According to the US Environmental Protection Agency, scope 1 emissions are direct greenhouse gas emissions from sources controlled by a company, while scope 2 emissions are indirect emissions associated with purchasing electricity, heat, or cooling.
Lowering emissions and increasing efficiency
UBS cited several reasons for the outperformance of the low carbon intensity portfolio, including the fact that lower emissions can lead to more efficient operations.
“Low carbon intensity firms produce products and services with lower carbon emissions than their competitors. If carbon emissions are a proxy for resource use (which is a reasonable assumption given that almost all production processes emit carbon emissions), then carbon intensity is a measure of a firm’s efficiency, according to the firm.
The report from UBS comes at a time when there is a surge in support for sustainable investing and ESG strategies, or when environmental, social, and governance factors are taken into account.
According to a recent Morningstar report, global assets under management in sustainable funds are approaching $2 trillion after record inflows into ESG funds during the first quarter.
Assets surpassed the $1 trillion mark in the second quarter of 2020, nearly doubling in less than a year.
Selections from various industries
UBS highlighted names in its low carbon intensity portfolio that it rates as buy or neutral.
Within the consumer discretionary theme, Booking Holdings and Hasbro are favorites, with the firm rating the stocks as neutral and buy, respectively.
UBS also mentioned Mastercard and Arista Networks, both of which it rates as a buy.
In the energy sector, Kinder Morgan and Baker Hughes are both rated buy, while Anthem and Cigna Corporation stand out in health care. Each company has a buy rating from the firm.
Carbon disclosures are becoming more common, but accurately assessing a company’s environmental footprint remains difficult.
For one thing, data can take a long time to update and may contain a lookback bias. In other words, businesses may choose to report emissions from previous years. Scope 3 emissions, or the impact of a company’s entire value chain, can be particularly difficult to assess.
“Carbon data is insufficient. “Not all companies are required to disclose their emissions, and it can be burdensome, so not all of them do,” according to UBS.
According to UBS, approximately 360 of the roughly 1,540 companies in the MSCI World Index do not disclose enough data to estimate their carbon emissions. These companies account for approximately 11% of the index weight, down from 23% a decade ago.