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EVIC or Equity + Debt.
Real estate fi nanced emissions = ∑(Real estate emissions × LTV) 174
Sustainability Report 2022 | Appendix 5 | Other 175.
Climate-related resolutions.
Theme Climate-related.
Metric(s) – Number of climate-related resolutions voted upon – Proportion of supported climate-related resolutions (%)
Definition and Method Climate-related resolutions voted upon by UBS Asset Management (AM) on behalf of AM clients during the reporting period, including the percentage of such proposals that were supported out of the total, as identified by ISS (Institutional Share Services) categorization.
The metrics include the Asset Management business only and cover all resolutions made by companies that are held on behalf of clients and by Asset Management directly. Only climate-related resolutions are considered in this metric; with votes for other resolutions, e.g., Director election, being excluded.
The percentage represents the number of climate resolutions that were supported, i.e., voted in favor, out of the total climate resolutions that UBS AM voted on.
The ISS ProxyExchange categorization is utilized for “climate” resolution identification, as defined in the “ISS Code 2022 Category Descriptions.” ISS ProxyExchange is a third-party vendor service used by market participants for proxy voting.
Companies actively engaged on climate / ESG topics.
Theme Sustainable products.
Metric(s) – Companies actively engaged on ESG topics – Companies actively engaged on climate topics – % share of corporate engagements on climate topics with progress against pre-set objectives.
Definition and Method.
Companies actively engaged on ESG topics represents the number of individual corporate issuers with whom UBS Asset Management has engaged during the reporting period, where ESG has been one of the topics of engagement.
Companies actively engaged on climate topics represents the number of individual corporate issuers with whom UBS Asset Management has engaged during the reporting period, where climate change has been one of the topics of engagement. The metric represents the absolute number of engagements where a climate-related topic has been discussed within the reporting period.
% share of corporate engagements on climate topics with progress against preset objectives is the proportion of individual corporate issuers with whom UBS Asset Management has engaged on climate change during the reporting period, where it has been deemed that progress has been made against engagement objectives. The calculation is:
The metrics are derived from UBS Asset Management business only and are comprised of individual corporate issuers who have been actively engaged on ESG topics broadly, of which a smaller number have been engaged on climate change.
We regard engagement as a two-way mutually beneficial dialogue with a company, with the objective to enhance information and understanding and improve business performance. The focus on discussion is important as we believe simply asking companies questions without providing feedback and encouraging improvements does not constitute an engagement. We focus on the quality of our engagement, not the quantity of discussions we have. In order to manage our engagements, we set goals or objectives and determine progress against these in the recording of our engagement efforts.
% share of corporate engagements on climate topics with progress against preset objectives number of corporate issuers with progress against objectives number of corporate issuers engaged = 175
Sustainability Report 2022 | Appendix 5 | Other 176.
Total exposure to climate-sensitive sectors – transition risk.
Theme Climate-sensitive metrics.
Metric(s) – Total exposure to climate-sensitive sectors, transition risk (including transition risk heatmap) – Proportion of total customer lending exposure, gross (%), transition risk.
Definition (and Method) Sustainability and climate risks may manifest as credit, market, liquidity and/or non-financial risks for UBS, resulting in potential adverse financial, liability and/or reputational impacts. These risks extend to the value of investments and may also affect the value of collateral (e.g., real estate).
Climate risks can arise from efforts to mitigate climate change (transition risks). Transition risks from efforts to address a changing climate may contribute to a structural change across economies and consequently can affect banks and the stability of the broader financial sector through financial and non-financial impacts.
The metric is calculated for UBS Group, UBS AG, UBS Switzerland AG, and UBS Europe SE, on the total loans and advances to customers and guarantees, as well as irrevocable loan commitments (within the scope of expected credit loss) and is based on standalone and consolidated IFRS numbers. Credit exposure is drawn from a group CFO reporting system.
The transition risk heatmap methodology is based upon a risk segmentation process, first dividing financing types and then rating economic sectors and sub-industry segments that share similar climate risk vulnerability characteristics. Climate transition risk scores and rating are assigned to sectors and segments according to their vulnerability to (i) climate policy, (ii) low-carbon technology risks, and (iii) revenue or demand shifts under an immediate and ambitious approach to meeting the well-below-2˚C Paris goal. The risk ratings can be used to support identification of potential climate-sensitive concentrations and further analysis. The ratings in the heatmap reflect the levels of risk that would likely occur under an ambitious transition (in the shortterm). UBS derived the methodological approach for the transition risk assessment from an active collaboration with the UNEP FI and Oliver Wyman.
Economic sectors are classified according to the Group Industry Code 2.0 (GIC 2.0) which is constituted by a hierarchical structure. Sensitive sectors and subsectors are defined as those business activities that are rated as having high, moderately high, or moderate vulnerability to climate transition risks. Assessments are derived as part of the 2018–2022 Collaboration with the UNEP-FI based on IAMC scenario information as well as academic research supporting risk rating analysis. The collaboration included development of the initial transition risk heatmap methodology. Furthermore, internal UBS GIC2 sectors / subsectors are utilized.
For a selection of sectors (i.e., power sector), country information is used to assign risk ratings to exposures. For the other sectors, geographic location of assets/counterparties is not currently integrated in the methodology due to data and systems limitations.
The transition risk heatmap methodology is a top-down methodology based on a sector-classification approach (assuming exposures are proxy-rated through the average subindustry risk rating to which it is mapped), considering counterparty- and asset-specific information in materially relevant cases. This assumption is being further addressed through better counterparty- and asset-specific data and methodologies, which are under development.
In the current stage of the methodology, a look-through analysis for Lombard lending, real estate financing, and private clients with mortgages is not yet fully carried out. For this reason, Lombard lending rating is assigned based on the average riskiness of loans. Real estate ratings are assigned based on qualitative estimates leveraging internal studies (yielding a low-risk rating) or based on the riskiness of loan counterparties.
The proportion of total customer lending exposure, gross (%), transition risk, is calculated by combining all climate sensitive exposures (transition risk), divided by all total customer lending exposures, regardless of risk rating and across all financing types, including exposures that cannot be classified into any risk rating due to lack of information.
176
Sustainability Report 2022 | Appendix 5 | Other 177.
Total exposure to climate-sensitive sectors – physical risk.
Theme Climate-sensitive metrics.
Metric(s) – Total exposure to climate-sensitive sectors, physical risk (Including physical risk heatmap) – Proportion of total customer lending exposure, gross (%), physical risk.
Definition (and Method) Sustainability and climate risks may manifest as credit, market, liquidity and/or non-financial risks for UBS, resulting in potential adverse financial, liability and/or reputational impacts. These risks extend to the value of investments and may also affect the value of collateral (e.g., real estate).
Climate risks can arise from changing climate conditions (physical risks). Physical risks from a changing climate may contribute to a structural change across economies and consequently can affect banks and the stability of the broader financial sector through financial and non-financial impacts.
The metric is calculated for UBS Group, UBS AG, UBS Switzerland AG, and UBS Europe SE, on the total loans and advances to customers and guarantees, as well as irrevocable loan commitments (within the scope of expected credit loss) and is based on standalone and consolidated IFRS numbers. Credit exposure is drawn from a group CFO reporting system.
The physical risk heatmap methodology groups corporate counterparties based on exposure to key physical risk factors, by rating sectoral (sectoral average risk distribution), geographic (country vulnerability and adaptive capacity), and value chain (sectoral average risk distribution) vulnerabilities in a climate change trajectory, in which no additional policy action is taken and scored for the potential for financial loss in the short-term. The metric sums normalized scores for sector (average geographic footprint used as proxy in lieu of asset-level data), location (country of risk domicile), and value-chain exposures. Ratings from low to high are based on a weighted average score (from 0 to 1 in 0.2 banded increments), given by twice the weight for sector and geography, and once for value-chain (as it is partly included in sectoral and geographic scores). Scores are given by inputs as described below; – the counterparty’s sectoral activity (e.g. primary energy extraction presents higher physical risks than banks due to the sector’s average geographic footprint and vulnerability to financial losses in the short term from physical risk hazards); – the counterparty’s geography, represented by the main country of risk domicile. For example, countries in Southeast Asia tend to be higher risk than those in western Europe, with some exceptions, reflecting the potential for national economic resilience and subsidy to economic activities threatened by climate change; and – the potential disruption to a counterparty’s value chain, where relevant (both its supply chain and distribution channels again reflecting the sectoral average geographic footprint and vulnerability). Economic sectors are classified according to the Group Industry Code 2.0 (GIC 2.0) which consists of a hierarchical structure. Sensitive sectors are defined as those business activities that are rated as having high, moderately high or moderate vulnerability to physical risk.
External research and analysis is used to facilitate development of the physical risk heatmap methodology, including asset-level geospatial analysis where material and possible (e.g. real estate). Furthermore, internal UBS GIC2 sectors / subsectors are utilized.
The physical risk heatmap methodology is a top-down methodology based on a sector and country-classification approach (assuming exposures are proxy-rated through the average subindustry risk rating to which it is mapped), considering counterparty or asset-specific information in materially relevant cases. This assumption is being further addressed with better counterparty- and asset-specific data and methodologies in development.
In the current stage of the methodology, a look-through analysis for Lombard lending, real estate financing, and private clients with mortgages is not yet fully carried out. For this reason, Lombard lending rating is assigned based on the average riskiness of loans. Real estate ratings are assigned based on qualitative estimates leveraging internal studies (yielding a low-risk rating) or based on the riskiness of loan counterparties.
The proportion of total customer lending exposure, gross (%), physical risk, is calculated by combining all climate sensitive exposures (physical risk), divided by all total customer lending exposures, regardless of risk rating and across all financing types, including exposures that cannot be classified into any risk rating due to lack of information.
177
Sustainability Report 2022 | Appendix 5 | Other 178.
Carbon-related assets.
Theme Climate-sensitive metrics.
Metric(s) – Carbon-Related Assets – Proportion of total customer lending exposure, gross (%)
Definition (and Method) Carbon-related assets are defined as significant concentrations of credit exposure to assets tied to the four non-financial groups as defined by the Task Force on Climate-related Financial Disclosures (TCFD) (using Global Industry Classification Standard, GICS). These four groups are (i) energy; (ii) transportation; (iii) materials and buildings; and (iv) agriculture, food and forest products. Recognizing that the term carbon-related assets is currently not well defined, the TCFD encourages banks to use a consistent definition to support comparability.
The metric is calculated for UBS Group, UBS AG, UBS Switzerland AG, and UBS Europe SE, on the total loans and advances to customers and guarantees, as well as irrevocable loan commitments (within the scope of expected credit loss) and is based on standalone and consolidated IFRS numbers. Credit exposure is drawn from a group CFO reporting system.
The carbon-related assets metric is the total exposure of assets in the four non-financial groups as defined by the TCFD in its expanded definition published in 2021, UBS defines carbon-related assets through industry-identifying attributes of the firm's banking book. UBS further includes the four non-financial sectors addressed by the TCFD, including but not limited to, fossil fuel extraction, carbon-based power generation, transportation (air, sea, rail, and auto manufacture), metals production and mining, manufacturing industries, real estate development, chemicals, petrochemicals, and pharmaceuticals, building and construction materials and activities, forestry, agriculture, fishing, food and beverage production, as well as including trading companies who may trade any of the above (e.g. oil trading or agricultural commodity trading companies). This metric is agnostic of risk rating, and therefore may include exposures of companies who may be already transitioning or adapting their business models to climate risks, unlike UBS climate-sensitive sectors methodology, which takes a risk-based approach to defining material exposure to climate impacts.
Economic sectors are classified according to the Group Industry Code 2.0 (GIC 2.0) which comprises a hierarchical structure, and further dissected using the heatmap segmentation. Internal UBS GIC2 sectors / subsectors are utilized. Currently, approximately 2.8% of exposures cannot be classified to any risk rating due to missing information. The proportion of total customer lending exposure, gross (%), is calculated by including those exposures in the denominator.
Total exposure to nature-related risks.
Theme Nature-related risks.
Metric(s) – Total exposure to nature-related risks (USD billion) – Proportion of total customer lending exposure, gross (%)
Definition (and Method) With this metric we measure our firm’s risk exposures within sectors with a moderate to high dependency on natural capital, as defined through the Exploring Natural Capital Opportunities, Risks and Exposure (ENCORE) methodology. ENCORE was developed by the Natural Capital Finance Alliance in partnership with the UNEP World Conservation Monitoring Centre. ENCORE identifies economic activities that are most vulnerable to financial impacts due to their dependency on ecosystem services and maps production processes within economic sectors to ecosystem services dependencies on natural capital assets.
The metric is calculated for total loans and advances to customers and guarantees, as well as irrevocable loan commitments (within the scope of expected credit loss) and is based on standalone IFRS numbers. Credit exposure is drawn from group CFO reporting system.
The natural capital risk heatmap identifies our firm’s exposure to companies in sectors where activities are vulnerable to disruption of ecosystem services due to dependency on the natural environment. Our SCR unit mapped the ENCORE database to UBS GIC2 sectors. Respective ratings were then assigned to the GIC2 sectors / sub-sectors. The ratings for ecosystem services dependencies of a sector considers the potential (i) loss of functionality of a production process; and (ii) financial loss, if the ecosystem service is disrupted. As ENCORE focuses on production processes, residential real estate are “Not (yet) classified” via the ENCORE approach. Lombard lending rating is assigned based on the average riskiness of loans. The score ranges from 5 (high dependency) to 1 (low dependency). Scores are summarized (added) and standardized on a normal cumulative distribution function. Our firm’s exposure classification to those ratings (and sub-sectors) may be considered a proxy for dependencies to ecosystem services. The metric of dependency / total lending exposure (as a percentage) is calculated, in line with the climate sensitive metric. For the summary table, broken down by sector and sub-sector, presented alongside the transition and physical risk sector breakdowns and trends, scores individual scores are shown (ENCORE ratings, standardized). The “sensitive sector” exposure amount is given by the total exposure rated Moderate to High, within subsectors.
Economic sectors are classified according to the Group Industry Code 2.0 (GIC 2.0) which comprises a hierarchical structure. Sensitive sectors are defined as those business activities that are rated as having high, moderately high or moderate vulnerability to nature-related risks.
Assessments derived as part of the collaboration with the UNEP-FI to develop a natural capital dependency and impact methodology (ENCORE). Furthermore, internal UBS GIC2 sectors / subsectors are utilized. Geographic location of assets/counterparties is not currently integrated in the methodology due to data and systems limitations.
In the current stage of the methodology, a look-through analysis for Lombard lending and private clients with mortgages is not yet fully carried out. For this reason, Lombard lending rating is assigned based on the average riskiness of loans. Further, for private clients with mortgages a not classified risk rating is assigned.
The proportion of total customer lending exposure, gross (%), nature-related risk, is calculated by combining all sensitive exposures (nature-related risk), divided by all total customer lending exposures, regardless of risk rating and across all financing types, including exposures that cannot be classified into any risk rating due to lack of information.
178
Sustainability Report 2022 | Appendix 5 | Other 179.
ESG integration and exclusion.
Theme Other metrics.
Metric(s) – ESG integration and exclusion (USD billion) – ESG integration (USD billion) – Exclusion (USD billion)
Definition and method We identify two approaches that consider ESG factors in the investment process to varying degrees, but which on their own are not considered sustainable investment. The investment products in scope for reporting Assets under Management (AuM) for these two categories are exclusively UBS Asset Management products under the direct management of UBS Asset Management as noted in the scope section of the UBS Asset Management Exclusion Policy. UBS Global Wealth Management does not report these.
– ESG Integration; considers ESG factors alongside traditional financial metrics to assess the risk-return profile in the investment process. – Exclusion; individual companies or entire industries are excluded from portfolios because their activities do not meet certain ESG criteria, and/or do not align with the values of clients and/or UBS.
› Refer to the UBS AM Sustainable Investing Policy for details, available on ubs.com/am-si 179
Sustainability Report 2022 | Appendix 5 | Other 180.
Key terms and definitions.
Sustainability Is commonly defined as “meeting the needs of the present without compromising the ability of future generations to meet their own needs“ (United Nations (UN) Brundtland Commission, 1987). In this way, we sometimes refer to sustainability to imply a broader scope of exhausted resources beyond those that impact climate change. Our ambition is to conduct business and operations without negatively impacting the environment, society or the economy as a whole and, through our sustainability disclosure, be transparent about how we are pursuing this.
Sustainable Development Goals (the SDGs) The 2030 Agenda for Sustainable Development, adopted by all UN member states in 2015, provides a shared blueprint for peace and prosperity for people and the planet. At its heart are the 17 UN Sustainable Development Goals (available on sdgs.un.org/goals), the SDGs, which are an urgent call for action by all countries – developed and developing – in a global partnership. They recognize that ending poverty and other deprivations must go handin-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.
ESG (Environmental, Social, Governance) A framework to help stakeholders understand how an organization is managing risks and opportunities related to ESG criteria or factors. It is often used in the context of investing, but – beyond the investment community – clients, suppliers, and employees are also increasingly interested in how sustainable an organization’s operations are.
Sustainable finance Sustainability focus: Strategies that have explicit sustainable intentions or objectives that drive the strategy. Underlying investments may contribute to positive sustainability outcomes through products / services / use of proceeds.
Impact investing: Investment strategies that have an explicit intention to generate measurable, verifiable, positive sustainability outcomes. Impact generated is attributable to investor action and/or contribution.
Green, social, sustainability and sustainability-linked bonds: Debt instruments with a commitment to use the proceeds to (re-)finance green or sustainable projects, aligned with the voluntary guidelines in the pertinent International Capital Market Association (ICMA) Principles.
Low-carbon economy Refers to a type of decarbonized economy that is based on low energy consumption and low levels of greenhouse gas (GHG) emissions.
GHG emissions.
Scope 1: Accounts for GHG emissions by UBS.
Scope 2: Accounts for indirect GHG emissions associated with the generation of imported / purchased electricity (grid average emission factor), heat or steam.
Scope 3: Accounts for GHG emissions resulting from activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain.
Net zero: Refers to cutting GHG emissions to as close to zero as possible, with any remaining emissions re-absorbed from the atmosphere.
GHG key vendor: A top GHG scope 3 emitter relative to UBS’s overall scope 3 supply chain emissions and with which UBS has a long-term ongoing relationship.