Responding to climate change

Another unusually mild winter in many parts of the Northern Hemisphere, coupled with a recent spate of prominent environmental studies and documentaries, has kept the issue of climate change at the forefront of the international agenda. Societal and governmental pressure to cut carbon dioxide emissions is high – as recently evidenced by California’s new law that requires industry located in the state to cut greenhouse gas emissions to 1990 levels by 2020.

Worldwide concern also appears to be leading to the creation of a global emissions allowances market. California, through the new legislation, has established an emissions permit trading program similar to the European Emissions Trading Scheme (EU ETS), which has been in place since February 2005. Both programs follow the “cap and trade” system that allows relatively clean businesses to sell unused emissions permits (allowances certifi cates) to companies that need them, using market forces to reduce pollution cost effectively and flexibly.

In response to the burgeoning “cap and trade” market, UBS launched its fi rst commodity-based index for global markets of emissions allowances. At its inception in October 2006, the UBS World Emissions Index (UBS-WEMI) covered several European emissions programs – all part of the EU ETS. In the future, additional emissions programs will continue to be monitored for potential inclusion in the index.

The UBS-WEMI index has been created as a liquid and international benchmark of tradable derivative instruments referencing emissions allowances. It is composed as an open basket of futures contracts on EU ETS carbon dioxide (CO2), currently weighted between two European trading platforms – the European Climate Exchange and the Nordic Power Exchange. Their weights are allocated based on the program size and liquidity of the underlying emissions programs.

In a report released this past September by the Carbon Disclosure Project (CDP), a group of institutional investors who survey the implications of corporate greenhouse gas emissions, UBS was rated “Best in Class” its approach to climate change. UBS was also included in the CDP “Climate Leadership Index” as one of 50 FT500 companies showing distinction in its response to greenhouse gas emissions. Moreover, UBS has been a part of the Dow Jones Sustainability Indices (DJSI) since their inception in 1999.