UBS AM launches framework that quantifies the economic impact of green transition

• The world depends on products produced by some of the largest greenhouse gas emitting sectors such as cement and steel for buildings, trains and wind turbines

• Green portfolios often exclude these sectors to achieve lower emissions than a benchmark

• UBS Asset Management has developed an innovative Decarbonization Framework that quantifies an economic impact of corporate emission reductions, known as green transitions

• It is based on a traditional discounted cash flow (DCF) method regularly used by investors to value companies

• The model makes it possible to recognize the economic value of these companies transitioning, thereby unlocking value for shareholders and benefiting the climate
  

UBS Asset Management (UBS AM) has developed a Decarbonization Framework quantifying an economic value of corporate emission reductions in emissions intensive industries. It shows that their green transition can drive positive financial value and in doing so enable more investors to engage with and support these companies in their climate efforts.

The focus of the Framework is primarily on heavy industry. To achieve global climate targets, these sectors must reduce their greenhouse gas (GHG) emissions significantly. The production of heavy industry materials (aluminium, cement, chemicals and steel) today accounts for around 20% of the world’s total GHG emissions. While these sectors are often referred to as ‘hard-to-abate’, substantial emission reductions in these sectors are possible and can be value accretive.

Barry Gill, Head of Investments at UBS Asset Management said: “Heavy industry and other emission-intense sectors are often ignored by investors looking to reduce the carbon footprint of their portfolio. However, substantial emission reductions are not only possible, but we believe have the potential to be value accretive. It is our view that this is one of the most misunderstood opportunities in today’s markets, both from an investor and climate point of view.”

Decarbonization Framework
UBS Asset Management has developed a proprietary Decarbonization Framework quantifying the economic value of corporate emission reductions, known as green transitions, thereby providing a link between emissions and financial value. Results suggests that companies abating their emissions not only limit downside risk, but in many cases capture an upside potential.

The Framework forms a foundation for company-specific climate engagements, to identify gaps where company emission reduction targets are not aggressive enough and to urge those companies to be more ambitious in their climate efforts in a way that adds values.

Key elements of the Framework include:

• It is based on a traditional discounted cash flow (DCF) method regularly used by investors to value companies
• The model accounts for the price of future emissions, based on EU Emissions Trading Scheme (EU ETS) scenarios
• It takes a systematic approach to emission abatements, realised at the cost of green capital expenditures (CAPEX) and green operating expenses (OPEX)
• The model utilizes proprietary Marginal Abatement Cost Curves (MACCs) developed in collaboration with Swedish consultancy Material Economics

The innovative framework is published in a paper entitled “The Value of a Green Transition”. The paper illustrates how the framework is applied through a case study of HeidelbergCement (cement) that has plans to move to fossil-free production this decade.

Adam Gustafsson, Director, Quantitative Evidence & Data Science team, said: “By not recognizing the value of green transitions investors are indirectly holding companies back from taking critical action. UBS Asset Management’s Decarbonization Framework provides a data and science-based approach of measuring the value, leading to a more informed dialogue with companies about their journey to a low-carbon economy.”