The long road toward ESG integration

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Marc-Olivier Buffle, Pictet Asset Management 

Pictet Asset Management has been managing various ESG-focused thematic equity funds, such as its water fund, which has been around for around 18 years.

However, formal ESG integration for all the firm’s managed funds started in 2007 when it became a signatory in the UN’s PRI, according to Marc-Olivier Buffle, Geneva-based senior client portfolio manager for thematic equities.

“You could say that formal ESG integration started with the signature for the PRI,” he said.

Given its early start, all of the firm’s funds, including thematic and mainstream funds, have integrated ESG factors in the investment process – but it also took some time.

“It has been something that is building over time, so it’s not one year. We suddenly decided to incorporate ESG within the processes, but it is rather something started with one strategy, and then another and then another,” he said.

Like Franklin Templeton, Buffle said that ESG integration will vary from one team to another.

“You don’t have a one-size fits all process for ESG integration. For example, the European sustainable equities team integrates ESG slightly different from what we do in thematics, and thematics is different from the fixed income team.”

How ESG factors helped

Buffle said his firm’s governance checks stopped it from investing in a problematic company – Volkswagen.

The car manufacturer company was involved in an environmental scandal even though it was hailed as an ESG champion, receiving various awards and accolades for being an environmental steward.

The news about Volkswagen cheating on emissions tests broke only 2015 but had actually been going on since 2006. During that period, management behaved publicly like they helmed a leading ESG company, ticking all the boxes, while hidden from view they wilfully violated ESG principles by cheating on US government emissions tests.

“We detected that the company’s governance was not a good one, and therefore we did not invest at the time,” Buffle said.

“To be fair, we didn’t know it was a pollution issue, although the tests were governance issues,” he said.

Buffle explained that ESG scores help fund managers detect failure in management, but it does not necessarily tell exactly what the problem is going to be.

“It is not a silver bullet. If it was that simple that you could do ESG scores and immediately make money out of it. So you need to integrate this knowledge along with financial information and make yourself a victor out if it.”

The firm makes use of various ESG research and metrics coming from third-party providers, as well as excluding around 50 companies that are involved in weapons or military from the whole equity universe.

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