The world is abuzz with talk of climate change. The topic received top billing at this year’s World Economic Forum in Davos; the Intergovernmental Panel on Climate Change is to publish a long-awaited study on the latest scientific findings; and the issue was even mentioned in President Bush’s State of the Union address.

Policies to combat the threat of future climate change are proliferating, designed to influence people’s behaviour. This is likely to alter the risk profile of many businesses and improve the investment outlook for others.

The issue is gathering momentum in legislatures across the globe, which reflects its increasing resonance in the world of public opinion. Having said this, the regulatory environment is still a long way from addressing the underlying causes of global warming.

According to UBS, it is the prospect of individual behaviour proliferating on a large scale, combined with more stringent regulation of greenhouse gas emissions, that makes the opportunities and risks related to climate change mitigation a compelling investment case.

 

The science of climate change

The world warmed by roughly 0.7°C during the 20th century and is now heating up at a rate of about 0.2°C per decade. Scientists are now certain that human-induced greenhouse gas emissions are primarily responsible for these higher average global surface temperatures, as well as the knock-on effects of rising sea levels, melting glaciers, and thinning ice and snow cover.

Climate change experts are converging on a consensus that temperature change of more than 2–3°C on pre-industrial levels will all but guarantee irreversible and severe climate change events, such as widespread flooding and loss of habitat. Greenhouse gas emissions are projected to increase steadily over the next quarter-century, but would need to decline sharply to stabilize atmospheric greenhouse gas concentrations and avoid the more severe outcomes of climate change.

 

Energy use and climate change

Ultimately, the risks of climate change are tied to the world’s approach to energy use. Burning of fossil fuels is the primary contributor to the increase in atmospheric greenhouse gas concentrations. Energy consumption is projected to increase by more than 50% during the next quarter century, largely because of population expansion and economic growth in developing countries. Renewable energy sources and nuclear power can help to slow the growth in energy-related greenhouse gas emissions. However, emissions will continue to move higher unless energy efficiency gains are made at the same time and consumption of fossil fuels is reduced.

The impact of climate change will go far beyond simple changes to the weather; and it is no longer a question of if but on what scale. Although technological solutions to cut emissions are available, global policies to create incentives to reduce emissions where the ability is greatest are virtually non-existent. For UBS, the policy framework for combating climate change will both broaden and deepen, but will probably fail to bring about an outright reduction in emissions. Specifically, UBS analysts expect:

• increased demand for private modes of transport and energy-guzzling consumer products, but slow growth in the most fuel-efficient options;

• a slower rate of adoption and implementation of available energy-efficiency technologies than is necessary to stabilize and reduce emissions, such as in building and energy delivery;

• limited emission reduction opportunities in primary materials production, such as cement and steel;

• limited infrastructure enhancements, such as greater availability of inter-modal transport and a more decentralized energy delivery architecture.

 

Investment risks and opportunities

Even though policies to slow the growth of greenhouse gas emissions are likely to prove insufficient to stabilize atmospheric concentrations, heightened attention on climate change will produce serious ramifications for the world’s business and investment climate. UBS analysts are therefore providing a blueprint for thinking about the risks and opportunities.

The risk of climate change events on companies and industries includes heightened regulation, increased impairment of physical property, loss of revenues, and erosion of reputation. Sectors with direct greenhouse gas emissions from large point sources bear the highest regulatory risks; however, effective climate change policies may also need to target sectors with high indirect emissions and high adaptability.

The opportunities related to climate change mitigation fall into two broad categories: products and processes that deliver improved energy efficiency, and development of renewable/low-carbon energy sources. The more incentives that emerge to encourage people to limit greenhouse gas output, the greater the outlook for investment opportunities related to climate change mitigation.

 

The financial product universe

Making investments based on climate change criteria is difficult at present because of the limited financial product range and available information. That said, the financial product universe is broadening, and the pressure on companies to disclose information relevant to climate change and emissions is increasing. Equity-related strategies include underweighting sectors, industries, and companies that are highly carbon intensive and have little scope to adapt.

In addition, UBS analysts believe there are opportunities to benefit directly from climate change mitigation by investing in companies exposed to renewable and low-carbon energy production, as well as energy efficiency.

Similarly, investors can target theme funds focusing specifically on climate change mitigation, along with a range of equity baskets, certificates, and indices on specific investment areas, like biotech, photovoltaics, and biofuels, for example.

Within the fixed-income markets, investors can reduce their exposure to companies that face heightened credit risk because of future policy measures and unhedged exposure to severe weather events, such as hurricanes and floods. On the opportunities side of the ledger, governments and project development companies are issuing renewable energy bonds with increased frequency in order to finance specific clean energy projects.

 

UBS Climate Change Certificate

Thanks to an actively managed certificate, investors can now access the performance potential of companies that develop sustainable solutions to reduce CO2 emissions.

Climate change is commonly seen as the greatest environmental challenge. According to various studies worldwide, CO2 emissions have to be drastically reduced – otherwise a global temperature increase and the resultant disruptive impact on society and the global economy cannot be avoided.

To fight climate change, huge investments in energy with lower carbon intensity, renewables and energy-efficient solutions are needed. Extensive know-how and experience is needed to select the most attractive stocks relating to climate change.

The UBS Climate Change Strategy Certificate offers a solution. It gives investors easy access to innovative companies that develop solutions to reduce CO2 emissions. This is an actively managed basket of around 25 stocks, carefully selected by a team of experts from UBS Global Asset Management. It focuses on power delivery (the supply side of energy use), buildings, transportation, and industrial processes (the demand side of energy use). UBS Strategy Certificates allow the investor to participate in the performance of the underlying basket of carefully selected stocks.

 

Benefits

Investors invest in an omnipresent investment theme. UBS experts identify stocks of companies which contribute significantly to CO2 reduction and therefore have above-average performance potential. Investors benefit from the active management of an experienced, specialized SRI (Socially Responsible Investments) team and an external network of internationally renowned energy experts (e.g. eco institute, Rocky Mountain Institute).