How Blending Philanthropy, Investment Creates "Win-Wins" – Pictet

Tom Burroughes Group Editor London 14 November 2023

How Blending Philanthropy, Investment Creates

This news service recently spoke to a senior Pictet figure about the work it does on sustainability, impact investing, and philanthropy – areas which increasingly intersect.

Blending philanthropy with forms of early-stage investment can remove some of the risks from projects for a more sustainable world. This approach appeals to the time horizons of wealthy clients, a senior figure at Pictet Wealth Management says. 

Pictet Wealth Management’s head of ESG, Rosa Sangiorgio, who is based most of the time in Switzerland, talked to WealthBriefing at the firm’s London offices in a wide-ranging conversation that touched on many facets of sustainability. These go beyond the usual topic of curbing fossil fuels, to address subjects such as biodiversity, regenerative agriculture and management of oceans.

Mindful that the more challenging economic conditions at present can create headwinds, a major concern about putting money into sustainability is how to do this at scale and in ways which bring tangible results, she said. Working with colleagues on the philanthropy side, Sangiorgio noted how philanthropy can be married up with forms of investment – for a period. “Philanthropy can help to de-risk it,” she said.

“We are talking about multi-generational wealth and time horizons that go well beyond 10 years,” Sangiorgio said. “Clients realise that their investments are the real economy that they will leave for their children, their nephews and nieces.” 

“Many clients are successful entrepreneurs and they have been successful because they found solutions to problems,” she said. “The financial industry is a bridge between people with money and people with ideas.”

Sangiorgio brings plenty of experience to the role – 22 years of it. She has worked in structuring, managing, and distributing traditional and responsible investment solutions for institutional and private investors globally. Before she joined the Swiss firm in 2020, Sangiorgio worked for several major European financial institutions. Since 2012, she has been concentrating on sustainability and impact investing, most recently leading the sustainability and impact investing effort for Credit Suisse Investment Management.

Sangiorgio talked about the approach Pictet takes in private market investments. This news service put several questions to her:

Does Pictet have a particular approach to how private market investments are held and managed from a sustainability point of view? 
“Pictet has more than 30 years of experience in alternative investments, and around $27 billion of assets under management invested in private equity. This expertise in private markets, coupled with our long-term thematic franchise, allows us to capture interesting investment opportunities. As the risk-profile of private investment opportunities is different from listed markets, we are particularly careful to invest in well diversified portfolios, along with experienced partners in the space and with dedicated due diligence. 

“It's common knowledge that private markets are opaque, with unlisted companies not required to make the same levels of disclosure as their listed peers. This is far from ideal for sustainability where transparency is key. Fortunately, this is now changing for several reasons including sustainability becoming a priority for asset owners and companies, growing interest in democratising private markets, and regulation around disclosure developing in Europe (green taxonomy and sustainable finance disclosure regulation), the UK and US. 

“In this journey towards transparency, Pictet is taking an active role. In 2021, we joined the ESG Data Convergence Initiative (EDCI) as a member of the steering committee. The objective of EDCI is to increase transparency and facilitate the comparability of data between companies and sectors. 

“In general, we believe that private markets are well placed to lead the green transition with private investors exerting direct control and therefore greater influence on corporate behaviour and capital allocation decisions (compared with listed markets). The time horizon is also often longer than that of investors in listed assets, giving companies more time to act and succeed.” 

Does Pictet WM have a cap on how many flights its staff take on business to curb C02 emissions, or if it has a carbon offset strategy, how does this work? Has it found that working from home or in an office is, in net terms, energy efficient?
“To significantly reduce the environmental impact of both our activities and investments is a key ambition for us. We have established a strategy based on three pillars to meet the challenge of making operations responsible: infrastructure, mobility and consumption.
“On business travel, we have forbidden air travel within Switzerland and encourage employees to travel by train across France, Italy and Germany. We promote virtual meetings to reduce travel demand by investing in tools (for both desktop and meeting rooms) that facilitate remote collaboration. While working from home automatically results in a reduction of the emissions generated by commuting. 
“At Pictet, our strategy is to reduce emissions first and then contribute to financing global projects to remove CO2. These include, for example, projects that sequestrate emissions by relying on natural processes – e.g., afforestation, reforestation and revegetation and stewardship of coastal ecosystems – to enhance natural carbon sinks. As well as projects that use chemical processes for carbon dioxide removal (CDR) with an objective to achieve "net negative emissions," i.e., drawing more CO2 from the atmosphere than the levels emitted. 
“Most recently, Pictet has been one of the few financial institutions with committed and validated targets by the Science Base Targets initiative. By 2030, the Pictet Group aims to reduce direct greenhouse gas emissions by 55 per cent compared with 2019 levels.”

Can we talk about some of the ways that clients who are interested in areas such as, for example, regenerative agriculture, can put their money to work? Can you offer a few case studies?
"The latest statistics show the population increasing to around 10 billion by 2030, compounded with a progressively higher quality of life. This translates into an increasing demand for food. At the same time, food production accounts for 40 per cent of land, 70 per cent of water, 47 per cent of pressure on biodiversity and food systems are responsible for one third of global GHG emissions; one in five deaths are due to poor nutrition, more than two billion people are overweight or obese, and more than two billion people have insufficient access to nutrition. We believe that food systems are key to optimising human health and environmental sustainability.

“We see great interest in regenerative agriculture from our clients to promote better practices, more yield and nutritional value in the long term, with fewer resources used. Some of our clients invest directly in agriculture, buying land and transitioning from conventional agriculture to regenerative agriculture. However, this type of activity requires a high level of involvement, a development of competence and a long-term perspective.

“Others are investing in agritech either directly or through investment funds. Examples of investments in this field include leading providers of agriculture integrated equipment – that are innovating themselves by improving their technology to support regenerative practices – and smaller innovators producing smart tools, working for example on highly efficient and precise soil sampling, or drones for agriculture.”

Data is important and clients need and expect evidence that their investments are working as hoped. What sort of data do you collect and how do you deal with the challenge of making it intelligible?
“Across research, investment decisions, risk management and advisory services, we place an emphasis on the inclusion of high quality environmental, social and governance data when evaluating corporate issuers. As such, and specifically to inform investment decisions and active ownership activities, we have developed a proprietary ESG scorecard that provides a focused view of ESG risks and opportunities. 

“We believe investment success results from a rigorous and repeatable process. It is not about luck or having access to privileged information. It requires a rigorous and unbiased method for gathering and analysing information, taking decisions, and executing them with discipline. 

“The Pictet ESG Scorecard is based on a curated set of the most material data points, across four pillars:

1.  Corporate governance: Are companies managed for the long term e.g., board competence and independence, executive renumeration, audit and risk control?

2.  Products and services: How “future-fit/SDF compatible” is their product-mix? Are they generating revenue at the expense of public health and/or the environment? Are they offering “clean and safe” products and services?

3.  Operational risks: How do they run their business? What is the carbon intensity of their operations? Are they exposed to extreme weather events and other climate risks? Are they managing other environmental and social impacts associated with their activities and sup-ply chain?

4. Controversies: Are they 'walking the talk' e.g., bribery and corruption, market abuse, product recalls?

“The Pictet ESG Scorecard is underpinned by a robust framework of data and threshold selection, driven by deep data knowledge, analysis and experience. Rather than going down the route of aggregation and risk losing the details that matter, our investment teams use flags as indicators for their own fundamental research and decision-making.  

“The Scorecard indicates areas of concern from an ESG perspective through red flags. Meanwhile, areas seen as positive from an ESG perspective are indicated through green flags.”

On the idea of philanthropy and its “de-risking” of early-stage investments of certain projects, are there actual examples? 
“Philanthropic money and development finance can offer guarantees to reduce risk for private finance, and/or create strong incentives for the private sector to invest in strategic sectors through supplement grants or technical assistance.”

The world is in a difficult place – high energy prices, some grim geopolitics (Ukraine, Israel, etc), interest rates are rising to curb inflation pressures, the mental/physical impact of the pandemic – do you find these events have increased interest in sustainability, or have forced people to adapt?
“There is increasing awareness of the fact that investments represent the real economy of the future. In today’s challenging times, this awareness is at the same time frightening and empowering. Alongside increasing scientific knowledge, regulators’ pressure and high media coverage, this awareness has supported investors interest trends towards sustainability.

At the same time, the definition of sustainability has sharpened. While 10 years ago there was much more demand for exclusions, today’s investors realise that engaging with companies and voting at their AGMs is a much more effective transformation strategy.”

When sitting down with clients, typically who is the first to talk about sustainability – Pictet, or the client?
“It’s difficult to gather statistics on who initiates the conversation. Responsibility is one of the guiding principles at Pictet and one of our long-term investment beliefs, so often we initiate the conversation on the overall topic and then deep dive into the specific area of interest for clients. Some clients are more interested in how we avoid sustainability risks, others want to know how to leverage upcoming opportunities. Some clients ask about investing in the energy transition, others want to ensure they invest in companies with good governance. Each client has their own perspective and vision.

“My personal experience is that the conversation is unique and often key to deepening the relationship. It allows the client to connect with their wealth and legacy and enables us to get to know them better, and therefore provide them with the most appropriate investment solutions and services.”

To what extent do you think that sustainability in all its forms is increasingly forming part of risk management and due diligence?
“ESG integration is definitively becoming the norm. Together with increasing regulations and disclosure comes increasing awareness. For example, on the E side, every company has a climate action plan, and analysts and portfolio managers are becoming more and more accustomed to judge whether those are credible or not. Ignoring that information and those signals is not an option anymore.

“At the same time, the concept of sustainability, at least in Europe, is more linked to specific economic activities than to the overall operations of a company. This is where we see a huge influence of the “EU Taxonomy” that allows a common definition of economic activities that can be considered environmentally sustainable (or not).”

Are there other points you want to make about the work Pictet is doing in this area and where you see things at the firm in five years’ time?
“Investing in companies that seek to find the most appropriate solutions to pressing environmental and social issues is, today, a concrete way in which investors can contribute to safeguarding the quality of life – including our own and that of the generations to come – through the management of their portfolios.

“But this may not be enough to achieve the ambitious ESG goals we have set for ourselves. We need to make sure that all companies, even in the most traditional sectors, change their approach to more sustainable practices. 

“Take the example of companies that produce energy from fossil fuels: on the one hand, they are an integral part of the supply chain that allows us to turn on the lights or catch a plane; on the other, the use of oil and coal are driving the greenhouse gas emissions that contribute to global warming. What should a responsible investor do? Sell the shares of such companies? Numerous studies show that selling or less trading demand has little effect on the company when it comes to listed secondary markets. Most likely someone else will buy those shares and the company will continue to operate without too much drama. In extreme cases, ownership could even go private, with even less information transparency requirements and a worsening of the situation.

“Staying invested and supporting the company as shareholders in order to transform it is, in some cases, the most responsible decision. At Pictet we use the tool of active share ownership to establish a constructive dialogue with management, supporting their commitment to zero emissions, directing companies to adopt new processes to produce energy more sustainably, invest in research and renewable resources, and involve experts who specialise in climate change in strategic decisions. The goal is to significantly reduce their carbon footprint over time.

“Excluding these companies from portfolios reduces the investor's reputational risk, but it is not always the ideal solution if the goal is to support the transition. The basic ingredients for success in this type of dialogue are clarity and consistency of message. If initial engagement efforts are unsuccessful, investors may consider escalation strategies, such as contacting the board of directors, resorting to a vote, filing a resolution, up to and including reducing exposure or divesting.”

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