Building a climate smart future

The climate is changing and while this creates risks, it will also bring investment opportunities. Our Fixed Income team believe a climate aware approach is beneficial for both portfolios and the planet.

21 Sep 2020

Climate change is increasingly becoming a risk facing companies, financial organizations and individuals. Potential impacts can be physical, regulatory or technological and therefore are expected to become a critical factor for companies in the future. These regulatory changes and the increasing awareness about climate change have made climate investing essential for investors as the effects will be felt in the short term, but are expected to have an even greater impact over the long term.

At UBS-AM, we believe that to address climate change and avoid a climate crisis, urgent change is needed.

In 2015, the historic UN Climate Change Paris Agreement pledged to reduce greenhouse gas emissions, limit global average temperatures to a maximum of 2˚ above pre-industrial levels and accelerate the transition to a lower-carbon economy. Investment is already moving into climate change solutions such as improving energy efficiency to renewable storage solutions to alternative meat amongst others.

While the underlying climate considerations are consistent across most asset classes, the Fixed Income approach is differentiated. By approaching climate change as a systemic issue, our strategy aims to address climate change by investing in bond issuers that are at the forefront of a low-carbon economy and making a commitment to carbon neutrality thus addressing the needs of the Paris Agreement.

The refinancing of debt obligations allows Fixed Income investors more opportunities to actively engage with companies. One important element of this is having a targeted engagement program with issuers to encourage better behaviour but not excluding complete sub-sectors, instead tilting towards green energy.

Our strategy looks to identify issuers that are reducing climate risks to their business model (Mitigation), innovating in climate-related technologies or solutions (Adaptation), or transitioning their business model to align with a 2 degree Celsius warming scenario (Transition). The portfolio actively seeks exposure to issuers tilting toward green energy or other environmental themes but our approach to climate change in our Fixed Income portfolios enables the construction of a diversified portfolio with a low carbon footprint.

As a team, we take a balanced view of how the economy will evolve towards a low-carbon future by investing in companies that exhibit leadership in three categories.

  • Climate Mitigation: companies that are addressing climate change in their own operations
  • Climate Adaptation: companies with products and services that provide solutions to a low-carbon future
  • Climate Transition: companies in carbon-heavy industries that are transforming their existing business models.

Mitigation

Bottom-up

  • Underweight Easyjet

Focusing on:

  • High carbon emissions (CO2 certificates)
  • Sustainability issues (regulation)
  • Impact: Rail to replace airlines for short distances

Adaptation

Top-down

  • Overweight water management (i.e. Veolia)

Focusing on:

  • Pressure to effectively use scarce water resources
  • Impact: Water management in demand

Transition

Engagement

  • Fortum

Focusing on:

  • Acquisition of Uniper (exposure to coal/gas)
  • UBS engagement: Phase out coal – 2030
  • UBS engagement: Net zero emission – 2035
  • Impact: Lower costs for CO2 certificates
  • Impact: Higher investors demand as ESG quality improves

We believe incorporating climate change awareness in Fixed Income allocations can help lead to a more sustainable future. Our solution is primarily an investment grade corporate bond portfolio diversified across sectors and issuers with a low-carbon footprint. This means achieving at least 30% mitigation of climate risk while seeking outperformance relative to the market through active management.

Climate change is here and causing a wide range of impacts to our planet which is why our approach to identify and select companies that are leaders in fighting climate change is an important leap in the evolution of Fixed Income investing. Our Climate Aware Active Corporate Bond portfolio takes a strong thematic position with active management opportunities in sectors where climate and environmental risk are most relevant. We believe that through active management we can navigate the risks and opportunities of climate change and our primary focus is on mitigating climate risk.

Our experienced 100+ Fixed Income investment professionals have an average of 18 years investment experience which is complemented by a global credit research analyst platform. We fully integrate ESG considerations into the investment process and to deliver Climate Aware Fixed Income solutions to our clients, we draw on the expertise of a dedicated 20-strong SI Research team with over 900 investment professionals.

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