Understanding climate awareness

Is there a better way to invest in climate-conscious returns?

Climate change is one of the most significant risks that organisations face today. Yet the vast potential of physical, regulatory and technological impact is largely misunderstood.

The UN Climate Change Paris Agreement requires signatory countries to work towards reducing greenhouse gas emissions, limiting global average temperature to a maximum of 2 ̊ above pre-industrial levels and accelerating the transition to a lower-carbon economy. This requires widespread change, that will bring both risks and opportunities impacting industries around the globe.

To bring about global change, investors have a crucial role to play in urging companies to invest in climate solutions, implement TCFD disclosure recommendations and adopt a scenario analysis to assess climate-related risks and opportunities.

Some investors have chosen to simply invest in tracker funds that are benchmarked to ex-fossil fuel indices. However, by excluding any investment in fossil fuels, the passive investor is avoiding not just the risk but the opportunity of one of the major market segments. For instance, it is often the ‘oil majors’ that are the largest investors in renewable energy. Further, a blanket exclusion policy reduces influence on the means and timing of transitions.

At UBS, we believe that rather than adopt blanket exclusion policies, a more productive approach is one of proactive engagement with those companies in need of greater change. In this way we can play an active part in driving the processes which are needed to ensure effective and long-lasting solutions.

UBS has developed a Climate Aware World Equity Strategy, which aims to substantially reduce the carbon (CO2) footprint of a passive global equity portfolio, increase investment in companies benefiting from a growing demand for renewable energy and achieve long-term returns broadly in line with the net of costs and performance of a designated underlying index benchmark (e.g. FTSE Developed Index, MSCI World, etc.).

The strategy selects its investments by using a transparent, rules-based and optimised portfolio construction methodology and has generated positive results, in particular, enabling clear tilts towards renewables and away from fossil fuels.

Explaining the mechanics

Climate change is one of the most significant and yet misunderstood risks that companies and financial organisations face today.