By: Francis Condon, Senior Sustainable and Impact Investing Analyst and Valeria Piani, Strategic Engagement Lead, Sustainable and Impact Investing
Insights from Global Head of Sustainable and Impact Investing
The view one year in: climate engagement
Climate change is the greatest risk facing our planet today, and we believe Asset Managers have a significant role to play in limiting its impact.
That is why we developed the Climate Aware strategy, which is a rules-based index-oriented strategy that provides investors an opportunity to integrate climate risk into their passive equity allocations. It has three unique characteristics:
- It helps investors reduce their carbon risk exposure while maintaining a low tracking error and therefore without excessive risks or costs
- It employs a unique proprietary forward-looking assessment of climate risks to tilt the portfolio to account for future climate risks
- A dedicated engagement program that supports that strategy through a focus list of 50 companies that pose the great risks from a climate perspective
In this paper, we focus on the engagement element of the strategy, building on the document that we published in September 2017, in which we described how we intended to have a dialogue with companies.
The formal engagement program was launched the following year, in 2018. While UBS Asset Management has interests across a wide range of industries, we identified the energy and utilities sectors as particularly exposed to climate change transition. Our approach was unique, understanding how the companies we invest in address climate risks and with direct engagement, influencing real change. Today, one year in, it is important to reflect on the first insights from our in depth interactions with companies.
In order to ensure a systematic approach to our engagement with companies, we developed a scorecard analysis based on the TCFD (Task-force on frameworkClimate Related Financial Disclosures) , that reveals interesting insights on the current practice on climate change by the and the gaps we need to address. We scored companies on eight factors: responsiveness, governance, risk management, strategy, performance, targets, lobbying and disclosure.
Several areas showed heartening results, such as the 90% of the focus companies that disclosed climate change information through a sustainability report. However, the scorecard also revealed opportunities for growth. For instance, only two companies have incorporated remuneration metrics explicitly aligned with a 2-degree scenario. Most impressively, some companies have announced longer term ambitions for decarbonisation, like Shell, Equinor, Repsol, Xcel and CSM to name some.
We are not alone on this journey. At UBS-AM, we believe in collaboration with collective bodies or shareholders to increase the effectiveness of engagement. By sharing resources, we make it easier for companies to engage efficiently with investors, as seen in our involvement with Climate Action 100+.
More than a a year of engagement, we have now been able to reflect on trends and best practices that have emerged, benefiting from the insights and knowledge gained from research and engagement process.
Applying climate tilts
50 companies targeted by our engagement programme represent 27% of the FTSE All Developed Index's CO2 emissions.
These findings are giving us additional inputs to feed into our investment analysis and decisions, and helping deepen the integration of sustainability within the equity and fixed income investment process.