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This is why we are working to identify the contribution our firm can make to ensure inclusive growth through four pillars: employees, clients, suppliers and society.
Our approach.
In 2022, we built transparency around our various inclusive growth initiatives. We completed a full inventory of existing and planned initiatives, established external benchmarking across the four pillars of employees, clients, suppliers and society, and identified a KPI framework for all four pillars. DE&I reports were published in both the UK and the US. › Refer to our DE&I Report 2022, available in Q2 2023 at ubs.com/diversity, for detailed information about UBS’s approach to DE&I 1 McKinsey & Company, October 2021; Our future lives and livelihoods: Sustainable and inclusive and growing.
Inclusive growth.
Economic growth that is distributed fairly across society and creates opportunities for all.
Guiding principles Accessibility Participation Advancement.
Pillars Employees Clients Communities Suppliers.
Topics Health Education Financial inclusion Employment.
Diversity, equity & inclusion (DE&I)
Inclusive growth 76
Sustainability Report 2022 | Social 77.
Impact and scale Through our own products and services, we are working to promote a fairer distribution of resources, capital and wealth. Examples include the Girls’ Education / Educate Girls’ Development Impact Bond and the Global Gender Equality UCITS exchange-traded fund. In the US, we launched our Inclusive Investment Solutions team in 2022. We also have a dedicated female client segment and a multi-cultural client segment. › Refer to the “Strategy” section of this report for more information about sustainable finance and investing products and services.
In 2022, we partnered with external organizations to further the debate around some of the key components of inclusive growth. In October 2022, UBS sponsored the GenderSmart Investing Summit, building on a multi-year partnership the aim of which is to unlock gender-smart capital at scale.
Inclusive growth initiatives and their impact on the community We work with a diverse range of grassroots, national and cross-border non-governmental organizations, as well as community organizations. Together, we address wealth inequality through education and skills development. These community initiatives provide us with access to marginalized and underprivileged groups across the full spectrum of DE&I focus areas. › Refer to “Social impact” above for more information.
Inclusive growth in the supply chain In 2022, we established the foundations for inclusive growth by extending our supplier diversity program to five additional locations with relatively developed diverse supplier communities and the availability of local diversity certification organizations. In addition to the US, where diverse spend accounts for 22% of third-party spend, we are now increasing opportunities for diverse suppliers to win business with UBS through inclusion in tenders in the UK, Australia, Brazil, Canada and South Africa.
We have identified new diverse suppliers to support (via preferred diverse vendor panels for some categories and locations), launched a referral form and built visibility in tools and processes so buyers can make conscious vendor selection decisions that lead to positive social impact.
We are proud members of diverse supplier advocacy organizations including WeConnect International, National Minority Supplier Development Council, National LGBT Chamber of Commerce, Minority Supplier Development UK, Canadian Aboriginal and Minority Supplier Council, Supply Nation and South African Supplier Diversity Council. These partnerships give us insights into diverse supplier markets across the globe, as well as assisting with supplier outreach efforts and opportunity matching.
In 2022, we increased the number of diverse supplier relationships (focused on minority-, women-, veteran-, disabled-, disadvantaged-, LGBTQ-owned businesses, with a minimum annual spend) by 30%. › Refer to “Managing our supply chain responsibly” above 77
Sustainability Report 2022 | Appendix 1 | Strategy 78.
Appendix.
Appendix 1 – Strategy.
We are committed to continuously improving and enhancing UBS’s sustainability performance. This appendix provides further details about the strategic components set out in the “Strategy” section of this report.
Supporting our climate strategy – our climate-related materiality assessment.
Methodology for assessing climate opportunities.
Considerations related to climate change are increasingly reflected in firms’ business planning and operations. Climate-related risks represent financial risks both for UBS itself, as well as for our diversified client base. At the same time, financing and investing in technological, industrial and/or business model innovation aimed at addressing or avoiding the effects from worsening climate change represent commercial opportunities for financial firms such as UBS.
As an example, supporting the global economy’s transition to a net-zero state by 2050 will require vast amounts of investment and financing, which banks can help allocate to effective and efficient uses in this context. To quantify this opportunity, we can look to the United Nations Framework Convention on Climate Change (the UNFCCC). It was reiterated during its 27th Conference of the Parties (COP 27) in 2022 that “about USD 4 trillion per year needs to be invested in renewable energy up until 2030 to be able to reach net-zero emissions by 2050 and that, furthermore, the global transformation to a low-carbon economy is expected to require investment of at least USD 4 trillion to USD 6 trillion per year.”1.
As elaborated on in further detail below, for UBS, given its capital-light business model, the largest commercial opportunities lie in the climate-related investment space, while essential enablers for all climate-related business initiatives are strong research, data and analytics foundations that support clients’ and our own understanding of key trends. We derive these conclusions from a systematic approach aimed at better understanding UBS’s future opportunities around climate. On an annual basis, and in line with the Task Force on Climate-related Financial Disclosures (the TCFD)’s recommendations (as set out in the Strategy section of the TCFD recommendations), we are assessing potentially relevant climate-related opportunities for UBS, encompassing commercial products and services, social finance, resource efficiency and energy consumption, operational resilience, as well as green funding.
In doing so, we follow a two-step approach: i) identifying relevant opportunities; and ii) assessing their relative materiality for the Group over the short, medium and longer terms. It is important to note that sustainability overall, and climate specifically, are continuously evolving topics, for example in terms of applicable political and regulatory frameworks, as well as client and market dynamics, implying that our annual assessment always represents a pointin-time analysis and needs to undergo continued challenge and reviews, so as to consistently reflect an accurate representation of our opportunity space in climate.
In the following sections we describe the individual opportunities we have identified across four distinct areas of our business.
Commercial products and services.
The starting point for identifying commercially relevant climate-related business opportunities is UBS’s annual process to formulate sustainable finance ambitions for each of its four business divisions. This ensures relevant opportunities are systematically screened and selected. In the process, external research and publications are systematically consulted, as are activities among UBS’s key peers in order to ensure that the latest client, market, industry and regulatory trends are appropriately reflected. We identify climate-related business opportunities as those that directly or indirectly contribute to one or more of three areas: climate mitigation, climate adaptation or climate transition.
1 Based on information from the UNFCCC, see https://unfccc.int/sites/default/files/resource/cma2022_L21_revised_adv.pdf 78
Sustainability Report 2022 | Appendix 1 | Strategy 79.
Individual climate-relevant products and services are organized into dedicated categories1. To ensure sufficient granularity for our survey-based, qualitative materiality assessment by an internal panel of sustainable finance experts, we then break these main categories down into 11 subcategories, each representing a coherent set of related products and services. Our expert panel then assesses the expected materiality of the individual subcategories, as well as the time horizon over which these are expected to start contributing materially to UBS’s business outcomes. Materiality is hereby assessed along three equally weighted dimensions: i) revenue potential, ii) strategic relevance and iii) the impact on the environment and stakeholders (“double materiality”).
The assessment is done in a qualitative manner based on expert judgment in order to take account of the inherent difficulties involved in making more precise and/or quantified assessments on future commercial developments, in particular in an area such as climate, where regulatory and policy frameworks, as well as market conventions and industry trends, are still subject to considerable change and evolution. It is therefore imperative that we regularly review, reiterate and report on these assessments so as to ensure continuous relevance of the reported results. We have identified below the commercial product and services categories for the assessment:
Climate-related investment products These products include for example our climate-aware, low-carbon and Paris-aligned funds and ETFs, carbonreferencing structured products and dedicated climate-focused investment modules. We also see opportunities within private-market investment strategies related to climate mitigation, such as battery storage and cold storage.
Carbon-related financial services and products These include supporting clients in different business lines in identifying and assessing opportunities related to carbon credits (in both compliance and voluntary markets).
Climate-related financing products and solutions These include green balance-sheet lending to corporate and private clients, structuring and underwriting green bonds for corporate and sovereign issuers, and supporting and financing innovative climate start-ups, as well as green infrastructure finance (e.g., renewable energy).
Advice on strategic climate opportunities This includes corporate advisory work through the incorporation of climate factors, for example in valuation and analysis, and, more specifically, advising on transactions where climate considerations are clearly identifiable as part of a transaction rationale from the point of view of either an acquirer or a target company.
Thematic research This includes climate-related in-depth research and thought leadership work, looking across and delving into relevant developments in the real economy and various economic sectors, the financial industry and financial markets, as well as scientific research. As a highly dynamic topic, climate-related research plays a key role in keeping our clients and ourselves on top of relevant developments and key trends.
Data analytics and metrics These include data-driven analytical tools available in various business lines, which are being continuously developed and further refined to cover in more depth and breadth relevant sustainability- and climate-related aspects. Examples of application include the portfolio management process, quantitative modeling, climate exposure analytics within client reporting and data-powered strategic insights work.
Platforms These include innovative platform solutions enabling clients to gain access to climate-related products, such as green mortgages and, in the future, voluntary carbon credits. Such platform solutions enable UBS to scale and achieve impact beyond some of our own operational limitations (e.g., balance sheet, geographical reach, own product shelf).
1 To guide this assessment, we have used the definition for materiality as provided by the Global Reporting Initiative (the GRI).
79
Sustainability Report 2022 | Appendix 1 | Strategy 80.
Philanthropy Services and UBS Optimus Foundation.
In addition to our commercial offering, our clients have access to solutions helping them realize their philanthropy goals, including climate-related ones. Through our Philanthropy Services teams, we provide grants and social finance investments to climate-related projects under the UBS Optimus Foundation network’s environment and climate portfolio of work. The UBS Optimus Foundation network’s environmental and climate strategy focuses on two pillars, “Sustainable Land Use” and “Coastal and Marine Ecosystems”, and guides the identification and selection of potential opportunities. Our program director for environment and climate assesses and selects these opportunities in terms of their fit with the UBS Optimus Foundation network’s environment and climate strategy, the quality of the organization’s team and track record, and potential for scale, as well as for expected results in key impact areas, including climate change mitigation efforts (we already actively monitor the share of portfolio assets being allocated to this) and climate change adaptation. They are then reviewed and approved by a seniorlevel approval committee. Experts from our Philanthropy Services and UBS Optimus Foundation teams provide a summary assessment of the materiality of this portfolio of projects, which is then included in the overall assessment. The following category represents our Philanthropy Services and UBS Optimus Foundation in the assessment:
Social Impact This includes climate-related philanthropy activities orchestrated by our Social Impact teams.
Own operations.
UBS is committed to reducing its operational impact on the environment and has set clear reduction targets for resource use, as well as formulating ambitious net-zero commitments. Experts from UBS’s Group Corporate Services team, responsible for managing UBS’s operational footprint, have assessed the materiality of opportunities stemming from efforts in this area. These opportunities can be grouped into three distinct categories: resilience, energy consumption and resource efficiency.
Climate-related funding.
UBS, spearheaded by Group Treasury in partnership with relevant business lines, is continually assessing new opportunities for climate-related funding that could contribute to expansion of our investor base or achieving favorable funding costs. As part of this assessment, experts from Group Treasury reviewed the materiality of opportunities for funding, such as green or sustainability-linked bonds. › Refer to the “Strategy” section of this report for more details about our sustainable and climate finance product offering and achievements in 2022 › Refer to the “Social” section of this report for more details about our social impact activities › Refer to the “Environment” section of this report for more details about our in-house environmental management › Refer to our Green Funding annual investor report, available at ubs.com/greenbonds 2022 climate-related opportunities materiality results.
The comprehensive results for UBS from the different expert assessments are displayed in the infographic below, placing individual categories within low / medium / high materiality and short- / medium- / long-term time-horizon segments. Categories are displayed on a relative scale, with the highest relative degree of materiality seen for thematic research, data analytics and metrics as key enablers for a wide range of other business opportunities with clients. Climate-related investment products are the highest-ranked immediate commercial product opportunity, while resilience is seen as the most important operational opportunity regarding climate matters.
80
Sustainability Report 2022 | Appendix 1 | Strategy 81.
Methodology for assessing climate-driven risks.
Climate-related risks are driven from either changing climate conditions (physical risk) or from efforts to mitigate the effects of climate change (transition risk). These climate risk drivers affect banks, the financial system, and the broader economy through both micro- and macroeconomic channels. Underpinning UBS’s materiality-driven approach to managing climate-related risks, the firm undertakes an assessment of how climate-driven risks may result in material impacts (e.g., credit losses or reputational incidences resulting in lost revenues), given UBS’s own specific product footprint. The assessment considers geographic, jurisdictional, and sectoral differentiating factors as well as the full range of climate-related time horizons. The methodology continues to improve as data quality and understanding of transmission channels improve with time.
On an annual basis, the sustainability and climate risk (SCR) unit coordinates a systematic materiality assessment of climate-related risks in accordance with the ISO-14001 environmental management standard. Based on industry collaboration, regulatory guidance, and internal subject matter expertise, ratings are agreed between the SCR unit and respective business division representatives, covering: (i) granular definition of transmission channels; and (ii) science- and business-based qualitative ratings of climate-driven risks.
Time horizon.
Materiality short-term medium-term long-term low medium high.
Energy consumption.
Resource effi ciency.
Climate-related funding.
Social impact.
Resilience Carbon-related fi nancial services and products.
Platforms Climate-related fi nancing products and solutions.
Climate-related investment products.
Data analytics and metrics.
Thematic research.
Resource effi ciency, Energy consumption and Resilience.
Philanthropy services and Optimus Foundation.
Climate-related funding Commercial products and services.
Advice on strategic climate opportunities 81
Sustainability Report 2022 | Appendix 1 | Strategy 82.
Risk rating process The climate-driven risk assessment, resulting in a risk rating (shown on the Y-axis in the chart below), covers all business divisions and the products and services offered within them. The process is conducted by the SCR unit, in partnership and agreement with relevant business representatives. UBS first evaluates the inherent risk at the product/service level, defining pre-mitigant risk to UBS across financial and non-financial risk types (e.g., credit and market risks for financial and operational, liability, and reputational risks for non-financial). Climate risk drivers that may result in impacts on banks and/or its clients, investees, and assets are decomposed to articulate the discrete channels from which these impacts may materialize. The transmission channel value chain is primarily built as follows: 1) climate risk driver (e.g., climate policies, tech for transition); 2) transmission impact (e.g., wealth or income); 3) channel (e.g., through counterparty, assets, or directly to UBS); 4) the type of channel (e.g., corporate debt asset, retail counterparty, etc.); 5) impact driver (e.g., credit worthiness); 6) impact variable (e.g., probability of default); 7) the type of risk (e.g., liquidity for financial, regulatory compliance, or reputational for non-financial); 8) primary differentiator (e.g., sectoral concentration in high-risk sectors); 9) risk amplifier (e.g., macroeconomic feedback loops); 10) mitigants (both internal and external).
These so-called climate risk transmissions channels are defined at the granularity of UBS’s climate risk assessment methodologies. For example, climate transition risks that may result in credit losses to UBS (i.e., credit risk), are decomposed to examine how changes in global climate policies, low-carbon technologies, and downstream (consumer and investor) sentiment may affect either the credit worthiness of UBS counterparties and/or affect the value of collateral UBS may hold against existing credit facilities.
The database of transmission channels and narratives are analysed against the range of products and services UBS offers, to determine an initial inherent risk rating. Ratings are given on a qualitative (converted into a quantitative) scale ranging from low (1), moderate stable (2), moderate emerging (2.5) to high (3), and are distributed on a relative basis: risky items against relatively less risky ones across products within a business division, and across risk drivers and types.
Initial ratings are proposed by experienced SCR officers, leveraging in-house expertise, scientific and regulatory publications, news analysis and sector sustainability risk monitoring, and the relevant business model. Business representatives then engage relevant front-office experts to challenge SCR’s initial proposal or confirm it. Business divisions undertake their own rating for potential risks arising in their products and services according to a step-bystep procedure of evaluation and ranking, review and approval, and documentation.
Assessments are evaluated on a two-way materiality basis. Both financial and non-financial risk impacts to UBS are evaluated, alongside impacts to the environment, climate, and human rights holders (for the broader SCR assessment). Materiality is assessed for those products and services with higher than average impact and/or risk rating. Items rated as having a potential material risk are mapped to relevant risk controls. The proposed materiality assessment is then provided to UBS’s SCR Portfolio Underwriter.
Key aspects included in the holistic analysis, including amplification potential from macro-economic feedback loops (qualitatively included), as well as risk differentiating factors (including geographic, jurisdictional, and/or sectoral concentrations). To layer in the differentiating factors, transmission channels are mapped to a primary differentiator (e.g., geographic location is a key differentiator in determining UBS’s exposure to acute climate hazards, whether in UBS’s own operations or from our clients). Those differentiators link to existing risk concentration analyses, like climate risk heatmaps for sectoral heterogeneity along with other input factors. Concentrations of exposure to higher-risk geographies, jurisdictions, and/or sectors are given a relative rating in line with the relative rating approach taken in the overall initial risk rating (above) and averaged into the risk and impact rating already given (otherwise referred to below as the “enhanced rating”). Further enhancements planned for 2023 include quantitative integration of macro-economic feedback loops, expansion of traditional risk categories (e.g., include 82
Sustainability Report 2022 | Appendix 1 | Strategy 83 liquidity), layering of risk mitigants (e.g., structural product considerations, or insurance in the short term), and further academic exploration towards identifying new and enhanced transmissions channels.
Concerning the time horizon (shown on the X-axis in the chart below), UBS defines short term as less than three years, medium term as three to ten years and long term as beyond ten years. Currently, the most relevant time horizon for risk and impact are determined in agreement with relevant business division representatives, across the transmission channels. This is then given a rating from short to long term, with an ordinal integer assigned respectively. In 2023, we expect to assign an individual rating to each of the three time horizons for each channel and product/service, as to reflect both the complex nature of climate risk timing and its embedded uncertainty.
Final ratings.
Enhanced ratings for each transmission channel are obtained by averaging the front-to-back agreed risk rating, impact rating, and SCR-defined differential ratings for each identified channel and relevant product or service. Driving towards a UBS firm-wide assessment, ratings are then further averaged amongst products within business divisions and normalized by the count of products/services, and further averaged amongst the business divisions. Two ratings are produced: 1) a risk rating and 2) a time horizon rating. Given the methodological approach in decomposing transmission channels, we are able to present ratings through multiple lenses, for example from the perspective of the climate risk driver or from the traditional risk category (e.g., credit, market, reputational, etc.).
In the graph below, we show the climate-driven risk ratings by risk driver (grey) and traditional risk type (red). For the traditional risk types, we aggregate results into financial, including both credit and market, and non-financial, including operational risk (relating to either business continuity or regulatory compliance) and reputational risk. This graph tells us that technological change-driven transition risks pose the lowest risk potential to UBS, while market sentiment-driven climate risks pose the highest potential risk (primarily due to UBS product footprint and great uncertainty associated with timing and impact of climate-related market-driven risks). Further analysis with respect to the ratings process defined above shows that due to UBS’s established climate strategy, climate-driven business risks are relatively low, when compared to, for example, inherent reputational risk exposure. Most importantly, and as substantiated by repeated scenario-based climate analyses since 2014, climate-driven financial risks are found to be stable in the mid-term, at moderate.
Climate-driven risks by risk driver and risk type.