Pictet Asset Management: Climate-aligned portfolio through the lens of asset pricing and scenario analysis

Context and background

Since the 2015 Paris Agreement, investors have faced growing pressure to integrate climate considerations into their portfolios. Most available methodologies—such as Paris-aligned benchmarks—are primarily designed to meet policy or normative objectives, often assuming that greener assets will automatically deliver superior returns through a “green premium.” However, this link is rarely scrutinized using insights from asset pricing, the academic field that studies how markets value risk and return. At the same time, ESG practices are facing polarized reactions: some asset owners are skeptical, while others demand more rigorous, science-based approaches and tailored climate-aware solutions. For Pictet Asset Management, whose clients include pension funds and private wealth platforms, it has become essential to move beyond compliance-driven ESG and develop approaches that demonstrate both environmental relevance and clear financial logic. This project directly responds to these needs by exploring how sustainable investing can be better tied to financial performance, in line with the emerging paradigm of “Rational Sustainability.”

Project description

The project aims to design a commercially applicable methodology for climate-aware portfolios that integrates state-of-the-art academic insights from asset pricing with real-world financial practice. Instead of being led by normative goals, the framework will be grounded in expected economic and market developments under different climate scenarios. Students will begin by surveying existing portfolio methodologies, climate scenarios, and the literature on the green premium, paying particular attention to how physical and transition risks interact. They will then develop a model that links climate scenarios with asset pricing, capturing both equilibrium pricing and adjustment dynamics as markets internalize risks. This framework will allow investors to articulate their climate investment beliefs, test the robustness of existing indexes and approaches, and construct optimal climate-aware portfolios. Using financial market data—some provided by Pictet and potentially complemented by external sources—students will test and refine the model, creating a tool that can be directly applied in client discussions and portfolio construction. The ultimate objective is to provide Pictet with an innovative, evidence-based approach that strengthens the case for climate-aware investing by aligning sustainability with financial performance.

This project is part of the Transformative Projects: teams of 3-4 SMT students from different disciplines work together over three months on a topic developed by a company with the objective to propose new perspectives and solutions that can have the potential to transform industry or societal practices.