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Can the business world’s environmental footprint even be measured?

Daniel Beltrá
Captured in 2018, this aerial view of the Amazon rainforest outside the Parque Estadual de Guajara-Mirim in Brazil was captured by Daniel Beltrá, a Shortlisted Artist for Prix Pictet, the world’s leading award for photography and sustainability.
By Pictet Asset Management
Published Last updated

As the world awakens to the need for sustainable growth, new ways of looking at how businesses and investors affect the environment are critical. Although “green investing” has gained ground in recent years, it’s hampered by a lack of well-defined and quantified definitions. Even in the field of clean energy, an area where these issues are easier to identify and eco-minded approaches seem obvious, well-intentioned investors run the risk of causing unintended but damaging consequences. For example, while biofuels certainly help reduce CO2, producing them can have disastrous impacts on biodiversity. 

That’s why a broader and more detailed type of analysis is needed to protect our precious ecosystems—the sort of rigor offered by the Planetary Boundaries (PB) framework. This framework is a tool that Pictet Asset Management, one of Europe’s leading investors, has used for almost a decade to define the environmental cost of economic activity. 

Developed by a team of leading scientists at the Stockholm Resilience Centre (SRC) and recently explored in the Netflix documentary series Breaking Boundaries, PB has evolved into an important starting point for how the investment managers at Pictet AM curate their portfolios.  

The scientific framework

The PB model identifies the nine most critical environmental dimensions, illustrated below, essential to maintaining a stable biosphere required for human development and prosperity. It then demarcates the “safe operating space” within which human activities should take place for each of these dimensions. 

For example, for global water use to remain at sustainable levels, humans must not draw on more than 6 million cubic metres a year. Breach that, or any of the other eight thresholds, the model says, and we risk triggering abrupt or irreversible damage to the Earth’s biophysical systems.

Four of the nine boundaries have already been breached.

🌎 

Climate change

Increasing emissions accelerate global warming, change precipitation patterns, cause rising sea levels, and increase storm severity

🌱 Biodiversity

Loss of species higher than natural background rate, gravely endanger our natural “life support systems”

🔬 Nitrogen and phosphorus cycle

Atmospheric N has reached an unprecedented scale with detriments to human health, eutrophication, and ozone layer

🌾 Land-system change

Conversion of natural habitats for intensive agricultural or industrial production release GHG and degrades ecosystems

The investment outcome

Since 2012, Pictet AM has been adapting the SRC’s model to help its investment managers measure the environmental footprint of 100-plus companies. So how does it work?

STEP 1

Using the Planetary Boundaries matrix, Pictet AM analyses every activity in the production of a good or service, from the extraction of raw materials, manufacturing processes, distribution to transport, product use, and disposal and recycling, and then ranks each firm by its environmental footprint.

STEP 2

To determine which firms are developing products and services that make a real difference in reversing environmental degradation, investment teams then select the companies whose products or services make a positive impact on at least one environmental dimension in the PB model, without breaching the safe space of others.

STEP 3

Once Pictet AM has identified firms delivering positive change, the next step is to conduct detailed company-by-company research, and, using a proprietary scoring system, to pinpoint firms with the most attractive risk-return characteristics. 

STEP 4

The result is a concentrated portfolio of around 50 stocks, with each investment combining an attractive risk-return profile with a small ecological footprint. 

With more than 20 years’ experience in thematic investing, Pictet AM has built up a range of 15 products for such diverse industries as timber, water, and clean energy.

This investment approach forms the bedrock of Pictet AM’s Global Environmental Strategy, launched in 2014, which today stands at more than USD12 billion invested with a positive impact objective. Pictet AM recently teamed up with John Hancock to allow US investors access to a similar mutual fund strategy, and Pictet AM estimates the environmental theme will grow at 6-7% a year, outpacing the global economy. 

Using the Planetary Boundaries framework, it is now possible to single out those companies at the forefront of change because going green is not just good for the environment, it’s good for investors.

Discover new ways of investing in our planet’s future.

This article was produced on behalf of Pictet Asset Management by Quartz Creative and not by the Quartz editorial staff. Sources are provided for informational and reference purposes only. They are not an endorsement of Pictet Asset Management or Pictet Asset Managements products. This material is for distribution to professional investors only. However, it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. 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 used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested.  This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management (Europe) SA, and may not be reproduced or distributed, either in part or in full, without their prior authorisation. Pictet Asset Management (USA) Corp (“Pictet AM USA Corp”) is responsible for effecting solicitation in the United States to promote the portfolio management services of Pictet Asset Management Limited (“Pictet AM Ltd”), Pictet Asset Management (Singapore) Pte Ltd (“PAM S”) and Pictet Asset Management SA (“Pictet AM SA”). Pictet AM (USA) Corp is registered as an SEC Investment Adviser and its activities are conducted in full compliance with SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref.17CFR275.206(4)-3.

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