Sustainable Investment From Theory to Practice

Eric Borremans

19th May, 2016

FIAP International Seminar

Sustainable InvestmentFrom Theory to Practice

Pictet Asset Management | For professional investors only | Sustainable Investment From Theory to Practice

1

What are talking about?

2Pictet Asset Management | For professional investors only | Sustainable Investment From Theory to Practice

ESG torpedoes can be lethal

3

2001: Enron

2010: BP

2014: Takata, Petrobras

2015: Valeant, Volkswagen

0

10

20

30

40

50

60

70

80

90

100

1 25 50 75 100 125 150 175 200 225 250

Volkswagen

Takata

Enron

BP

Petrobras

Valeant

Source: Pictet Asset Management Datastream

Number of trading days

Ab

solu

te p

erfo

rman

ce r

ebas

ed t

o 1

00


Several options for integrating sustainability

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Investment universe

Ob

ject

ive

• Equities• Fixed Income• Balanced

Sustainablestrategies

Picklong-termwinners

Focused

• Exclusion of controversial weapons• Integration of critical ESG risks• Systematic exercise of voting rights

Conventionalstrategies

Avoidtorpedoes

Large

• Water• Clean Energy• Forestry & Agriculture

Environmental strategiesTarget clean

products &services

Concentrated


Measuring ESG characteristics is key


Provide a concrete measure of the portfolio against its benchmark

Use transparent and objective indicators

Identify key contributors to, and detractors from, performance

Update on a quarterly basis

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ESG characteristics: corporate governance

› The portfolio is invested in companies with

robust governance practices:

› National Grid

› Philips, ABB

› Danone, L’Oreal

› Ahold

› The portfolio is not exposed to companies

with significant governance weaknesses

› Volkswagen

› BP

› HSBC, Standard Chartered, Aberdeen AM

› LVMH

› Finmeccanica

Source: ISS, Pictet Asset Management. As at 31.03.2016

(1) In response to increased pressure from regulators and shareholders for stronger corporate governance,companies are expected to strengthen board competence and independence, to adopt executiveremuneration plans based on long-term performance, to respect minority shareholder rights, and toreinforce risk control and audit functions. This indicator provides the portfolio breakdown v. itsbenchmark according to three levels of corporate governance (robust, average, risky). Results are basedon total company weight in each category.

Corporate governance in portfolio vs benchmark1


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Carbon intensity of portfolio vs benchmark1

ESG characteristics: carbon intensity

Source: InRate, Pictet Asset Management. As at 31.03.2016

(1) This indicator compares the carbon intensity of the portfolio against its benchmark. GHGemissions include direct emissions from production activities (e.g. from car manufacturing) aswell as indirect emissions associated with product use (e.g. from car driving). In order to providemeaningful comparisons, total GHG emissions are expressed in tonnes of CO2 (tCO2 eq.) dividedby company revenue. Final results are based on company weights in the portfolio and benchmark.

33% reduction

The portfolio is invested in companies that are significantly less carbon intensive than its benchmark

› Absence of major carbon emitters

› Glencore, BHP Billiton, Rio Tinto, Anglo

American

› Statoil, BP, Total, Shell

› Inclusion of low carbon energy sources

› Scottish & Soutern Energy

› National Grid

› Snam

› Enagas


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ESG characteristics: controversial companies

Source: Sustainanalytics, Pictet Asset Management. As at 31.03.2016

(1) This indicator measures the extent to which companies are impacted by ESG controversies suchas bribery, corruption, product recalls, pollution incidents and conflicts with local communities.Controversies are evaluated based on their degree of severity and recurrence, as well as companyaccountability and reliability of information sources. Controversies are measured on a relative scaleand categorised into eight different themes. Final results are based on company weights in theportfolio and benchmark.

ESG controversies of portfolio vs benchmark1

Companies Key controversies

Glencore Multiple pollution incidents

BHP Billiton Multiple pollution incidents

Alstom Bribery allegations

Syngenta Product-related controversies

Deutsche Bank Market abuse

Volkswagen Market abuse

HSBC Market abuse

Barclays Market abuse

› Examples of controversial companies in which we do not invest


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Active ownership

› Voting rights are systematically exercised

› Advice provided by Ethos

› 95 meetings and 1640 resolutions

› No stock lending

› Voted against or abstained 264 resolutions

› Short-term or excessive executive

remuneration (eg adidas)

› Equity issuance without pre-emptive rights

(eg L’Oreal)

› Appointment of directors (eg Lindt &

Sprungli)

› Supported 4 out of 12 shareholder

resolutions (eg Industrivarden)

Source: Ethos. As at 31.12.2015

Proxy voting by type of resolution (% of total no of resolutions)

0% 25% 50% 75% 100%

Reorganization and Mergers

Routine/Business

Directors Related

Capitalization

Remuneration

Shareholder Proposals

For Against or abstain


2

The Case for Sustainable Investment


Companies face disruptive challenges

Financial pressures Short-termism

Over-dependency on leverage

Misallocation of capital to deliver fast growth

Governance concerns Market abuse

Principal-agent issues

Accounting creativity and tax avoidance

Social challenges Product health & safety concerns

Poor labour standards

Human rights violations

Environmental limits Depletion of natural resources

Environmental degradation

Climate change

(1)

(2)

(1) Source: Pictet Asset Management. Annual compounded performance of a universe of global equities by assets growth 1991-2011. Largest 20% global equities: North

America, Europe, Japan. Ranked by total assets growth over 5-year periods. Equally-weighted portfolios rebalanced twice a year. Total return in USD.

(2) Source: HOLT ValueSearch® , Factset Compustat data base. Universe EUR greater than $1B in market cap. Effective tax rate = annual book tax expense per the income

statement / annual pre tax earnings. Cash Tax Rate = annual cash taxes paid per the statement of cash flows / annual pretax earnings.

Pictet Asset Management | For professional investors only | Sustainable Investment From Theory to Practice 11

Where can it go wrong ?

Board

Management

Customers

Fixed Assets

Employees

Suppliers

Lenders

Shareholders

Free CashFlow

Government

• Capex• R&D

• Sales

• Capital increase

• Loans• Bonds

• Interest• Principal

• Salaries• Pension contribution

• Taxes

• Supplies

• Remuneration

• Dividends

• Fees

FinancialMarkets

Price & Liquidity

• Bribery & corruption• Aggressive tax planning• Fines / Settlements

• Ill-health / injuries / fatalities

• Poor labour standards• Excessive turnover

• Poor labour standards• Violation of human rights• Environmental damage

• Pollution• Impact on local communities

• Bribery and corruption• Market abuse• Public health impacts• Pollution

• Creative accounting

• Excessive leverage

• Excessive use of sharebuy backs to boost EPS

• Short-term oriented

• Conflicts between majority and with minority shareholders

• Lack of strategicdirection / oversight


Example # 1 - Climate change

› Emissions are on track for 3.2 to

5.4°C “likely” increase in

temperature above pre-industrial

level

› Strong momentum for a global

agreement in Paris

13

GHG emissions : observations and scenarios

Source: Fuss et al, 2014

Cumulative climate policies since 2005

Source: IEA, GLOBE, HSBC


Clean technologies are becoming more competitive

Evolution of levelized cost of energy

Source: New Energy Finance, H2-15. Notes: Levelized cost of energy indicates the cost of producing 1 MWh of

electricity, including capital costs, operating costs and financing costs

Projected cost of lithium-ion battery packs (USD per KWh)

-50% -33%-33%

Source: Pictet Asset Management, Deutsche Bank, Tesla Motors 2015


The risk of stranded assets of oil companies

OIL GAS COAL

Reserves Resources

0.3o C0.8o C

0.2o C

0.8o C

1.2o C

38.0o C (!)

We should leave in the ground:- 1/3 of oil reserves, - 50% of gas reserves - 82% of coal reserves- 100% of coal resources

Source: University College London, UNEP

Reserves Resources Reserves Resources

Source: PWM Learning estimates (08.12.2015). WACC = 6.1%

Oil price per barrel 60 USD 40 USD

EV today (bn USD) 128

EV forecasted (bn USD)

1.5% growth infinity 154 21% 88 -31%

0.0% growth infinity 115 -10% 66 -49%

30 yr forecasts, -1.5% gr. 82 -36% 47 -63%


Example #2 - Aggressive tax planning under attack in Europe


Structural decline of corporate tax rates

Corporate Tax Rates in Europe

Source: HOLT ValueSearch® , Factset Compustat data base. Universe EUR greater than $1B in market cap. Effective tax rate = annual book tax expense per the income statement / annual pre tax earnings. Cash Tax Rate = annual cash taxes paid per the statement of cash flows / annual pretax earnings

› Corporate tax rates have

come down over the past

10 years in Europe

› However, the effective

and cash tax rates also

have declined, creating a

tax gap


Companies with low tax rates could be at risk

?Pictet Asset Management | For professional investors only | Sustainable Investment From Theory to Practice 18

Example #3: Excessive share buybacks

2009 S.Palmisano

V.Rometty

Investors satisfied of EPS growth

Analysts doubt on the sustainability of growthFCF generated160 bn

(2007-2017E)+

Cessions 5 mias

M&A (45 deals)20 bn USD

over 10 years+

Dividends& Share buybacks

145 bn USD

Huge improvement of operating marginsEPS rises 11% per yearROE rises from 36% in 2004 to 69% in 2014

-> 48% linked to EPS


3

Applying Sustainable Investment : European Equities


Investment objective

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› We aim to generate steady

returns by investing in

financially robust

companies that benefit from

the drive to a more

sustainable economy

› … while avoiding those that

generate profits at the

expense of society or the

natural environment.

Target sustainable and avoid unsustainable companies

Responsibility

Weak

Strong

Unattractive Attractive

Profitable companies at cost to society or

the environment

Sustainable Companies

≈ 30% (*)

Quality

Clean and safe but

not financially attractive

(*) By weight in MSCI Europe. This weight is indicative and subject to change.

Source: Pictet Asset Management

Irresponsible and

unprofitable


How we identify Quality Companies

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QUALITYCOMPANIES

Price

Protection

Profitability

Prudence

Reasonably priced

• Price/Book

• Price/Sales

• Price/Cash Flow

• Price/Earnings

• EV/EBITDA

• Dividend Yield

Resilient

• Volatility

• Beta

• Correlation

• Drawdowns

Stable return businesses

• Equity / Assets

• Debt/EV

• Cash flows /Interest

costs

• Debt/Cash Flows

• 5 yr Asset Growth

High return businesses

• Gross, Operating and

Net margins

• Asset efficiency

• Special items

• ROCE, ROE

• Long term averages

and trend


How we identify Responsible Companies

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RESPONSIBLE COMPANIES

Governance

ReputationOperations

Products

Well-managed...

• Board competence & independence

• Pay for long-term performance

• Audit & risk control

• Accounting integrity

• Tax citizenship

… walking the talk

• Bribery & corruption

• Market abuse

• Pollution incidents

• Human right violations

… operationally efficient

• Energy efficiency

• Carbon footprint

• Occupational safety

• Water criticality

...with an attractive product-mix

• Increase exposure to clean &

safe products products &

services

• Avoid negative impacts on

public health and/or the

environment(*)

(*) Companies generating over 5% turnover in weapons, nuclear, tobacco, alcohol, gambling, pornography, GMOs are not investible.


Our ESG research is based on market leading sources

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Research providers Leading edge

Corporate governance and proxy voting research (Global)

Proxy voting research (Europe)

Creative accounting

Executive remuneration, corporate tax

Controversial products, carbon footprint, ESG rating

Controversy analysis, controversial weapons

Controversy newsflow

Environmental and social indicators

Sustainable products & services (1)

Corporate governance (CLSA, Oddo), Climate change

(HSBC)

Proprietary screen based on a unique combination of data providers

Each provider was selected for its market leading research on specific ESG datasets

(1) Currently on-trial.

Pictet has not acquired any rights or license to reproduce the trademarks, logos or images set out in this document except that it holds the rights to use the Pictet and Pictet Funds

trademarks. The trademarks, logos and images set out in this document are used only for the purpose of this presentation.


Putting it all together

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Source: Pictet Asset Management.

Pictet has not acquired any rights or license to reproduce the trademarks, logos or images set out in this document except that it holds the rights to use the Pictet and Pictet Funds

trademarks. The trademarks, logos and images set out in this document are used only for the purpose of this presentation.

CorporateResponsibility

Weak

Strong


Financial Quality


3

Key Lessons


Investors are wired for the short-term

« Natural human tendency to make decisions in search of immediate gratification at the expense of future returns: decisions which we subsequentlyregret."

Source: The Kay Review of UK Equity Markets and Long-Term DecisionMaking, July 2012

100 USDTODAY

200 USDIN 1 YEAR

IRR = 100%

BULL MARKETS

Reward circuitDopamine

vs.

BEAR MARKETS

Fear circuitPreparing for fight or flight


Sustainable Investment Solutions are wired for the long-term

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1. ESG torpedoes can be lethal

2. Policymakers and consumers are on the

move

3. Institutional investors and millenials

becoming more sophisticated

4. Solutions exist to deliver steady financial

performance AND positive/measurable

impact

Target clean products &

services

Investment universe

Avoid torpedoes

Picklong-term winners

Ob

ject

ive

Mainstreamstrategies

Sustainablestrategies

Environmental strategies

LargeConcentrated Focused


Appendix


Biography

Eric Borremans joined Pictet Asset Management in

2013. He is a sustainability expert responsible for the

development and implementation of sustainable

investment concepts.

Before joining Pictet, he spent eleven years with BNP

Paribas Investment Partners in Paris as Head of CSR

& SRI Development. He was previously Head of

Research Services with Sustainable Asset

Management (Zurich) until 2002. He started his

career in 1992 and worked during eight years for

Environmental Resources Management (ERM) as

Consultant and Technical Director (Brussels and

Oxford).

Eric holds a degree in Finance from Solvay Business

School and an MBA from Columbia Business School.

He is also Vice-Chairman of the Institutional Investors

Group on Climate Change (IIGCC) and a member of

the FTSE Environmental Markets Advisory

Committee.

Sustainability Expert

Eric Borremans

Active Quantitative Investments


A long-term commitment to Sustainable Investment

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2007

2008

Pictet-European

SustainableEquities

* Source: Pictet Asset Management, as at 31.12.2015

2002

1999

2005

2006

Pictet-Timber

Partnership with Ethos

3 time winner “SRI Provider of the Year” by Global Pensions

2009

2004

First indexed mandates with ESG criteria &

active Corporate Governance

2010

First SRI Mandate for

Emerging Markets

Pictet-Clean

Energy

Total assets in environmental and

sustainable investment strategies

ca. EUR 10bn*

2000

Pictet-Water

Pictet-Agriculture

2012Pictet-Environmental-Megatrend selection

Pictet-EmergingMarkets

SustainableEquities

2015SRI Provider of the Year (European Pensions Awards ) SRI/ESG Provider

of the Year (UK Pensions Awards)

Pictet-Ethos (CH) - Swiss Sustainable Equities


Performance since inception


Performance attribution (2015)

CorporateResponsibility

Weak

Strong


Financial Quality

+3.1%

Novo Nordisk +54bpAdidas +46bpSwiss Re +40bpAhold +40bp

-0.2%

E.On +17bpArcelor Mittal +8bpDeutsche Tel -13bpFresenius -8bp

+1.3%

Glencore +42bpAnglo American +23bpRio Tinto +23bpVolkswagen +13bp

+0.2%

Shell +68bpNovartis +31bpHSBC +21bpAlcohol & Tobacco -64bp

Source: Pictet Asset Management, MSCI. Gross of fees. Company classification as at 30.11.2015. Performance data as at 31.12.2015.


Pictet Asset Management

www.pictetfunds.comwww.pictet.comFor further information, please visit our websites

34

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Sustainable Investment From Theory to Practice

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