Levers of climate action: Our clients’ assets

ESG integration

As active investors and selectors of third party managers, the first step to achieving our low-carbon transition targets for our investments is to further integrate climate considerations into our investment processes. Over the coming years, this will mean refining our Climate Investment Principles (CIPs), further embedding their implications across our investment value chain, and improving upon available datasets.

Our Climate Investment Principles (CIPs)

The Climate Investment Principles created the foundations for a common investment philosophy around the topic of climate change at Pictet by assembling a set of actionnable investment principles that are underpinned by robust research.

Our high-level principles

We believe climate change will have a material impact on asset prices and investment returns in the coming years. Understanding this impact is critical to investment leadership.

We believe that as part of the asset manager and owner community, our activities have an impact on climate change outcomes. As such, we have a responsibly to understand how to foster positive, and mitigate negative, impact.

Our Climate Investment Principles summary ^pdf

Integrating CIPs in our investment processes

In line with our Climate Investment Principles, strategic asset allocation should embed the risks and opportunities linked to climate change in our evaluation of all investible assets, as asset classes, sectors and companies carry varying sensitivities to this factor. ^{CIP C}For portfolio construction it is important to further integrate asset class-specific convictions. ^{CIP D,E,F}

Ensuring that our investment teams have access to reliable climate-related data is central to the integration of climate change factors in our investment processes and our ability to offer leading and credible products. We will continue to work to improve the quality and scope of that data. This includes both backward- and forward-looking data on transition and physical climate risks and opportunities.
Integrating CIPs in our risk management processes

We will continue to strengthen the integration of climate factors into our risk processes throughout our three lines of defence. In addition, we plan to obtain further insights by including climate change in our stress testing exercises by 2023. ^{CIP C.2}

Extracts from Pictet’s Climate Investment Principles

^{CIP C} The impact of climate change is a discrete risk that should be embedded in the evaluation of all investible assets. There is a market-wide risk premium and asset classes, sectors and companies carry varying sensitivities to this factor.

^{CIP C.2} Today, physical risks are especially under-appreciated and under-priced in companies. Physical and transition risks can be crystallised and brought forward in the form of liability risks.

^CIP D The extent to which sovereign bonds are affected by climate change varies significantly from country to country and region to region. Emerging market economies are more vulnerable to climate change than develop world counterparts.

^CIP E Companies' decarbonisation efforts and the quality of their climate-related governance and carbon disclosures will play an increasingly important role in determining the cost of equity and debt capital through dispersion of risk and expected return. All of which means that bond and equity investors will need to pay much greater attention to non-financial factors when assessing a firm's investment potential.

^CIP F Private asset classes are more exposed to the impact of climate change because they are far less liquid and of longer duration than most other investments.

Responsible products and solutions

We recognise the importance of expanding our range of products that actively contribute to the low-carbon transition.^{CIP G}

As pioneers in thematic investing, we will continue to offer strategies focused on climate change-mitigation, as well as on key areas for adaptation and nature. We are actively working to broaden such solutions across other asset classes.

Low-carbon solutions

Investing in the development and deployment of low-carbon technologies will ultimately enable all sectors to reduce their emissions. ^{CIP G.2}

Transitioning companies

By investing in net-zero transition leaders, and deliberately investing in high-emitting companies with the ability to transition and engaging with them, we plan to use our influence to accelerate the shift to a low-carbon economy. ^{CIP G.1}

This is why we will continue to develop products that focus on the repricing of companies as they transition. ^{CIP C.1}

Adaptation

Even at 1.5°C of warming, climate change impacts will be felt across the world, which is why we plan to continue to invest in key areas for climate change adaptation, such as water, nutrition and the regenerative economy.

Extracts from Pictet’s Climate Investment Principles

^{CIP C.1} The transition to a point where assets embed a “steady state” risk premium is a dynamic process, which will unfold over many years. Understanding where investments sit on this continuum is a first step towards identifying investment opportunities for excess returns. Over shorter time horizons, green assets may be overvalued just as brown assets may be under-valued.

^{CIP G} The investment community affects climate change outcomes through capital allocation decisions, and by collectively shifting the cost of capital.

^{CIP G.1} In order to incentivise GHG emissions reductions, we need to allocate capital to companies and countries that are in the process of reducing their emissions, and couple this with effective engagement, creating a ripple effect beyond our investments.

^{CIP G.2} Capital allocation is also needed to support the growth of companies and opportunities (including in hard-to-abate areas), which can exist within or contribute towards a low-carbon economy.

Active ownership

Active ownership is one of the most important levers at our disposal to both help stem climate change and protect and/or enhance shareholder value. ^{CIP H}

Active ownership with corporates

Bilateral engagement

We can have a meaningful impact on an individual issuer in which we hold a significant position and have specific expertise. ^{CIP H.2}

We have identified high-emitting companies to engage with in priority on climate issues across the low-carbon transition and sustainable forests through our Group Engagement Focus programme. Over time, we will expand the companies included as those in the initial target list make satisfactory progress. We will ask those companies to set validated science-based targets and devise credible decarbonisation plans to achieve them.

Concrete engagement objectives and timelines will be solidified for each target issuer. Over a pre-determined time horizon, when insufficient progress or a lack of response is noted, the respective investment team will, on a case-by-case basis, determine whether escalation actions should be taken.

Collective engagement

To achieve the required speed and scale, we consider collaborative initiatives to be an effective way of working towards common goals. Where possible, we will continue to reinforce our bilateral engagement efforts by also taking an active role in collaborative initiatives, such as Climate Action 100+¹, Ceres’ Valuing Water initiative² and FAIRR³.

Proxy voting

We will also continue to ensure that our proxy-voting policies support our Climate Action Plan and the specific issues raised in our engagements with target companies.

Extracts from Pictet's Climate Investment Principles

^{CIP H} Active ownership activities can contribute positively to climate change outcomes and protect and/or enhance shareholder value creation.

^{CIP H.2} Engagement is most effective when an investor leverages a particular area of expertise and/or when it is done as part of a collective effort. We believe engagement efforts should possess the following characteristics: they should focus on issues that have a material effect on our portfolios and on matters on which we can claim genuine expertise and influence.

Active ownership with sovereigns

Despite the challenges of engaging with sovereign issuers, we will continue to seek targeted and informed dialogue in areas of importance for the long-term outlook of the countries in which we invest, which may include climate change.^{CIP H.3}

Sovereigns can deliver policies necessary to enable the transition to a low-carbon economy and therefore have a unique role to play in initiating the transformation of the entire economy.

We view the development of ESG-labelled bonds as a key enabler to fostering bilateral dialogue on environmental policy with governments, and we aim to collaborate with other stakeholders to influence sovereign actors. We will continue to use our partnership with EMPower to obtain access to local contacts and develop a deeper understanding of the key, often hidden, areas of risk, allowing us to develop credible foundations for meaningful dialogue with sovereign issuers.

Extracts from Pictet's Climate Investment Principles

^{CIP H.3} The ability of an investor to influence change in a corporate is typically larger than in a sovereign context, and particularly in EMs – with some exceptions.

Active ownership with third-party fund managers

As wealth managers, we must also engage with third-party fund managers. The more fund managers that set science-based targets, the easier it will be to accelerate the transition and collectively reduce climate risks in the financial system. Through our engagements, we hope to increase the understanding about the importance of setting externally-verified, science-based targets and further incentivise them to match Pictet’s efforts to decarbonise investments.

We will continue to collect information through our ESG due diligence questionnaire to get visibility on the climate-change policies of third-party funds and will determine priority engagement targets for 2023.

Active ownership on private equity real estate

The climate-related risks and opportunities associated with the operation, construction and disposal of real assets can be significant. A new focus on more sustainable, smarter and occupier-friendly buildings is also creating investment opportunities. As an active owner, we engage with key stakeholders to manage the climate-related risks and opportunities associated with our real estate investments.

For example, we may engage with occupiers, general partners (GPs), property managers, and developers, as relevant. In our direct real estate investments, we incorporate relevant climate resilience factors into asset enhancement plans, which help mitigate climate risks and create value. In our real estate co-investments, we invest with GPs to benefit from their local knowledge and expertise. We may engage with GPs to better understand their management of climate factors and where relevant, to encourage the adoption of low-carbon measures into business plans.

Client disclosure

As a privately-held firm, we have the strength of independence and a governance model 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 committed to increasing transparency on climate change and other environmental factors.

Transparency will be key to solving the climate challenge. As investors, we depend on the transparency of the issuers and assets in which we invest to obtain the data we need and understand their transition pathways. Material environmental and social disclosures help us make better capital allocation decisions, and ultimately contribute to the transition.

Taking leadership and setting an example are powerful vectors of change. We will continue to provide climate-related transparency and education to our clients on their portfolios. ^{CIP G.4}

Further, Pictet will remain committed to report to the Carbon Disclosure Project (CDP), in line with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. We plan to publish an annual progress report from 2023 onwards.

This will be accompanied by better product and portfolio-level disclosure for clients to help them make better decisions. We will embrace and implement any new regulations and standards, such as the Swiss Climate Scores, as they emerge and where applicable.

Outside our target scope, reporting can give our execution-only and custody clients better information on climate risks and opportunities. We will continue to develop tools to help our clients understand their investment footprints and the potential climate impacts they may be exposed to.

Extracts from Pictet's Climate Investment Principles

^{CIP G.4} Transparency and disclosure provide us with the information we need to rebalance our portfolios, and make our allocation decisions visible to clients, regulators and investors.

Research and thought leadership

We will use our substantial experience across key environmental and social themes to publish targeted research and help raise awareness and capital for the sustainable transition.

A key part of climate action is to both gather from - and contribute to - the growing body of knowledge. This will help us further iterate our Climate Investment Principles, better understand the complex trade-offs that economies and societies face and notably to derive sectoral insights.

We also commit to doing more research on the interlinkages between climate change and other environmental and social themes and any resulting compounding risk effects. This includes complex risks, like biodiversity loss. We will expand our research collaborations with external partners, including by better leveraging relationships with our existing advisory boards, academic institutions and NGOs. Furthering the collaboration with our Foundation will be key to building more synergies on this front.

¹ A collaborative initiative on the low-carbon transition that targets the 166 highest-emitting companies in the world.

² Engages companies with a high water footprint to value and act on water footprint to value and act on water as a financial risk and drive the necessary large-scale change to better protect water systems.

³ Facilitates collaborative investor engagements with companies on some of the most material issues linked to intensive animal production.

Levers of climate action: Our clients’ assets