More

    Engagement, Transition & Passive Investments

    Exchange Traded Funds

    “Applying our renowned Stewardship and Engagement skills to such exposures that are then offered in an ETF wrapper, allows our clients to benefit from the full value-chain of the Transition to a low carbon economy, both from a portfolio construction as well as an engagement perspective.”

     

    Florian Cisana
    Head UBS ETF & Index Fund Sales Nordics
    UBS Asset Management

    According to UBS’s recent report on “Engaging with companies to achieve net zero” engagement and proxy voting can be used as important means to influence corporate behavior and accelerate action in those sectors where it is most needed. Through dialogue UBS also believes it is able to transfer best practices within sectors. The bank’s philosophy is to fully understand the business model of the companies it invests in, build relationships with management, provide feedback on current climate performance and provide insights on actions to develop companies’ resilience in a low carbon economy.

    UBS’s Thematic Engagement Program

    March 2018 saw UBS launch a three-year thematic engagement program on climate change targeting 45 oil and gas and utilities companies lagging on climate change performance. The companies were selected according to the Swiss bank’s proprietary Climate Aware methodology, which focuses on the companies identified as best placed to benefit from the climate change transition. The two sectors were selected due to their prominent climate change impact and their potential ability to provide capital and technologies to solve it.

    UBS’s engagement objectives are built around the framework of the Task Force on Climate-related Financial Disclosure (TCFD) on governance, strategy, risk management, metrics and targets to ensure that:

    • boards are equipped to oversee management in setting and executing a climate change strategy;
    • remuneration is linked to climate change targets;
    • climate risks are fully integrated in risk management processes;
    • business strategies are reflective of robust scenario analysis;
    • emissions reduction targets are set for the short, mid and long term and cover all the most material sources of emissions;
    • performance against targets is measured and reported;
    • advocacy activities with policy makers is conducted in consistency with the achievement
      of the Paris Agreement.

    While the effort started in connection with a specific passive strategy, the engagement project also encompasses UBS’s financial exposure to these companies across passive and active strategies in both listed equity and fixed income.

    Engagement Collaborations

    UBS has been an active member of Climate Action 100+ (CA100+), the largest collaborative effort from institutional investors to fight against climate change, counting on the support of 615 investors, representing over USD 55 trillion of assets under management engaging with more than 167 of the world’s largest corporate greenhouse gas emitters. Over the last three years, the Swiss bank has been part of 29 coalitions in total, 8 of which it led. These represented 60% of the target engagement list. During the last three years, global climate change goals have evolved from seeking to keep temperatures from rising above 2⁰C to keeping them well below that level while the focus has shifted to renewable energy and low carbon technologies, phasing out coal and considering the social implications of this transition.

    Insights From Three Years of Dialogue

    Since 2018, UBS has participated in over 200 meetings with management and representatives of the board of companies in the focus list through both individual and collaborative engagements. It assessed 45 companies and took part in 7 AGM statements on progress made and areas for improvements in collaboration with co-leads within CA100+. It published one investor/company joint statement on climate action in collaboration with co-leads within CA100+ and was one of the signatories of a letter to the EU on the post-COVID-19 green recovery.

    The Swiss bank also supported 26 shareholder resolutions on climate change in relation to the focus list of companies as well as two global investor statements to governments on climate co-signed by other investors. The final analysis shows that more than 58% of companies in UBS’s focus list have made good or excellent progress against set objectives. However, there is still a percentage of companies with limited or partial action on addressing the climate change challenge.

    Climate Alignment & Performance

    According to the analysis of outcomes conducted by UBS, oil and gas companies in Europe are leading their peers in other parts of the world, while American utility companies are outperforming their peers thanks to state level positive regulatory environments. Sectorally, UBS finds that utility companies are able to align themselves to the transition by shifting the sources of energy used from fossil fuels to renewables faster than their oil and gas counterparts. Regarding the progress made by the companies in setting GHG emissions reduction targets, as many as 80% of the companies had strong or partial reduction targets. Only one company on the list did not have any reduction target and more than half of the companies have set a net zero emissions by 2050 goal/ambition. Strong targets are short, mid and long term, are related to all material direct and indirect emissions (i.e., scope 1, 2 and 3) and cover all significant company operations/activities. Utility companies have a higher percentage of strong targets than oil and gas companies.

    To assess companies’ climate performance, UBS has focused on current ambitions for increasing the exposure to renewable energy. 29 out of the 45 companies have set goals to increase either the percentage of energy capacity or the total gigawatts produced or the amount of money invested in renewable energy.

    Stewardship and Passive Products

    Stewardship in passive products is as important as
    it is in active strategies, according to Florian Cisana,
    Head UBS ETF & Index Fund Sales Nordics at UBS Asset Management. “While engagement dialogue is not different between active and passive solutions,
    the underlying motivations are slightly different,”
    Cisana says.

    “In the case of passive strategies, it is important to tackle certain ESG issues which could ultimately have an impact on investor´s portfolio. As a passive portfolio manager, we do not have the freedom to sell and buy stocks at our discretion, but have to track the underlying index. However, through Stewardship we can still manage certain risks we are exposed to in our portfolios. In addition to Stewardship, Proxy Voting is a very effective tool that allows us to express our opinion on governance and the business strategy across all our holdings on an annual basis,” Cisana continues.

    Both Stewardship and Proxy Voting are applied across UBS’s traditional as well as its Sustainable Equity ETF shelf. “UBS has been a pioneer in the sustainability ETF space since 2011. This journey has led us to become the second largest sustainable ETF provider in Europe, with US$32 billion in assets under management, equivalent to a 17.5%1 market share. As our society has grown more conscious of the need to address climate change and with climate risk considerations increas¬ingly becoming a focal point for investors, it became apparent that we needed to incorporate carbon emissions criteria in addition to traditional ESG screens both in our SRI and ESG Universal families. In addition to these benchmark enhancements, we also launched two sets of SFDR Article 9 funds that focus specifically on the transition to a low carbon economy: the UBS Climate Aware Climate Transition ETF and our flagship family of UBS MSCI Paris Aligned ETFs,” Cisana explains.

    “The philosophy behind these exposures is well aligned with both the Transition and Stewardship topics, as these indices’ overall objective is to promote an orderly transition to a low carbon economy. To achieve that goal, for example, the Climate Paris Aligned Indices exclude some companies as required by the regulation, but, on the remaining part of the portfolio, it applies the principles of Stewardship and Engagement in order to engage with companies and assist them in their transition,” Cisana says. “Applying our renowned Stewardship and Engagement skills to such exposures that are then offered in an ETF wrapper, allows our clients to benefit from the full value-chain of the Transition to a low carbon economy, both from a portfolio construction as well as an engagement perspective,” Cisana concludes.

     

    Read our 2020 Stewardship Report.

     

    Featured image: Maximilian Weisbecker on Unsplash

    IMPORTANT INFORMATION

    This material is directed to professional and eligible counterparties only and should not be relied upon by retail investors.
    The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.
    Information is subject to change based on market or other conditions.
    Investing involves risk- no investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
    Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
    © 2021 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.
    Issued in the United Kingdom by Northern Trust Global Investments Limited. Issued in the EEA by Northern Trust Fund Managers (Ireland) Limited.

    Image courtesy of Vizi David via Twenty20
    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

    Latest Posts

    NordSIP Insights Handbook

    What else is new?