Structuring the offering to meet the expectations of a new generation of clients

Pictet’s first steps in the field of sustainable investment, in other words managing assets that take environmental, social and governance (ESG) criteria into account, date back to 1999, when it launched a Swiss equity fund in partnership with Ethos.

This initiative was followed by the launch of several environmentally themed strategies, including a water fund, and a series of best-in-class strategies focused on European and emerging equities. This ongoing process led to the launch of the Global Credit fund last year.

“We’re on the threshold of seeing a transfer of assets from one generation to another. The next generation has grown up discussing environmental issues.”

Eric Borremans Head of ESG at Pictet Asset Management since 2013
Eric Borremans, Pictet Asset Management

AGEFI: Which of the different sustainable development approaches does Pictet Asset Management favour?

Eric Borremans: Sustainable development and responsible investing are values that have the support of all Pictet’s Partners. These topics affect all our business lines, including private banking and custody banking.

Historically, we have been known for our thematic approaches in the environmental space. It’s here that we’ve been at the forefront for many years; we’re leaders in the field in Switzerland and internationally. More recently, our commitment to sustainable finance has been extended to all our investment strategies. For five years now, and especially for the past three years, we’ve been committed to an approach aimed at ensuring that all our management activities benefit from the expertise we have developed over the past 20 years, though initially that was limited to environmental or best-in-class management.

“Portfolio managers see real added value in the ESG factors because they provide a complementary perspective compared to the most widely used financial analyses, from which there is a surplus of information.”

Eric Borremans

These days, our efforts are increasingly focused on sharing our ESG expertise across Pictet. Of course, ESG remains an important part of our development strategy, but it must benefit our entire business. My team is leading these efforts as part of a programme that aims to ensure ESG criteria are systematically taken into account in all our investments, both on the bond side and in equity management.

To what extent do conventional investments have to integrate ESG criteria?

Our objective isn’t to turn all our funds into theme or best-in-class funds. There’s an analogy to the automobile industry, where manufacturers are producing electric, hybrid and conventional vehicles, each designed to fulfill different client needs. Environmental funds are comparable to electric vehicles, best-in-class funds can be compared to hybrid vehicles, and four-fifths of the total sales are still made up of conventional vehicles – in other words, conventional management but with ESG criteria integrated into investment processes in an increasingly formalised and structured way.

“We launched an initiative urging major index providers to exclude companies involved in controversial weapons from conventional indices.”

Eric Borremans

Some approaches, such as exclusion, seem to be easier to apply than others. To what extent do you have to take this difficulty into account?

There are common denominators that are applied not only throughout Pictet Asset Management but also at Group level. This is true particularly for controversial weapons, which fall into five categories – anti-personnel mines, cluster munitions, chemical and biological weapons and nuclear weapons from countries that have not signed the Non-Proliferation Treaty.  As a consequence, today, in an approach that is applied consistently across the Group, Pictet excludes around sixty companies involved in controversial weapons. 

Is it true then that Pictet has even launched an initiative with global index providers?

Almost a year ago, in keeping with this commitment, we launched an initiative urging major index providers to exclude this type of companies from conventional indices. We’re not talking here about ESG indices or specialised indices which, of course, already offer this type of possibility, but standard indices such as the MSCI World, the S&P500 and other market indices used by the vast majority of investors. The initiative is now coordinated by Swiss Sustainable Finance and has already gained the support of around 170 institutional investors in Switzerland and abroad, representing more than USD 9 trillion.

“As for the best-in-class approaches, the experience has also been positive for equity funds, especially in times of market downturns owing to the defensive nature of ESG strategies.”

Eric Borremans

In the light of this, and based on your experience, what impact is ESG investment having on the financial performance of investments?

It all depends on the management approach. In thematic management, in particular environmental theme funds that invest in sectors where growth is around twice that of the remaining economy, overall performance outstrips that of the major market indices. Today, these green strategies are the ones with the longest track records. In the short term, they can obviously be more volatile during specific market cycles. But, overall, the experience with these strategies has been very positive.

What about the best-in-class strategies?

As for the best-in-class approaches, the experience has also been positive for equity funds, especially in times of market downturns owing to the defensive nature of ESG strategies. In credits, the first results are encouraging, although the information is insufficient as Pictet’s strategy was launched only a year ago.

And what progress is being made on the integration of ESG criteria?

When it comes to integration, the impact on performance is more difficult to quantify as the aim of the operation is to fully integrate ESG factors – climate factors, governance, etc. – into the fundamental analysis of securities. This makes it more difficult to measure the impact of each of these criteria in relation to the financial analysis factors. That’s because the two dimensions are part of a whole. That said, anecdotally, analysts and portfolio managers see real added value in the ESG factors because they provide a complementary perspective compared to the most widely used financial analyses, from which there is a surplus of information. In ESG, meanwhile, information is often more qualitative and less well covered by financial analysts and rating agencies. This is especially true as we are still in a learning phase when it comes to the methodologies to be used for the integration process: How should it be integrated into valuation models, etc.?

“Today, demand comes from both institutional and private wealth managers.”

Eric Borremans

According to a recent analysis, even though Switzerland has often been a leader in ESG investment, the country seems less advanced when it comes to engagement?

We formalised an engagement process more than a year ago, whereas this process was previously carried out in a less formal way. The approach, which is applied across Pictet Asset Management, is currently led by my team and seeks to establish a dialogue with the problematic companies whose securities we hold in our portfolios. The dialogue is conducted either directly, through shareholder coalitions or with the help of specialist service providers. Last year we initiated this type of dialogue with more than 140 issuers through different channels, and we’ll be publishing our first activity report within the next few weeks.

Engagement is interesting for another reason. It encourages closer cooperation among different management teams invested in the same security. Especially because, as you may know, management teams each tend to do their own thing. That’s the reality. Addressing the issue of problematic companies whose securities are held by several management teams gives the teams a chance to exchange views and can produce interesting results. 

What is the main source of demand in Switzerland for the ESG investment approach? Is it mainly pension funds or wealth management?

Today, demand comes from both institutional and private wealth managers. Among institutional investors, foundations have shown particular interest, especially those whose purpose is more or less closely linked to sustainable development as well as humanitarian and environmental causes. These types of investor have relatively specific demands. But more broadly insurance companies as well as pension funds and schemes are becoming more involved. At the same time, advisory firms are refining their approach.

“We reckon that 80% of our assets under management formally integrate ESG criteria.”

Eric Borremans

On the private banking side, and we’re no exception, there’s also a general trend towards creating solutions tailored to meet the expectations of a new generation of clients. I think we’re on the threshold of seeing a transfer of assets from one generation to another. The next generation has grown up discussing environmental issues, which wasn’t the case for their parents. This shift is giving rise to new expectations in terms of investment offerings and solutions.

In areas such as these, I feel we need to use common sense and say that, of course, climate change is a reality. The frequency and intensity of extreme weather events is going to increase. We must be prepared for these new circumstances.

What has been the trend in AuM managed according to ESG criteria at Pictet AM?

We reckon that 80% of our assets under management formally integrate ESG criteria. The extent varies depending on the teams, as there’s no perfect homogeneity, but our programme covers most of our assets under management. In the asset categories that follow a stricter ESG approach, whether in thematics, environmental, best-in-class management or multiple exclusions, our assets under management have increased significantly over the past two years and reached more than CHF 18 billion as at the end of April 2019. However, the exclusion of controversial weapons extends to all our assets under management.

Harmonising reporting and indicators

In your view, what aspects offer prospects for improvement in the asset management industry?

Never before have we seen such enthusiasm for sustainable investment, either on the supply or demand side.  It’s really important that the industry in general makes greater efforts in terms of reporting and harmonising the indicators used to characterise the ESG properties of portfolios.

“I think it’s better to be approximately right than precisely wrong, which is why we emphasise a small number of simple but harmonised ESG indicators.”

Eric Borremans

In terms of reporting, there are almost as many standards as there are management companies. From the investor’s point of view it’s therefore very difficult to make comparisons, whether based on the carbon footprint or any other indicators. I believe that, here, we must emphasise a small number of simple but harmonised metrics. It’s better to do that than attempt to find perfect indicators that are overly reliant on estimations and assumptions used for calculations. In other words, I think it’s better to be approximately right than precisely wrong. So let’s try to see what can be done at industry level.

There’s also a proliferation of national SRI standards and labels in Germany, France, Austria, Belgium, Belgium, Sweden and the Netherlands. If we want to help investors see more clearly, we should bring a little order into all this. The broad strokes of a European label are starting to take shape, and I think these initiatives are a step in the right direction. That’s because the current proliferation of labels is complicated not only for investors but also for distributors and management companies, such as ours, which register funds in several European countries. We’re confronted with requests for compliance with labels whose specifications are similar, but always a little different from each other.

Difficult to measure the impact on returns

For a long time, the results of academic studies on the impact of ESG approaches on financial performance were mixed.

A multitude of studies have been carried out, whether academic or by financial institutions. In general, they tend to confirm that ESG criteria do not have a negative impact on performance, or indeed a positive impact. However, I think we should be realistic about what we can expect from these studies.

“In general, studies tend to confirm that ESG criteria do not have a negative impact on performance, or indeed a positive impact.”

Eric Borremans

Why?

Because performing a study of the last 10, 15 and 20 years pre-supposes that you have access to quality data. But the status of ESG data is evolving, and the quality of data still varies. The further back in time you go, the more problems there are with either quality or coverage. We therefore need to be cautious about what these studies can tell us. This is true for reasons of data quality and coverage, but even more fundamentally because they tend to address trends that are still taking shape.

Take climate change, for example, which had a very marginal impact on the economy 10 years ago. There was little or no carbon pricing, and extreme weather events were not of the same magnitude and intensity as they are now. Conducting a study on climate change covering the past 20 years may therefore be illusory. The phenomenon has only recently moved into focus. The price of carbon is gradually rising to between €25 and €30 per tonne. We’re only now seeing the conditions take hold that will mean these factors have a material influence on the performance of companies and investment funds.

©AGEFI, Interview  by Piotr Kaczor, 3 June 2019

Link to the article online