Sustainable, Responsible &/or ESG Policy:

The Climate Transition strategy is a rules-based equity strategy. The strategy invests in a traditional market capitalization index, and employs tilts to overweight or underweight stocks in line with its objective.

Mitigation

• We collect three types of carbon emissions data from best-in-class third parties’ databases:
  • Scope 1: direct CO2 emissions resulting from the company’s consumption of fossil fuels in its own production processes
  • Scope 2: indirect CO2 emissions arising from the consumption of bought-in power
  • Scope 3: indirect CO2 emissions associated with the company’s purchasing and sales activities not otherwise captured
• The strategy currently targets 40% reduction vs. benchmark in carbon intensity scope 1, 17% reduction in carbon intensity scope 2 and 8% reduction in carbon intensity scope 3 (as measured by the weighted average CO2 equivalent emissions in tons divided by revenue in USDm)
• The strategy also targets 30% reduction in carbon emissions intensity scope 1 and 2 (as measured by the weighted average CO2 equivalent emissions in tons divided by EVIC)
• Climate-sensitive companies: The strategy targets a higher exposure to climate-sensitive sectors as classified by NACE Sector Codes: A, B, C, D, E, F, G, H, L

Adaptation

•  Green opportunities: we aim to increase investment in companies that invest in renewable energy and associated relevant climate technologies. The strategy currently targets at least 15% higher exposure to companies that generate clean technologies compared to the benchmark.
• Fossil fuel reserves: being in the ground or under the sea, fossil fuel reserves are potential sources of future emissions, and carry the potential risk of permanent loss of value, should governments implement policies to restrict companies from fully extracting their reserves. We aim to decrease investment in companies that currently hold proven reserves in coal, oil and gas. The strategy currently targets 20% reduction in Fossil Fuel Reserves.

Transition

•  Net Zero 2050 Scenario Glide Path probability: The International Energy Agency (IEA) has developed a series of industry targets that selected industry segments must meet in order to achieve global net zero emissions by 2050. These curves are consistent with the IPCC’s 1.5°C scenario. We built a quantitative model that compares the company’s carbon footprint trend with the required emission reduction implied by the Net Zero 2050 scenario. This approach allows us to estimate the probability that the company will achieve those Glide Path targets. The strategy currently targets a 15% tilt towards companies most aligned to meet industry carbon reduction targets in line with the Net Zero 2050 scenario.
• Low carbon commitment score: we consider a number of qualitative, forward-looking indicators of a company’s overall commitment to reducing its CO2 footprint, including company’s disclosures under Science Based Target Initiative (SBTI). We refer to a company’s total score on these indicators as its Low Carbon Commitment Score. By incorporating these forward-looking elements we increase our confidence in our assessment of whether a given company could achieve its target.

Sustainability

• UBS Blended ESG Score: we aim to increase investment in companies with a higher than average ESG score. The strategy currently targets at least 10% UBS Blended ESG Score improvement.
• UN SDGs: we aim to increase investment in companies aligned with five UN Sustainable Development Goals (SDGs): Good Health & Well Being; Affordable & Clean Energy; Decent Work & Economic Growth; Responsible Consumption & Production and Climate Action. The strategy typically targets at least 5% higher exposure to each of the aforementioned SDGs, expect SDG 8 - Decent Work & Economic Growth for which the strategy typically targets 3% higher exposure than the benchmark.

Exclusions

In addition to the tilts outlined above, the strategy applies select sustainable and climate-related exclusions:

• Companies violating the United Nations Global Compact (UNGC) principles, and which do not demonstrate credible corrective action.
• Companies involved in controversial weapons and depleted uranium manufacturers.
• Companies that generate greater than 5% of their revenues from tobacco (production or manufacture of tobacco products).
• Companies that generate greater than 20% of their revenues from thermal coal mining or oil sands extraction.
• Companies that are not adequately progressing against set objectives after a pre-defined period of time as determined by UBS-AM in its Engagement Programme.

Active ownership through engagement and voting

A key differentiating feature of the Climate Transition strategy is its associated stewardship program which includes an active voting and corporate engagement policy that has also evolved in recent years. As an essential component of the Climate Aware strategy, UBS-AM have run a dedicated climate engagement program since early 2018 focused on companies in high emitting sectors. Building on our established climate engagement program, we have sharpened our thematic engagement on climate change, with a focus on the net-zero alignment and transition planning of companies. This includes not only a robust and structured net-zero research framework, but also sector-specific expectations that aim to guide engagements and enhance our objective setting and tracking approach.

We expanded the scope of the program to 75 companies across the energy, utilities, chemicals, and materials sectors, representing a 50% increase in our focus list, in addition to climate remaining a core topic in the majority of engagements we have with companies.

Our objective is to encourage companies to develop their transition planning and achieve emission reductions in line with a 1.5 °C net-zero pathway. Our net-zero engagement framework enables us to assess and engage issuers on the alignment of their transition plans. It is based on guidance from market-leading standards such as IIGCC’s Net Zero Investment Framework1, Climate Action 100+ engagement process, and GFANZ’s Expectations for Real-economy Transition Plans2 report, and provides a consistent, cross-sector framework to assess and engage companies on their transition planning.

We have used the net-zero engagement framework to set our expectations on good transition planning for specific sectors. This enables us to baseline company performance against sector expectations to determine the alignment of transition plans and develop a holistic, granular view of the company’s climate strategy, as well as performance compared to peers. We are using these outputs to inform detailed, evidence-based conversations with companies in engagements.

Notes:

1. www.iigcc.org/resource/net-zero-investment-framework-implementation-guide
2. www.gfanzero.com/press/gfanz-releases-report-to-provide-blueprint-for-real-economy-transition-plans

Process:

As previously described, Climate Transition rules-based strategy utilises a series of quantitative and qualitative metrics, under four pillars (mitigation, adaptation, transition and sustainability), by applying positive and negative tilts. Portfolio constituents are weighted based on a transparent, rules-based process, and an optimised portfolio construction methodology.

A very important distinction of our investment process in the construction and maintenance of the portfolio is that we consider simultaneously the three key factors: transaction costs, tracking error, and index linear deviations, using our in-house proprietary portfolio management system, Portfolio Optimization Platform (POP). POP is interactive, enabling the portfolio managers to conduct scenario analysis and evaluate the impact of potential trades on the portfolio’s risk characteristics in real time. POP incorporates the explicit constraints placed upon the portfolio construction process, including sector and security diversification parameters.

External climate-related research is used to inform the glide path methodology and tilt approach. Broadly speaking, our methodology uses the following data sources: 

• Carbon / Climate related data at company / security level: We use Trucost and MSCI to have available different metrics on carbon, energy generation, reserves etc.
• Top-down climate data: We use climate scenarios at global and regional levels calculated by the International Energy Agency (IEA). These scenarios are produced in the report Energy Technology Perspectives (ETP).
• ESG score: UBS-AM’s blended ESG score is the average of the MSCI, Sustainalytics Risk and UBS industry adjusted scores. Before averaging the industry adjusted scores, raw scores from each providers are normalized using the same methodology and industry groups.
• Green opportunities: We use the clean technology score data from MSCI and enhance it with theme NLP based data from AlphaSense.
• SDGs: we currently use data mainly from MSCI ESG Research due to their approach on separating operational and product alignment for each SDG, good coverage of the investment universe (i.e. in non-neutral scores), and reasonable correlations of selected SDGs with other related ESG data.

Dialshifter

Our organisation is helping to support the Paris Climate Agreement and the Race to Net Zero by…

UBS AM is committed to helping our clients achieve their decarbonization goals and to supporting the work of governments around the world in their transition to a low-carbon economy in alignment with the objectives of the Paris Agreement.

We are a founding signatory of the Net Zero Asset Managers initiative and have a group-wide ambition to achieve net zero greenhouse gas emissions across scope 1 and 2, and specified scope 3 activities by 2050. In 2023, we made progress toward delivering our 2030 target of aligning 20% of our total AuM with net zero, using science-based portfolio alignment approaches.

SDR Labelling:

Unlabelled - promotes sustainable characteristics (has CFD)

SDR Literature:

• Consumer Facing Disclosure