UBS AM: Climate Primer

Over the past decade sustainable investing has swung from being a niche strategy, adopted by a select few high conviction clients to the fastest growing investment strategy in the world, according to the Global Sustainable Investment Alliance.¹ Today, over 75% of EMEA based institutional investors take ESG factors into account as part of the investment process.²  And leading this move to mainstream integration has been investors’ growing awareness of the risks and opportunities posed by climate change.

However, of all the ESG factors, climate change is not only arguably the most urgent in terms of its impact, it’s also the most complex and the one which raises the greatest degree of uncertainty.

Climate change is particularly important for our overall sustainable investment strategy given that it is a key material issue across a wide range of sectors. UBS was on the working group that developed the Task Force for Climate Related Financial Disclosures, and we are committed to assessing and reporting on our own risks relating to climate change as well as to providing solutions for clients to integrate climate risks into their investment strategies.

This climate change primer is designed to give:

• an overview of the climate change debate;
  
• the key drivers from the perspective of an investor;
  
• examples of ways in which investors can start to think about climate change and develop investment approaches.
  

Already a priority

As we have outlined, climate change is already a key priority for many investors. According to the latest USSSIF report published in October 2018, it is the single most important ESG issue considered by asset managers in asset-weighted terms. Managers responsible for USD 3.0 trillion cited climate as their number one ESG concern—a doubling compared to 2016. And in the same report, US institutional investors reflected that sentiment. They also regarded climate change and carbon emissions  as the most important environmental issue.

Regulation, regulation, regulation

A key driver underpinning investors’ concern with climate change is the efforts of policy makers to address global warming. Efforts which date back over twenty-five years, to the 1992 United Nations Framework Convention on Climate Change, famously opened for signature at the Rio Earth Summit that same year. Today, there are over 1,500 separate pieces of climate policy or legislation in force around the world.³

In recent years, many of these initiatives have been introduced in response to the Paris Agreement of December 2015. This requires countries to implement their nationally determined [carbon] contributions (NDCs) and to increase their ambitions over time, in a bid to keep the rise in global mean temperature well below 2°C. And some of these pieces of legislation affect investors very specifically.

In August 2015, shortly after the Paris Agreement was signed, France became the first country to make climate-change reporting mandatory for institutional investors, set out under Article 173 of the country’s law on “energy transition for green growth”. In California, comparable steps were taken two months ago, when in September 2018 the state passed legislation requiring the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to identify climate risk within their portfolios and report triennially, both to the public and the legislature on the level of risk.

The Paris Agreement, together with the UN Agenda for Sustainable Development, has also been responsible for shaping much of policy behind initiatives such as the EU Sustainable Finance Action Plan, which itself has a key emphasis on investment approaches relating to climate change.

Investors, and in particular, institutional investors, therefore have much to grapple with in terms of understanding the raft of legislation and policy which exists, not just around climate change, but sustainable investing more broadly.

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1 Source: Global Sustainable Investment Alliance, 2014 and 2016 Global Sustainable Investment Review.

2 ESG: Do you or don’t you? Responsible Investor survey June 2018.

3 Policy brief. Global trends in climate change legislation and litigation: 2018 snapshot, London School of Economics, Grantham  Research Institute on climate change and the environment.