternative funding remains available. Engagement can be a powerful and rewarding alternative route for responsible investors to influence progress.

The dialogue between investors and companies on industry evolution and best practices is a key tool to incentivise positive change. 

At Pictet, that dialogue is aligned with our Responsible Investing Vision and is guided by our Engagement Framework. This ensures we focus  on clear priority themes, high-risk activities and severe controversies.

Engagement can be used as a tool for improvement in companies and industries with potential for continued development – through materials, suppliers, logistics, approaches, or processes. It can also focus on seeking breakthrough innovation – transformative operations, products, and services that result in existing models becoming obsolete.

Looking at consumer staples companies, for example, their internal practices influence the way we consume and waste today. While their range of products may stay relatively stable, engaged investors have pushed towards more responsible operations. Sustainable packaging has been on their agenda for more than a decade, switching to paper-based, reusable, and biodegradable or compostable materials. The innovation roadmap  in this relatively low-risk industry has allowed for the constant enhancement of its contribution to a net-zero economy.

In an ideal world, fossil fuel companies would quickly become a thing of the past, with all of our energy being produced through renewables. However, this is not yet possible: in the short-term, oil and gas production is necessary for ensuring global energy security. While we build scale in low-carbon solutions, engagement provides investors with the opportunity to ensure that the unavoidable oil and gas operations are conducted according to best practice, and that emissions continuously decrease over time. In the longer term, engagement could even support the transformation of this industry through increasing Green Capex – capital expenditure on environmentally-sustainable activities.

The automotive industry is transforming to survive, shifting steadily towards an electric-based model – most of the major players  are committed to entirely electric production within a foreseeable timeframe. There has been huge investment in lithium-ion batteries, resulting in cheap manufacture on a vast scale. Although their production is profitable, the existing technology is unsustainable – and too destructive to be a long-term answer. If all cars  in circulation ran on lithium-ion batteries, the environmental impact would be unfathomable. Companies manufacturing batteries need to innovate, and carmakers cannot be passive consumers. They have a responsibility to invest in and prioritise scalable, material-efficient emerging technologies. Investors  have a chance to support, influence, and capitalise on the process through engaging and voting. 

Engagement can be beneficial for companies too – it’s not all just about being pushed to change. Investors bring guidance and industry awareness, backed up by analysts, informed by research teams – people with their fingers on the pulse of new and emerging technology, innovations, and investment. These insights are invaluable to companies searching for the most cost-effective and realistic paths to long-term sustainability.

Responsible innovation includes reinventing companies in high-risk industries. The transition to a sustainable economy is not about forgetting the engineering and technology of the past, but about evolving, improving, and reimagining it in the light of what we now know. This, combined with our human propensity for invention, is the most realistic path to cleaning up our act.