Pictet Asset Management's Thematic Equities

September 2023

Marketing Material

Written by

Marc-Olivier Buffle

Head of Thematic Client Portfolio Managers and Research

Louis Veilleux

Senior Investment Manager

Yi Shi

Client Porfolio Manager

01

Why we engage
02

What we do
03

How we identify engagement candidates and topics
04

How we engage
05

Engagement to proxy voting
06

Conclusion and further information

Why we engage

It can enhance long-term returns for our clients, both through value creation and risk mitigation. As a consequence, it is an integral part of our fiduciary duty to clients. Notably, it allows us to better understand business models and target improvements in areas of concern within companies.

In addition, we believe that equity investors can contribute to positive environmental and societal change through active ownership. Investors have a key role to play to achieve sustainability through their voting decisions and focused engagements. These center on the principles of trust building and long-term thinking with investee companies.

We consider active ownership to be a critical tool for having an investor impact. Investors can drive change by successfully raising concerns on ESG matters with companies which can lead to significant improvements for their stakeholders over time.

Thematic investing is particularly well-suited to generating such investor impact. That’s because thematic investment managers create differentiated, focused portfolios and are long-term investors across their investable universe. This approach establishes lasting relations with companies built on trust, which facilitate engagement discussions. Larger thematic strategies at Pictet Asset Management are also often a top twenty shareholders of their investees, making it easier to influence corporate management during engagement discussions.

Our Thematic Equities investment beliefs (focus, long-term, independence and responsibility) are deeply embedded in how we engage with the companies in which we invest.

We believe our role as an institution is about much more than financial return. We aim to create positive impact in the world through a responsible approach to investment and stewardship that values all stakeholders.

Laurent Ramsey Managing Partner

What we do

As active long-term company owners, the focus of our Thematic engagement goes beyond limiting the negatives – we don’t just seek to mitigate risks. Instead, we also focus on the positives, i.e., value creation. We embed these objectives into our engagement strategy. Risk mitigation targets improving management and disclosures of material, non-financial (incl. ESG) risks. Value creation targets strategic opportunities to enhance shareholder and stakeholder impact via sustainable transformation of business models and promotion of value-creating best practices.

How we identify engagement candidates and topics

The identification of strategic engagements is central to our engagement process. It is based on the alignment with important sustainability focus areas. These can be specific to a thematic portfolio strategy or fall under Pictet Group engagement priorities. The main considerations are:

How financially material the topic is to the company over the long term, and thus how important it is to its shareholders.
How material the topic is to the company’s wider stakeholders. Our proprietary ESG materiality framework is a key tool in determining this.
Our ability to influence the company. That can be through a significant ownership stake in the company or by having strong, long-term relationships with the company.

Some of these engagement topics are also aligned with the Pictet Group Engagement Focus, a top-down engagement programme that focuses on four key themes: climate, water, nutrition and long-termism.

Additionally ad-hoc engagements can be triggered for various reasons, including company requests for dialog, red flags raised from ESG screens, emerging controversies, data providers pointing towards potential high sustainability risks, or risks / concerns resulting from a corporate event.

Key engagement topics

By focusing on the six most critical stakeholder groups, we have identified the following potential engagement topics:

Topics table — *Pictet Group engagement focus

How we engage

While we are aware that engagements are unlikely to follow a linear path, we follow a structured process. This helps ensure the engagements achieve the following:

High quality – through fundamental research and coordination among investment teams to increase our ability to influence company management
Impactful – by setting meaningful, achievable objectives to increase the likelihood of positive outcome
Transparent – by carefully recording interactions and progress towards the set objectives for transparency and investor oversight

Strategy setting

• Approach Definition
We design a theme-specific engagement strategy.

• Prioritisation
We prioritise engagement with companies based on our ability to influence them. We also consider the materiality of the issue on the company and its stakeholder.

Engagement preparation

• Bottom-up research
We identify engagement topics for each prioritised company based on primary research and external data providers.
• Coordination
We coordinate with other Pictet investment teams and, in cases of collaborative engagement, with other investors.
• Initial fact-finding
We conduct an initial dialogue with the company to discuss and refine engagement topics and fill potential research gaps.

Engagement

• Objective setting
We define SMART (specific, measurable, attainable, relevant, time-bound) engagement objectives and share them with the company.
• Engagement
We meet with companies and other key stakeholders to ensure commitment to addressing the topic(s) and progress towards the objective. We also create an action plan for next steps.
• Record
Interactions (internal and external) are recorded to ensure accountability , auditability, and a basis for reporting. Generally, we record our engagement journey with a company using five milestones: Initial communications; Dialogue; Commitment to Address Issue; Strategy Development to Address Issue; and Advanced implementation.
• Follow-up/Escalation
We record progress made against the pre-defined objectives and evaluate the outcome after conclusion of the objective’s time horizon. Based on the outcome, we reassess our investment and potentially change the target weight of the company in our portfolio.

Where we consider a company’s progress unsatisfactory, a number of actions can follow: collaborative engagement; vote against management; write formal letters; or submit shareholder resolutions. Ultimately, if various escalation channels have been exhausted and we see insufficient progress, we may decide to reduce our exposure to a company, or divest completely.

Outcome

• Resolution/Termination
Targeted engagement led by Pictet Asset Management is tracked. Once we are satisfied that the company has addressed the objective, we close the engagement case and record the outcome.
• Reporting
We use the Pictet Asset Management-wide recording system to inform our engagement statistics and write about the engagement cases for our clients as well as portfolio reviews and ad-hoc due diligence requests. While we aim for transparency wherever possible, we also carefully consider the sensitivity of information we share (e.g., company names may need to be redacted).

Engagement to proxy voting

Our engagements are interlinked with our approach to proxy voting. The need for one can be triggered by the other:

Voting rights are exercised at general assembly meetings for the companies held in the Thematic Equity strategies in accordance with Pictet Asset Management’s voting policy. Our voting decisions are made according to the Thematic Equity team’s bottom-up analysis. The teams conduct due diligence on votable topics and then review the ISS’s sustainability voting recommendations. In cases where our team’s decisions are in line with ISS recommendations, proxy voting agents will pass on our votes and, where appropriate, we may follow up with the company post-voting if we vote against management. On the other hand, decision to deviate from ISS recommendation can be based on having a deeper understanding of the company, additional clarifications from the company relating to proxy voting topics or an escalation of an existing engagement. Our decision to deviate may also necessitate new, targeted engagements.

Conclusion and further information

Active engagement is an essential part of the investment process within Pictet Asset Management’s Thematic Equities strategies. It enables investment managers to gain deeper insights into the companies they hold and encourage companies to adopt changes that can unlock business value and mitigate risk. It is also a critical tool for our investment teams to drive positive environmental and social change. The approach will likely continue to gain in importance and we are committed to providing regular reporting on such activities.

Please contact your relationship manager in case of interest for any of the following: Responsible Investment Report, Impact Report, Active Ownership Report, Responsible Investment Policy.

Engagement case study

Company: Tetra Tech, Inc.
ESG issue: Board / management structure and remuneration
Engagement objective: Board renewal and increased board diversity

Strategy setting

process step 1

Tetra Tech, a mid-cap company, is a long-term holding in Pictet-Water and Pictet-Global Environmental Opportunities making us a top 5 shareholder in the company. Our ability to influence was considered high enough to proceed. The topic of engagement, board composition, was considered material to ensure the company would have the skills and experience to face long-term strategic challenges and opportunities.

Engagement preparation

process step 2

Two out of the seven non-executive directors on the board had tenures of 28 and 33 years, respectively. While both had brought significant experience and skills to the board and contributed to the exceptional track record of the company, we saw an opportunity for board renewal. This related not only to a changed tenure profile, but also a desire to create a more diverse board. We set out three advantages to doing this: allowing the board to better understand the human dimension to the 'environmental justice' trend supported by President Biden's intention to increase funding for pollution prevention and public amenities to disadvantaged communities; making the board more reflective of the increasingly global footprint of its revenue streams; and making it more reflective of the employee base.

The Pictet-Water team led the engagement, in close collaboration with the Pictet-Global Environmental Opportunities.

Engagement

process step 3

Engagement began in 2021 after we voted against the two long-tenured non-executive directors. At the time of the 2022 AGM, one of the directors had stepped down. We welcomed this change, but believed further changes needed to happen. We contacted the company to express our intention to vote against the Chair of the Nomination Committee, and we sent a letter to the Board to explain the decision. We held further constructive engagement with the company and received assurances about the future process for board renewal, including the appointment of a new independent non-executive to the board with effect from 1 May 2022. Since then, we have conducted further constructive engagement.

Outcome

process step 4

Since the start of the engagement, board composition has developed significantly. Changes have taken place with an emphasis on candidates who are diverse but also bring deep relevant expertise to the Tetra Tech Board. During the second half of 2022, a further high quality appointment was made, the company embedded a tenure limit into its processes for Board appointment and membership, and confirmed that the remaining long-tenured Board member will stay until 2024 to aid the transition before stepping down. This measured programme of renewal has delivered on the outcomes we sought back in 2021. The engagement was closed and deemed successful.

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About

Marc-Olivier Buffle

Marc-Olivier Buffle joined Pictet Asset Management in 2014 and is Head of Thematic Client Portfolio Managers and Research in the Thematic Equities team, an internal member of Global Environmental Opportunity’s advisory board and of Pictet’s Environmental Policy Committee. Prior to that Marc was a member of the Board of the Swiss Climate foundation and of Pictet’s Sustainability Board. Before joining Pictet, Marc was at RobecoSAM where he acted as Head of industrials and water equity research, as well as co-Head of Sustainability Investing research. He was responsible for the research methodology underpinning the S&P Dow Jones Sustainability Index. Previously he was responsible for water technologies business development in EMEA at the Danaher Corporation. Marc started his career at Trojan Technologies in London Canada, where he led a R&D team focusing on advanced water treatment technologies. Marc holds a MSc in engineering from the ETH in Zurich, and a PhD from EAWAG in Environmental Chemistry and is the author of patents, scientific articles, technical and financial publications.

About

Louis Veilleux

Louis Veilleux joined Pictet Asset Management in 2005 and is a Senior Investment Manager in the Thematic Equities team. Louis took on the role of co-lead of the Water strategy in 2018. Before that, he co-managed our global utilities strategy since 2009. He began his career at Pictet in Canada in 1998 before moving to Geneva in 2000 to work in the Financial Research Department with Industrials coverage. Louis holds a Bachelor's degree in Business Administration from Laval University in Canada. He completed his MBA just before receiving his CFA qualification in 2001.

About

Yi Shi

Yi Shi joined Pictet Asset Management in 2022 as a Client Portfolio Manager and Engagement Specialist in the Thematic Equities team. Prior to Pictet, Shi worked for Royal Bank of Canada in their wealth management business advancing ESG integration into equity investments, advisory, and research. He has also held roles with Rhode Island Infrastructure Bank and Connecticut Green Bank focused on clean energy and green infrastructure initiatives. Shi received a B.A. in Physics and a B.S. in Society and Environment from the University of California, Berkeley. He also received a Master of Environmental Management from Yale University’s School of the Environment, and an MBA in Funds Management from the University of Toronto, Rotman School of Management.

Important legal information

This marketing material is issued by Pictet Asset Management (Europe) S.A.. It is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The latest version of the fund‘s prospectus, Pre-Contractual Template (PCT) when applicable, Key Information Document (KID), annual and semi-annual reports must be read before investing. They are available free of charge in English on www.assetmanagement.pictet or in paper copy at Pictet Asset Management (Europe) S.A., 6B, rue du Fort Niedergruenewald, L-2226 Luxembourg, or at the office of the fund local agent, distributor or centralizing agent if any.

The KID is also available in the local language of each country where the compartment is registered. The prospectus, the PCT when applicable, and the annual and semi-annual reports may also be available in other languages, please refer to the website for other available languages. Only the latest version of these documents may be relied upon as the basis for investment decisions.

The summary of investor rights (in English and in the different languages of our website) is available here and at www.assetmanagement.pictet under the heading "Resources", at the bottom of the page.

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The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments or services.

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. The management company has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.

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Pictet Asset Management's Thematic Equities

Thematic Equities: active engagement

Written by

Table of contents

Why we engage

What we do

How we identify engagement candidates and topics

Key engagement topics

How we engage

Strategy setting

Engagement preparation

Engagement

Outcome

Engagement to proxy voting

Conclusion and further information

Engagement case study

Strategy setting

Engagement preparation

Engagement

Outcome

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