Sustainable, Responsible &/or ESG Policy:
We are convinced that ESG considerations can help us make better long-term investment decisions while limiting environmental negative impact (lower carbon footprint) and contributing positively to several UN Sustainable Development Goals. As such, we are committed to integrating material ESG criteria in their investment process with a view to enhance returns. Recent examples have exacerbated the reputational risk of companies having poor corporate governance and/or low environmental considerations. We believe a growing portion of corporates’ risk is driven by extra-financial factors like fraudulent accounting or bad corporate governance. Since the Great financial crisis, governments worldwide have adopted environmental rules that are tighter, covering an increasing number of sectors and coming into force faster.
Almost all companies are impacted and need to change their business models. The ones proactively adapting their business models and minimizing ESG risks will prove more resilient and emerge as leaders.
Our core beliefs and approach:
- Strong and sustainable balance sheet: We focus on issuers with a solid balance sheet that enablethem to invest in the future of their business through research and development.
- Integrated ESG criteria into fundamental analysis helps understand the “body language” of companies.
- Companies integrating ESG elements in their management are less exposed to disruptive forces andbetter equipped to navigate through the cycles.
- The investment team is best positioned to reconcile financial and extra-financial factors; therefore,team members are deeply involved in the framework and implementation of our financial and ESGscorecards.
- We built our own proprietary ESG framework from a credit investor viewpoint. Third party providers are only used as data providers
- ESG indicators should be tailor-made and customized by sectors to consider each sector specificities
- ESG in credit is not only about controversies or exclusions. It is also about selecting companies with sustainable business models
- Responsible investments include the financing of the energy transition
- Act as a responsible lender: We want to be a long-term lender to our issuers as long as the credit fundamentals and ESG scores remain within our expectations and projections. We favor a low turnoverstrategy.
- Engaging with companies: Thanks to a concentrated high conviction portfolio, we are able to build stronger relations with our issuers and actively engage with them
Sustainable, Responsible &/or ESG Process:
Our investment process follows three stages:
- Stage 1: Screening Issuers’ Financial Sustainability following a best-in-class approach
- Stage 2: Screening ESG factors with a best-in-class approach
- Stage 3: Portfolio Construction
Ahead of stage 1 of the investment process, we narrow down the investment universe by applying a set of exclusions. The exclusions can be Fund specific and/or Label specific and/or specified by the Pictet Group/Pictet Asset Management in the exclusion policy. We exclude five sectors based on harmfulness to the economy, i.e. we exclude sectors that we believe are not essential to the well-functioning of economy but carrying a higher regulatory or litigation risk such as weapon, gaming, tobacco/alcohol, adult entertainment and defence, We also exclude partly three other sectors based on harmfulness to the environment: thermal coal, oil & gas and nuclear.
For gaming, tobacco/alcohol, adult entertainment and defence, companies with over 5% of their revenues linked to these activities (i.e. production) are excluded. For companies who are not producing but distribution gaming, tobacco/alcohol, adult entertainment and defence products, this threshold is increased to 10% of revenue. Ex: a retailer selling cigarette will be excluded from our investment universe if the revenue from the sale of cigarette represent more than 10% of the retailer total revenue.
For thermal coal extraction and unconventional oil & gas, this threshold is 10%. For thermal coal power generation and nuclear, as well as conventional oil & gas production, this threshold increases to 25%. In addition, we are not investing in companies for which carbon emission exceed 393g CO2/kWh, meeting therefore the Febelfin label requirement. We are using an external provider for this specific filter.
Finally, we also implement the Pictet Group exclusion policy on companies involved in the production of anti-personnel mines, cluster munitions, biological & chemical weapons (including white phosphorous) and nuclear weapons from countries not signatory to the Treaty on the Non-Proliferation of Nuclear Weapons (NPT). This policy applies to actively managed strategies (funds and segregated accounts). Investment managers are prohibited from trading any securities on the Controversial Weapons List, unless they are shorting the securities.
It is also worth to mention that the fund complies with the SVVK- ASIK exclusion list.
These exclusions are programmed into the portfolio management system, PAMFolio, and overseen by the Pictet Asset Management's Compliance department.
Stage 1: Screening on Financial Sustainability
During the first step, we mainly use an external database to screen about 3000 issuers using a set of criteria that can summarize into the following categories:
- Balance sheet strength (i.e. leverage)
- Income statement (i.e. revenue, margin)
- Liquidity
- Cash flow
- Financial policy (i.e. R&D, shareholders remuneration)
Each criterion has a proprietary weighting and is ranked by quartile. Typically, we avoid companies with aggressive share buybacks programme, high dividend payout and low and unstable operational margins. Using a best-in-class approach, we keep the top quartile of each sector or about 600 issuers. By using this approach, we ensure to have a balanced and representative investment universe. The objective is to select resilient issuers with a strong ability to navigate through the business cycle.
Stage 2: Proprietary ESG framework
In addition to our financial filter, in a second step, we apply our proprietary ESG filters, where all sectors are identified with over a dozen criteria of what we consider to be their most relevant Key Performance Indicators (KPIs).
The main criteria can be split under the following categories with a few examples for each:
- Environmental: CO2 intensity, environmental controversies, coal mining, oil reserve
- Social: Supply chain, business ethics, operations, employee incidents, social controversies
- Governance: Board, audit, management, governance, diversity, incentives.
The weighting of these KPIs varies according to sectors and leads to an ESG Credit Score. We use a mix of external ESG research with providers such as CFRA, ISS, Bloomberg and Sustainalytics, and our own research.
During stage 2, we screen around 600 issuers. We keep the top 50% (top 2 quartiles) of each sector or about 300 issuers at the end of this stage. These 300 issues represent our investable universe.
We do not use data providers aggregate ESG score. Instead, we have developed our own proprietary scorecard with Key Performance Indicators adapted to each sector. We decided to tailor-made the ESG scorecard to each sector to better capture risks and opportunities specific to each industry. We select different ESG KPIs for each sector and weight accordingly.
Stage 3 (Portfolio Construction) is qualitative and judgmental.
Resources, Affiliations & Corporate Strategies
Pictet Asset Management has a dedicated ESG Team which leads and co-ordinates implementation of our responsible investment policy, including ESG integration in investment processes, ownership practices, risk management and reporting tools. The ESG Team reports directly to Sébastien Eisinger, Managing Partner Pictet Group, Co-CEO Pictet Asset Management and Head of Investments.
Key responsibilities include:
Investments
- Selection and due-diligence of external data providers in collaboration with investment teams and other B/Ls
- Development of proprietary assessment methodologies (eg sector-specific “E&S Deep Dives”, sovereign issuers)
- Integration of relevant ESG datasets in IT systems and definition of quality checks
- Training and awareness raising of investment teams
Active Ownership
- Definition of engagement strategy and proxy voting policy
- Co-ordinate targeted engagements and participation in collaborative initiatives
- Consensus building between investment teams on specific resolutions
Pictet Asset Management has been a signatory of the UNPRI since 2007. In addition, Pictet Asset Management actively participates in several investor initiatives aimed at sharing best practices between asset managers and owners and encouraging corporate disclosure on ESG issues. We are notably involved in the IIGCC (Institutional Investors Group on Climate Change), SSF (Swiss Sustainable Finance) and similar organisation in the UK, Germany and Spain.
Pictet Group and / or Pictet Asset Management supports and actively participates in international and national initiatives, organisations and partnerships including the below (which indicates Pictet’s involvement, year joined and key areas of focus) :
- FNG, SpainSIF: Member (2006) - Transparency on ESG
- UNPRI: Signatory (2007) - Transparency on ESG
- Copenhagen Institute for Futures Studies (CIFS): Member, Research Partnership: Megatrends Research (2007) - Interdisciplinary academic disciplines
- CDP: Member (2007) - Carbon
- Swiss Climate Foundation: Corporate sponsor (2008) - Climate
- Sustainable Finance Geneva (SFG): Institutional Partner (Pictet Group), President Strategy and Surveillance Committee (2008) - Promotion of sustainable finance
- EFAMA (European Fund and Asset Management Association): Member of the Stewardship Market Integrity & ESG Investment Standing Committee (2010) - Fund and Asset Management
- Climate Bond Initiative: Member of the Standards Board (2013) - Climate
- IIGCC (Institutional Investors Group on Climate Change): Member of the Adaptation & Resilience Working Group (2013) - Climate
- FTSE Environmental Markets: Member of the Advisory Committee (2013) - Environment
- Swiss Sustainable Finance (SSF): Founding member (2014) - Promotion of the integration of sustainability in the financial industry
- JP Stewardship Code: Signatory (2014) - Stewardship standards
- Stockholm Resilience Centre (SRC): Research Partnership: Planetary Boundaries Framework (from 2014-ongoing), Mistra Biodiversity Finance programme (from 2022) (2014) - Core focus is to advance research in the frontier of biosphere-based sustainability science, applying a social ecological approach and resilience thinking
- Investment Association: Member of the Sustainability and Responsible Investment Committee (2018) - Stewardship and Corporate governance
- Climate Action 100+: Collaborative Engagement (2018) - Climate
- Access to Nutrition Initiative (ATNI): Signatory (Pictet Group) (2018) - Delivery of nutritious, affordable foods.
- Empower: Partnership (2019) - Youth at Risk
- UNEP Finance Initiative: Signatory (Pictet Group) (2019) - Environment
- Task Force on Climate-related Financial Disclosures (TCFD): Signatory (2020) - Consistent climate-related financial risk disclosures
- FAIRR: Member (2021) - Animal agriculture
- ICGN (International Corporate Governance Network): Member (2021) - Governance
- Science Based Targets Initiative (SBTI): Signatory (Pictet Group) (2021) - Climate
- Net Zero Asset Managers Initiative: Signatory (Pictet Group) (2021) - Climate
- ESG Data Convergence Project: Steering Committee member (Pictet Group) (2021) - ESG metrics
- UN Principles on Responsible Banking: Signatory (Pictet Group) (2021) - Sustainable/responsible banking
- UK Stewardship Code 2020: Signatory (2022) - Stewardship standards
- Institute of International Finance (IIF): Research Partnership: Bonds that build back better (2022) - Green, transition, social, sustainability & sustainability-linked bonds
- Responsible Investing Association (RIA): Member (2022) - Canada's industry association for responsible investment
- Ceres Valuing Water Finance Initiative: Signatory (Pictet Group) (2022) - Water
- Finance for Biodiversity Foundation: Member (Pictet Group); participants in the Impact Assessment and Engagement Working Groups. (2022) - Biodiversity
- Taskforce for Nature-related Financial Disclosures (TNFD): Member of TNFD Forum (Pictet Group) (2022) - Risk management and disclosure framework on nature-related issues
- UN Global Compact: Signatory (Pictet Group) (2022) - Global sustainability principles
Source: Pictet Asset Management, [April 2023]
Other industry associations:
- Asset Management Association Switzerland (AMAS): Member (Pictet Group), Member of the Distribution, Taxes Specialist Committees (1993) - Swiss Asset Management industry development
- German Investment Funds Association (BVI): Member (2004) - German Asset Management industry development
- International Capital Markets Association (ICMA): Member (xx) Securities market
Furthermore, Pictet, together with Swiss Sustainable Finance, was leading an initiative to put pressure on index providers to remove controversial weapon manufacturers from mainstream indices. The initiative, launched in August 2018, secured the backing of 174 signatories controlling over USD 9.7 trillion and including international asset owners and managers (as of January 2020). This initiative has now been closed due to inclusion of controversial weapons exposure disclosures in draft RTS and EU Benchmarking regulation.
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