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The Institutional Investor’s Guide to ESG INVESTING P&I Content Solutions in partnership with

CONTENTS

This Guide is a resource for asset owners on best practices and current trends in environmental, social and governance investing – an evolving field which will continue to see advances across asset classes, data availability, benchmarking and engagement. Each section offers guidance on the approaches that investors are taking to engage with asset managers, corporates, issuers, and wider industry groups in order to promote and expand the ESG footprint across investment portfolios.

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I

DEFINING ESG TODAY

The mandate and objective of any investor is always to preserve and grow capital. Where ESG comes into the picture is that it tries to do so with social and environmental objectives in mind… You are trying to achieve the same return objectives from your capital but are doing so in a socially responsible way.
Ella Hoxha
Senior Investment Manager, Global Bonds, Pictet AM

By the very nature of their investment mandate, institutional investors have a vested interest in sustainability. With an investment horizon that typically spans decades — rather than the quarterly cadence of corporate earnings — investors must look beyond the next corner, toward the long-term risks and opportunities that will affect their ability to preserve and grow capital for future generations. This is where environmental, social and governance (ESG) investing is crucial.

By thinking strategically about the ESG issues facing society, corporations and governments, institutional investors can identify material risks that may not show up on an issuer’s balance sheet today but loom heavily over tomorrow. Those risks are just one side of the coin. Indeed, with a lens into environmental and social problems, investors can also identify opportunities in the new companies rising to address these challenges and pinpoint existing companies that are responding positively to ESG issues today. These companies may be the best opportunities on the risk mitigation and return spectrum in the years ahead.

Examples of ESG Risks

This long-term focus on material risks and opportunities lies at the heart of ESG investing, a field that has grown considerably in recent years. It continues to evolve today in asset class coverage, data availability, benchmarking, thematic investing and more.

For investors new to ESG investing — and for those looking for clarification and best practice — the Institutional Investors’ Guide to ESG, sponsored by Pictet Asset Management (Pictet AM), offers a road map of the approach today and where it is headed.

This guide demystifies the varied terminology used in ESG investing and provides guidance for implementing an ESG program across different asset classes. It offers practices for the selection and monitoring of asset managers in ESG investing and discusses the challenges of benchmarking. It also highlights key initiatives and engagements across the investment industry.

A pension fund cannot have a substantive long-term view on the risks and opportunities they face in managing a long-duration investment portfolio without taking into account how climate change and other environmental and social challenges impact the assets they are invested in.
Eric Borremans
Head of ESG, Pictet AM

Spectrum of ESG Approaches

Asset owners can utilize several different approaches to ESG investing. Broadly, Pictet AM defines these as three types of strategies: ESG integrated, ESG binding and positive impact.

ESG Integrated (Article 6*): In an integrated approach, the asset manager takes ESG factors into account in the analysis of a stock or bond. Those considerations can have a material impact on the company’s performance and are weighted alongside other financial factors that inform an investment decision. However, the investor is not promoting an environmental or social outcome.

Approximately half the global institutional investment market – some $45 trillion in assets – integrates ESG factors in some shape or form during the investment process.

ESG Binding (Article 8*): An ESG binding approach is when the investor tilts the portfolio toward top-performing companies from an ESG perspective. “Best-in-class” or “positive tilt” strategies fall within the binding category. These seek to overweight the securities of companies with low perceived sustainability risks and underweight those with high sustainability risks on a best-effort basis, subject to good governance practices.

Positive Impact (Article 9*): With an impact strategy, the investments are intended to generate a measurable, beneficial social or environmental impact alongside a financial return. Investors often employ an impact approach through a thematic strategy that targets a specific challenge, such as clean water or clean energy.

*Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (SFDR).

Types of ESG Approaches

Global Initiatives on ESG Investing

Global challenges, such as climate change and social inequality, are too big for a single investor or a single country to address significantly without widespread support. Therefore, a number of global and regional entities and initiatives have helped set ESG standards and guidelines which continue to drive progress. Here are some early proponents of ESG investing:

The Principles for Responsible Investment
The United Nations-supported PRI is one of the earliest ESG initiatives that launched in 2006 to establish a framework for responsible investing via ESG disclosure and metrics.

The PRI provides a standardized approach to ESG integration within the investment process and within an asset manager’s active ownership practices, including engagement and proxy voting. It promotes six key principles, such as incorporating ESG issues into investment analysis and decision-making processes and into ownership policies and practices, as well as seeking appropriate disclosure on ESG issues by invested entities.

ESG integration is about understanding the impact of ESG factors on the risk-return characteristics of your assets. That doesn’t necessarily mean that you are promoting specific environmental or social factors. That happens when you use a binding approach, or, at the furthest end of the responsible investing spectrum, a positive impact strategy.
Eric Borremans
Head of ESG, Pictet AM

Pictet AM is a PRI signatory, as one of over 4,000 asset owners and asset managers. The PRI signatories have moved to integrate the PRI principles into their investment process and broader ESG stewardship efforts. As part of their commitment, asset managers work to promote ESG principles across the investment industry and report on their own progress in implementing the principles.

UN Sustainable Development Goals
The sustainable development goals (SDGs) are a set of global social, environmental and economic goals agreed upon by the United Nations’ member countries in 2015, with a target of achieving them by 2030. Some SDGs are investable goals, such as clean water and climate action. Others are more the purview of governments, such as establishing peace and strong institutions.

Institutional investors can use the goals to determine how companies are exposed to these aspects and to help determine where to aim their investment strategy for impact. Asset managers often align with the SDGs through focused, thematic strategies. For example, Pictet AM has thematic strategies focused on environment, water, nutrition, timber and clean energy, among other themes.

Sustainable Development Goals

Sustainable Finance Disclosure Regulation
The European Union’s Sustainable Finance Disclosure Regulation (SFDR) was introduced in 2019 and came into effect in March 2021. The set of rules aims to make the sustainability profile of investment funds more transparent and comparable. Ultimately, the rules are designed to give asset owners more clarity about a strategy’s sustainability characteristics and prevent “greenwashing,” a term used to describe how some firms make misleading claims about the ESG credentials of their strategies.

The Sustainable Finance Disclosure Regulation is part of a push toward transparency. It helps ensure sustainable investing strategies deliver on what they say they do.
Eric Borremans
Head of ESG, Pictet AM

Task Force for Climate-Related Financial Disclosures
The TCFD is a task force created by the Financial Stability Board, with the support of some G20 member countries, to develop and promote more effective climate-related financial disclosures from issuers. The initiative is important because ESG investors depend on the quality of disclosure by the issuers.

If firms don’t disclose in a standardized way, it’s hard for investors to make informed decisions about investing in these companies, particularly companies that are supposed to be transitioning to a net-zero economy over the coming decade.

Top 10 Societal Issues in Sustainable Investing Today

Based on the interest by institutional investors, asset managers are creating impact strategies that focus on addressing specific sustainable themes. For Pictet AM, a few priority themes include water risk, which is becoming an urgent issue in many countries, and regenerative agriculture, because intensive agriculture is ravaging farmland in many regions. On the governance side, a key priority is getting companies to create a long-term corporate culture that fosters talent and nurtures sustainable performance.

Key investable themes today:
  • Climate Change
  • Diversity and Inclusion
  • Clean Energy
  • Water management
  • Waste management
  • Sustainable agriculture practices
  • Sustainable forestry
  • Biodiversity
  • Nutrition
  • Smart City (grid infrastructure)
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II

ESG ACROSS ASSET CLASSES

While asset owners can now apply an ESG framework across their entire portfolio, there are unique considerations for different asset classes. An ESG-integrated approach can be pursued across the traditional and alternative asset classes, active and passive investing, and public and private markets. Here are some key takeaways that an institutional investor needs to be aware of in equity and fixed income:

The issues around water use and water pollution are going to need a lot more attention in the near future. We have regions today that are running out of water — it’s not something that’s going to materialize over the next decade; it’s happening now.
Marie-Laure Schaufelberger
Head of Group ESG and Stewardship, Pictet Group

Equity

ESG approaches in equity investing are the most developed among all the asset classes. Many institutional investors have adopted, or are familiar with, aspects such as exclusionary screens and ESG metrics.

  • Exclusionary Screens: Often, institutional investors will mandate the exclusion of companies or industries that do not align with their sustainable investing objectives. Typically, exclusionary screens are determined in partnership between the asset owner and asset manager. Pictet AM’s own responsible-investment policy excludes companies that derive a substantial portion of revenue from investments such as fossil fuels and nuclear energy, weapons production, tobacco, adult entertainment and gambling.
  • Scoring of Companies: One of the biggest challenges to ESG investing is connecting the dots between increasingly sophisticated ESG data — which can sometimes come from disparate sources — in a way that coalesces into an investment thesis for a specific issuer. As such, institutional investors need to understand and be comfortable with their asset managers’ internal framework for scoring companies on ESG factors.

The ESG Scorecard
At Pictet AM, the ESG scoring framework revolves around a proprietary ESG Scorecard. The scorecard provides a focused view of the ESG risks and opportunities associated with an issuer and is based on a curated set of the most material data points across four pillars.

  • Corporate governance: Considers factors such as board competence and independence, executive remuneration, audit and risk controls.
  • Products and Services: Examines how the company is generating its revenue. For example, are its products or services addressing public health or environmental issues? Is the company offering “clean and safe” products and services?
  • Operational Risks: Provides a gauge of a company’s operational issues, including the carbon intensity of its operations and whether it is exposed to extreme weather events or other climate risks. It also analyzes factors such as whether the company is managing the environmental and social impacts associated with its supply chain.
  • Controversies: Examines and includes any negative issues that a company has been involved with, such as bribery and corruption, market abuse or product recalls.
 
Four Pillars of the ESG Scorecard

The ESG Scorecard “red flags” areas of ESG concern, while areas seen as positive are indicated with “green flags.” Flags can stem from each individual data source and are summed up at both the pillar and scorecard level. Individual or multiple companies can then be uniformly compared, within and across sectors and locations, to identify leaders as well as laggards.

Sample of ESG Scorecard

Impact Investing
As society has come to understand the magnitude and scope of some of the environmental and social problems facing it, enterprises are rising to the challenge of addressing them. The growing solution set addressing climate and other environmental concerns — and the growing demand for such technologies — is making thematic impact strategies a strong area of interest for institutional investors. According to Pictet AM, a thematic equity strategy invests in stocks whose returns are influenced by structural forces of change that evolve independently of the economic cycle.

Read: Adding thematic equities to diversified portfolios

Examples of Thematic Environmental Strategies

Asset owners who want to invest in a positive impact strategy need to be aware of a few considerations. First, an impact strategy is likely to be focused on addressing a specific environmental or social issue. As such, the investment universe will be much narrower, and the strategy will probably have a wide tracking error from a standard equity index. Given the differences, many impact strategies are non-benchmarked products. As they still strive to outperform the broader market, a standard equity index may provide a reference point for how the impact strategy is adding value, but the strategy is not going to align with it.

Institutional investors utilizing an impact strategy typically need to invest with a longer time horizon, as the nascent services and technologies addressing an environmental or social issue can take years to develop. Typically, a portfolio manager of an impact strategy holds an investment horizon of three or more years.

Private Markets
When considering ESG investing in the private markets, it is interesting to compare the level of influence on a private company versus a public one. A general partner for a private equity fund typically has more control over business strategy of the companies in its portfolio than an asset manager holding public equity. For private market investors, the opportunity to shape corporate direction as it relates to ESG risks or opportunities may be attractive — and they can incorporate an ESG impact strategy with a measurable social or environmental outcome. However, as private equity funds typically own fewer companies than a public equity strategy, the overall ESG impact is usually much smaller.

Fixed Income

Some of the ESG considerations for fixed income investors are the same as they are for an ESG equity strategy. For example, asset owners can work with their fixed-income manager to establish exclusionary screens for the portfolio. Asset owners also need to understand that their fixed-income manager’s scoring process for companies that issue debt on ESG factors is similar to the process for equities. For example, Pictet AM uses the same proprietary ESG scorecard to evaluate issuers of stock as it does for corporate debt.

However, ESG investing within fixed income adds an additional layer of complexity when analyzing sovereigns. Indeed, an asset manager requires a much more robust process to analyze and score an entire country on ESG factors. Typically, the manager develops its own proprietary methods for objectively assessing how a country is contributing to climate change, relative to other nations.

One example of Pictet AM’s sovereign debt analysis is that it focuses not only on a country’s total carbon emissions, but also on the efficiency of those emissions and how that efficiency is trending over time. The ongoing analysis requires going beyond carbon emissions data to analyzing factors such as carbon emissions relative to GDP, net of land management and forestry. This helps the firm achieve a more accurate picture of emissions efficiency.

Read: Sustainability-linked bonds: emerging market corporations up the ante

Qualitative factors are also part of an ESG fixed-income manager’s assessment of sovereigns. Pictet AM has sought to improve its qualitative assessment by adding climate scientists to its board, and they help analyze government policy that relates to climate change.

When considering sovereigns, we want to see if the efficiency of emissions has improved or deteriorated. If we see emission levels trending lower and improved efficiency, that passes one level of the analytical process. We then look at the environmental policies associated with that government.
Ella Hoxha
Senior Investment Manager, Global Bonds, Pictet AM

Green Bonds
An area of fixed income that has recently seen strong growth is green bonds, which is debt raised to finance specific environment-related projects. Green bonds can be a constructive means for governments or companies to finance climate-change initiatives. As such, Pictet AM has actively encouraged select countries to start a green bond program to help achieve environmental targets.

But investors also need to be wary of greenwashing, as the proceeds of so-called ‘green’ bonds may not be ring-fenced around an environment project. Instead, they can be used for other purposes, such as refinancing existing debt. Therefore, investors need to look past the green label to consider debt issued by companies that have measurable sustainable impact.

Dialogue with Sovereign Issuers
Dialogue with sovereigns can also be more challenging than with a corporate management team or board. To have more influence, asset managers will often work together through a conduit, such as a non-governmental agency, nonprofit or other local entity to engage with a country on a particular ESG issue.

For example, in 2019, Pictet AM began a partnership with EMpower, a well-respected and innovative global philanthropic organization focused on youth in emerging economies, to provide a more complete picture of a sovereign’s long-term sustainable trajectory in human development. These types of partnerships with local organizations have provided the firm with an on-the-ground perspective via people and groups that it would otherwise not have had access to, and they help inform a meaningful dialogue with sovereign issuers. Last year, with travel restricted due to the global pandemic, these partnerships continued to provide Pictet AM with essential insights into local developments and their implications.

Read: Why EM bond investors can no longer ignore ESG

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III

WORKING WITH YOUR ASSET MANAGER

As sustainable investing has become more widely accepted, most global asset managers have embraced ESG factors into their decision-making process. But the level of commitment among them varies considerably. Asset owners need to do their due diligence to determine how much – and how well – ESG principles are embedded into an asset manager’s investment process and the firm’s culture.

When we think about living and breathing ESG, it’s not just what we do for our clients through their investment strategies, but how we act as a firm.
Luciano Diana
Senior Investment Manager, Thematic Equities, Pictet AM

Is ESG supported from the top?
When ESG is encouraged by the chief executive officer and other C-suite executives at an asset management firm, it can have a cascading effect through the company’s culture. The commitment from top executives is best demonstrated not just by what they say about ESG, but by what they do. For example, Pictet AM’s CEO, Laurent Ramsey, sits on the investment stewardship and sustainability board that is responsible for driving the firm’s ESG strategy and coordinating all its ESG and stewardship initiatives.

Is the asset manager engaging with the scientific community on climate and other environmental issues?
The body of knowledge surrounding climate science continues to evolve. As such, asset managers dedicated to addressing environmental issues must step outside the realm of finance and collaborate with the scientific community to inform investment analysis.

At Pictet AM, scientific collaboration takes many forms. The firm produces research and thought leadership on environmental issues in collaboration with universities. University professors who are leaders in climate science and ecology are also on the firm’s thematic strategy advisory boards.

Example of Scientific Partnership: Pictet AM has partnered with the Stockholm Resilience Centre (SRC), which established a groundbreaking scientific model called Planetary Boundaries, or PB. The model identifies the nine most critical environmental dimensions — among them, carbon emissions, fresh water use, land use and biodiversity — that are essential to maintaining a stable biosphere, and it quantifies the safe operating space within which human activities should take place.

Institutional investors want more reporting and transparency on the metrics that asset managers use for ESG investing. They also want more engagement… they want to see ongoing dialogue with a company, as opposed to a one-off meeting here or there.
Luciano Diana
Senior Investment Manager, Thematic Equities, Pictet AM

Working with the SRC, Pictet AM has adapted the PB model to an investment setting by quantifying the environmental impact for every $1 million annual revenue that a business generates. It uses the PB model to help narrow down its investable universe, and to determine which firms are developing products and services that can make a real difference in reversing environmental degradation.

Read: Global Environmental Opportunities: transforming sustainable investment

Planetary Boundaries

Does an ESG-specific team work alongside the investment team?
While portfolio managers and analysts play a critical role in considering ESG factors in the investment process, some asset managers also maintain an additional resource: a dedicated ESG-specific team that works alongside the investment teams.

At Pictet AM, the ESG-specific team co-ordinates implementation of their responsible investment policy, including ESG integration in investment processes, risk management, training on ESG-specific issues and reporting tools. In addition, it keeps the investment team up to date on how ESG third-party data is evolving and coordinates corporate and sovereign engagement across strategies that hold the same issuer, so that the firm can put its full heft behind an initiative.

What is the asset manager’s history with ESG investing?
While the ESG lens has been more widely adopted across Europe, it has become more popular with U.S. institutional investors in recent years, leading to the introduction of several ESG-themed products by asset managers. Asset owners need to understand their asset manager’s journey in ESG investing, when it started and how they have moved forward. For some managers, ESG investing is still relatively new while others have provided ESG integrated strategies, or even impact strategies, for two decades.

Pictet Asset Management’s first environmental-focused strategy, which addressed water scarcity, launched in 2000.

How robust is the analysis of companies based on ESG criteria?
With ESG ratings and data now widely available, asset managers can often find outside sources to inform their ESG analysis on an issuer. However, asset managers who are dedicated to ESG tend to have a robust, proprietary process that connects data from multiple sources and that weighs relative data points appropriately for each holding.

Pictet Asset Management’s proprietary ESG scorecard distills all the disparate data, sourced both externally and internally, into a comprehensive view of an issuer’s ESG risks and opportunities.

Some asset managers take on the responsibility to run their own businesses in the sustainable manner that they expect from the companies they invest in. This commitment can be demonstrated in any number of ways.

The question of benchmarking for institutional investors is a real challenge, especially when you move toward positive impact and more binding strategies where sometimes the [traditional] benchmark makes less sense.
Marie-Laure Schaufelberger
Head of Group ESG and Stewardship, Pictet Group
At Pictet AM, internal sustainable practices include the following goals:
  • The firm has reduced its own CO2 emissions per employee by 73% between 2008 and 2020.
  • Its balance sheet is invested in activities that help speed up the transition to a low-carbon economy.
  • It has eliminated balance-sheet exposure to fossil fuel producers and extractors.
  • It takes a fair and equitable approach to recruitment, promotion and pay, including a yearly gender-pay gap analysis.
  • The Pictet Group Foundation was established to fund impact-driven solutions that build resilient communities and ecosystems in the areas of water and nutrition.
Pictet AM Internal ESG Commitments

Is the manager part of broader initiatives to promote ESG industry-wide?
While each institutional investor can make a difference by allocating dollars to sustainable investing, long-term transformational change in global environmental and social challenges is bigger than one investor. Some asset managers who are committed to ESG are involved in broader industry collaborations that raise awareness, promote best practices or further the body of knowledge related to sustainable investing.

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IV

MONITORING AND BENCHMARKING

Perhaps more so than in traditional investment management, ESG and impact investing requires a close partnership between asset owner and asset manager. Below are some best practices for monitoring your asset manager’s approach to ESG investing and benchmarking.

Investment Process Checklist
There are a number of ways to monitor how an asset manager implements an ESG-integration and impact-investment strategy. Those run the gamut from performance updates to directional shifts on ESG factors to progress on stewardship efforts. Below is a sampling of questions that often come up in the monitoring process.

  • Did the portfolio manager change a weighting or sell a position because of ESG factors?
      •   If so, what was the rationale?
  • Within the portfolio, did the sector or industry tilts change?
      •  If so, what was the reason?
  • In proxy voting, how often did the asset manager vote against management?
      •   What were the reasons for its position?
  • What is the dialogue process on specific engagement issues?
      •   Is there an outcome?
      •   If the outcome failed, did the asset manager divest?
  • Are there any relevant updates to the data sourced externally or internally?
      •   How has the process changed, or will it change?
      •   Has the manager asked for any specific changes?

ESG Benchmarking
Most institutional investors track the performance of their active ESG strategies against a traditional stock or bond index and add material ESG key performance indicators, or KPIs, to benchmark the strategy. Those KPIs can vary based on each asset owner’s mandate and goals.

The challenge is in the latitude that active managers are given on an ESG-integrated strategy to move away from a traditional benchmark. For actively managed traditional strategies, institutional investors are accustomed to a small tracking error, generally in the range of 2% to 3%. Asset owners need to be able to account for a wider tracking error for ESG strategies, and this can be particularly true for impact strategies.

For instance, Pictet AM’s positive impact strategies, such as its global environmental opportunities strategy or clean energy strategy, are typically non-benchmarked products. Each strategy aims to beat a broad market index, such as the MSCI World, but does not try to align with it. The comparison with a broad market index can, instead, be more helpful in determining what the ESG strategy adds in value versus a traditional benchmark.

 

Developments to Watch
Major index providers already offer ESG-specific benchmarks for passive strategies that institutional investors can use for comparison on their active strategies.

Developments in benchmarking and adoption of new benchmarks continue to accelerate, particularly in areas such as climate transition. For instance, targeted benchmarks, such as the European Union’s Climate-Transition Benchmark and its Paris-Aligned Benchmark, could become increasingly relevant to institutional investors as they focus on the transition to net-zero carbon emissions by 2050.

Both benchmarks consider the carbon footprint of the underlying assets. The Climate-Transition Benchmark brings the resulting portfolio on a decarbonization trajectory, and the Paris-Aligned Benchmark puts the resulting benchmark portfolio’s carbon emissions in line with the Paris Climate Agreement to limit the rise in global temperature to 1.5 degrees Celsius above pre-industrial levels.

A narrow tracking error against a traditional index, in many ways, locks the investor into the old-world, fossil fuel-heavy economy that still exists today. If you want to be forward looking — if you want to capture the opportunities of tomorrow — then you can’t restrict yourself in sticking too closely to these types of benchmarks.
Marie-Laure Schaufelberger
Head of Group ESG and Stewardship, Pictet Group
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V

ACTIVE ENGAGEMENT AND STEWARDSHIP

Many institutional investors approach ESG investing with a dual mandate. Their first goal is typically directing capital to issuers that already demonstrate favorable ESG characteristics, while avoiding companies that have a poor track record on environmental or social issues. Their second goal is to put issuers on a more sustainable path. This is where engagement comes in, taking diverse forms.

Direct Dialogue with Corporate Issuers
Asset managers can engage with companies through proxy voting or through consistent dialogue with a company’s management or board of directors to encourage change on a particular ESG issue. Active managers that interact frequently with issuers consider engagement as an integral part of their broader ESG strategy.

For example, in 2020 alone, Pictet AM conducted engagements with 227 companies on 272 ESG topics. By topic area, the engagements included 47 on environmental issues, 105 on social issues and 120 on governance issues.

Collaborative Engagement
There are occasions when it is more effective for asset managers to act collectively rather than individually, particularly when the manager’s investment is relatively small in relation to the enterprise value of the company. Below is a sampling of key initiatives by asset managers working together to address a company or industry issue.

  • Climate Action 100+
    An initiative, led by global asset managers and asset owners, that engages with the largest global greenhouse gas emitters and with other companies that have significant opportunities to drive the clean energy transition and achieve the goals of the Paris Agreement. By April 2021, 575 investors with more than $54 trillion in assets under management had joined this initiative to engage with 167 companies. (Source: Climate Action 100+, April 2021.)

  • Mining and Tailings Safety Initiative
    An investor-led initiative covering 983 extractives companies that was launched in the wake of Brazilian mining company Vale’s Brumadinho dam disaster in January 2019. Key objectives are to develop the first public global database of toxic mining waste storage facilities and to create a new, independent global standard in tailings safety.

  • Investor Initiative for Sustainable Forests
    A joint collaboration between Ceres Investor Network and the PRI to raise awareness of the material financial risks of deforestation for companies sourcing commodities. It aims to foster investor engagement with firms to eliminate deforestation from their supply chains.

Broader Stewardship Efforts
Besides engagement with issuers, asset managers and asset owners also participate in industry collaborations that seek to raise awareness, promote ESG best practices and further the body of knowledge related to sustainable investing.


ESG-Related Organizations, Initiatives and Partnerships in the Investment Industry*

Carbon Disclosure Project (CDP)
Climate Action 100+
Climate Bond Initiative
Copenhagen Institute for Future Studies
European Fund and Asset Management Association (EFAMA)
FNG (Sustainable Investment Fund label)
FTSE Environmental Markets
Institutional Investors Group on Climate Change (IIGCC)
International Corporate Governance Network (ICGN)
Investor Initiative for Sustainable Forests
Italian Sustainable Investment Forum
Mining and Tailings Safety Initiative
Oxford University: Smith School for Enterprise and the Environment
JP Stewardship Code
Spanish Sustainable Investment Forum
Stockholm Resilience Center
Swiss Climate Foundation
Swiss Sustainable Finance (SSF)
Task Force on Climate-related Financial Disclosures (TCFD)
UK Stewardship Code
Science Based Targets Initiative (SBTI)
Net Zero Asset Managers Initiative
UN Principles for Responsible Investment

Note: *List includes groups that Pictet AM has been involved with
 

Source: Pictet Asset Management, June 2021.
Challenges such as climate change or inequality are not going to be the purview of one industry, one economic actor or one government. These are issues we must solve together.
Marie-Laure Schaufelberger
Head of Group ESG and Stewardship, Pictet Group
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VI

LOOKING AHEAD

Despite its rapid growth in recent years, sustainable investing is still a relatively new field. In the coming years, ongoing global, national and local regulations will continue to support its adoption by institutional investors. Impetus is also coming from companies that are providing more ESG disclosure and transparency, both due to increasingly vocal investor demand and companies’ own commitment to sustainability. Asset owners can also expect greater transparency from asset managers on their ESG-related investment approaches and practices, so they will have more clarity about ESG strategies before they invest.

As of June 2021, there are more than 195 mandatory regulatory initiatives across the globe that relate to sustainable finance and corporate responsibility and are in the implementation phase, according to Pictet AM. Together, they amount to more than 80 regulatory initiatives that financial institutions will need to implement in the next 24 months. The initiatives are largely in the areas of climate change, biodiversity, equality/corporate governance and human rights.

In the U.S., several regulatory requirements are likely to be introduced in the coming months. The Securities and Exchange Commission has taken a slightly different approach from Europe on climate risk disclosures; instead of targeting investment managers, it is focusing on companies they invest in. The SEC’s climate risk disclosure requirements for companies, expected to be proposed by the end of 2021, may include:
  • Consistent and comparable disclosures that are mandatory and ‘decision-useful’ for investors
  • A requirement for some disclosures to be included in the 10-K form filing
  • Quantitative disclosures on greenhouse gas emissions
  • Qualitative disclosures, such as how company leaders manage climate-related risk and opportunities and how those feed into corporate strategy

In addition, to clamp down on greenwashing, the SEC has set up a 22-person Climate and ESG Task Force to look for misstatements and material gaps in climate risk disclosures under current rules. It has also said that it may require companies to share five-year plans for cutting GHG emissions and commit to net-zero emissions goals. Other federal agencies are also actively looking at climate risks, such as the Federal Reserve that has asked the big banks to provide information on the impact of climate-related events to their balance sheets.

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VII

GLOSSARY

Active ownership
This refers to investors addressing the ESG policies of companies and other issuers by voting on such topics or actively engaging with corporate executives and boards of directors.

Best-in-class
An investment approach based on a sustainability rating in which a company's or issuer's ESG performance is compared with that of its sector peers. All companies with a rating above a defined threshold are considered as investable. 

ESG
ESG stands for environmental (for example, energy consumption, water usage), social (for example talent attraction, supply chain management) and governance (for example, remuneration policies, board governance). ESG factors form the basis for the different sustainable investing or responsible investing approaches.

ESG integration (Article 6*)
The explicit inclusion by asset managers of ESG-related risks and opportunities into traditional investment strategies based on a systematic process and appropriate research sources.

ESG binding (Article 8*)
An approach that tilts the investment portfolio toward top-performing companies from an ESG perspective. ‘Best-in-class’ or ‘positive tilt’ strategies fall within the binding category. It seeks to overweight the securities of companies with low perceived sustainability risks and underweight those with high sustainability risks on a best effort basis, subject to good governance practices.

Greenwashing
A term used to describe misleading claims by asset management firms about the ESG credentials of their investment strategies.

Positive impact (Article 9*)
An outcome-focused investment approach intended to generate a measurable, beneficial social or environmental impact alongside a financial return. It includes thematic strategies that target a specific challenge, such as clean water or clean energy.

Engagement
Investor-led dialogue with companies and other issuers on ESG matters with a view to share potential concerns, seek additional information, enhance public disclosure and/or influence behavior.

Exclusions
An investing approach that excludes companies, countries or other issuers based on activities considered not investable. Exclusion criteria (based on norms and values) can refer to product categories (for example, weapons, tobacco), activities (for example, animal testing), or business practices (for example, severe violation of human rights, corruption).

Exclusionary or Negative Screening
An investment strategy that excludes companies, countries or issuers on the grounds of activities considered as not investable. See ‘Exclusions’ for exclusion criteria. They can also be based on personal values (such as gambling) or on risk considerations (such as nuclear power).

Impact investing
Investments intended to generate a measurable, beneficial social and environmental impact alongside a financial return.

Principles for Responsible Investment (PRI)
The United Nations’ supported investor network that promotes and supports ESG integration into the investment and ownership decision process. Since 2006, the 100 original signatories have grown to over 4000 signatories worldwide. www.unpri.org

Proxy voting
In the context of the shareholder’s right to vote on certain corporate matters, the option for the shareholder to cast a proxy vote without attending the company’s annual and special meetings to vote.

Responsible investment
Any investment approach that integrates environmental, social and governance criteria into the selection and management of investments. It takes many forms, such as best-in-class investments, ESG integration, exclusionary screening, thematic investing and impact investing.

Sustainable Finance Disclosure Regulation (SFDR)
The European Union’s set of disclosure regulations, effective March 2021, that requires asset managers and other financial market participants to be transparent in reporting sustainability risks in their investment processes and potential adverse impacts of investment decisions on sustainability factors.

Task Force on Climate-Related Financial Disclosures (TCFD)
The Financial Stability Board released the TCFD framework in 2017 to help public companies and other organizations disclose climate-related risks and opportunities in a more effective, standardized manner in their reporting processes. www.fsb-tcfd.org

Thematic investing 
Investment in businesses contributing to sustainable solutions in environmental and social topics. Environmentally related investments include renewable energy, energy efficiency, clean technology, low-carbon transportation infrastructure, water treatment and resource efficiency. Socially related investments include education, health systems, poverty reduction and solutions for an ageing society. Read more on thematic investing.

United Nations’ Sustainable Development Goals (SDGs)
The set of social, environmental and economic targets agreed to by the United Nations in 2015 for its member countries (such as zero hunger, gender equality, clean water, climate action). The SDGs are used by businesses to report on their sustainability efforts and credentials, and by investors who want to know how companies are exposed to the SDGs. www.sdgs.un.org

*Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (SFDR).

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Quiz

Test your knowledge of ESG investing based on the information provided in this Guide. It offers a brief recap of some key areas of information related to ESG investing.

 
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