Marco Suter, executive vice chairman, UBS Board of
Directors, carefully studied the chart on his desk. It showed the public
commitment of major financial institutions to help mitigate global warming (see
Exhibit 1). Evidently, UBS lagged behind its competitors. The graph was
part of a report that environmental specialists and senior executives at UBS
had compiled. It suggested the company adopt a more progressive policy on
climate change. Suter thought about the options that the working group had
generated. These ranged from stabilizing the company's current carbon emissions
to complete carbon neutrality (see Exhibit 2). He
felt it was possible that climate change would become an important issue for
financial services companies in the future:
Think of a superstar soccer player. What distinguishes the
superstar from the average player? The superstar is not running after the ball,
he is anticipating where the ball will be. This is the role of corporate
responsibility at UBS. We are not focused on our current legal and ethical
obligations. These we meet as a matter of course. As chairman of the UBS
Corporate Responsibility Committee it is my job to anticipate what stakeholders
will expect from us in the future. Which of these expectations will pose risks?
Which ones will open up new business opportunities?
The report also included figures on the cost of reducing
carbon emissions, but Suter did not view these as central:
It is difficult to measure the benefit of corporate
responsibility, and we currently do not do it. This is a question of
leadership. Corporate responsibility is a part of our strategy; it is a part of
what we believe in.
The UBS Corporate Responsibility Committee would meet early
next week. Suter wondered which option he should support.
UBS AG, headquartered in Zurich and Basel, Switzerland, was
one of the world's leading financial services companies, offering wealth and
asset management as well as investment banking services internationally, and retail and corporate banking in
Switzerland.1 UBS managed 2.65 trillion[3] Swiss francs (CHF) in
invested assets, had offices in more than 50 countries, and employed 70,000
people worldwide. The company established a strong presence in the U.S. after
purchasing the brokerage PaineWebber in 2000. UBS was listed on the New York, Swiss,
and Tokyo stock exchanges and had a market capitalization of CHF 131.9 billion
on December 31, 2005. Since 2000, the firm had significantly outperformed other
global financial services companies such as Citibank, HSBC, and its hometown
rival Credit Suisse (see Exhibits 3 and
4). UBS served high-net-worth individuals, corporations, and
institutional clients via three business units: Global Wealth Management &
Business Banking, Global Asset Management, and Investment Bank.
Global Wealth Management & Business Banking (GWMBB)
served private investors and corporations. The unit earned CHF 6.7 billion in
income (before taxes) in 2005. It accounted for 38% of UBS's total operating
income and 51% of the firm's operating profit.2 Since 2000, the unit
had grown organically and through a series of acquisitions. Higher fee income
came from an increased number of sophisticated investment vehicles such as real
estate and hedge fund products. The firm had also purchased nine deluxe
money-management firms that catered to ultra-high-net-worth customers.3
By 2006, UBS was the largest wealth manager in the world, with a 3.5% share of
the CHF 50 trillion GWMBB market.4
GWMBB was divided into three units. Advisors in the Wealth Management
International & Switzerland
division served wealthy Swiss and international clients excluding those from
the United States. Nearly half of the division's clients invested at least CHF
10 million with UBS.5 While a majority were European (26% hailed
from Switzerland and 41% were from the rest of Europe), the division was also
the leading wealth manager in the Asia Pacific region (excluding Japan), and it
held a strong position, after Goldman Sachs, in the emerging markets of Brazil,
Russia, India, and China.6
Wealth Management US competed with Citigroup Smith Barney, Morgan Stanley, and
Merrill Lynch to advise high-net-worth individuals in the U.S. From 2000 to
2005, the company's share of the U.S. private wealth management market had
increased from 13.2% to 15.8%.
The Business Banking Switzerland division provided traditional banking services in
Switzerland. It managed CHF 153 billion in invested assets and CHF 141 billion
in loans, 83% of which were mortgages. UBS was the top bank in Switzerland, serving
2.6 million individuals and approximately 137,000 corporations. It had about a
25% share of both the individual savings and mortgage markets.7
Headquartered in London and
New York and employing over 18,000 people in 34 countries, the UBS Investment
Bank earned a profit of CHF 5.2 billion (before taxes) on an operating income
of CHF 17.5 billion in 2005. The investment bank's mergers-and-acquisitions
(M&A) business grew particularly quickly, doubling its worldwide share
between 2002 and 2005. UBS participated in 295 deals worth $314.8 billion for a
market share of 13.9% in 2005.8 These deals included some of the
largest in the industry. For example, UBS was the financial advisor to Gillette
when Proctor & Gamble purchased the company for $57 billion in 2005.
In 2005, the Global Asset Management business earned a
profit of CHF 1.06 billion (before taxes), managing CHF 765 billion of invested
assets. The largest manager of mutual funds in Switzerland and the second
largest in Europe, the unit offered clients traditional investment vehicles
(e.g., equities and fixed income), alternative and quantitative investments
(e.g., hedge funds), and real estate investment options. Its institutional
clients included public pension plans, municipalities, and central banks.
Global Asset Management competed with businesses such as Fidelity Investments
and Merrill Lynch Investment Managers as well as local and regional companies.
UBS had taken corporate responsibility (CR) seriously for
some time.10 For example, the company was among the first to sign
the Bank Declaration of the United Nations' Environment Program, committing to
conduct its business in an environmentally responsible manner. CR efforts had
further gained in prominence in recent years, Chairman Marcel Ospel explained:
The numerous recent corporate scandals have sent shock
waves through the global economy and pushed "responsibility" up the
agenda. As tends to happen in these situations, a large number of organizations
have taken the issue on board, and it is clear that clients, the media, and
financial analysts in particular are now paying greater attention to this
aspect of corporate management.
For the UBS leadership, "responsible behavior"
was an important part of the company's culture, identity, and business
practice. Defying Milton Friedman's notion that there was one and only one
social responsibility of business—"to use its resources and engage in
activities designed to increase its profits"11—UBS pursued a
broader mission. Ospel explained: "For us, behaving responsibly sometimes
means moving beyond solely profit-oriented considerations and legal
requirements." UBS management was in good company. A 2005 McKinsey study
of more than 4,000 executives in over 100 countries had found that more than
80% of respondents believed that corporations should balance their obligation
to shareholders with explicit contributions to "the broader public
good."12
UBS's CR activities focused on four areas: the internal
work environment, client relationships, the communities in which UBS conducted
its business, and the natural environment.
Client relationships UBS strove
to develop expertise in incorporating environmental and social aspects into its
research and advisory activities. In 2004, it established an equity research
desk to monitor the rankings of socially responsible investments (SRIs) and
produce original research. By 2005, UBS managed SRIs valued at CHF 46.89
billion, about 2% of all invested assets. In its approach to SRIs, the company
distinguished among three classes of products. Funds using positive criteria
selected companies with a superior social track record (1.7% of SRIs). A second
type of fund excluded problematic industries such as weapons or tobacco
(15.7%). This approach was particularly popular in the U.S. In its most
significant class of SRIs (82.1%), UBS actively engaged management, trying to
influence the corporate behavior of the companies in which it invested. The
Global Asset Management unit in the U.K. was particularly active in this
regard. On average, the UBS SRIs tended to slightly outperform broad market
indices. In 2004, for example, the performance of these investments exceeded
the MSCI World Index by 1.3%.[4]
Communities UBS management believed that the company's success depended
not only on the skills and resources of its employees and the relationships
with its clients but also on the health and prosperity of the communities in
which the bank operated. To support these communities, UBS made annual cash
donations on the order of CHF 50 million, mostly for educational and
environmental projects.
Environment UBS carefully tracked the impact of its business operations
on the natural environment. Under its global environmental management system,
which was certified by an independent auditor using the ISO 14001 standard, the
company sought to manage the impact of its business operations on the natural
environment. UBS produced an annual environmental report that documented these
impacts (see Exhibit
5). Environmental reviews were also a
standard part of the bank's risk management systems.
In recognition of the company's efforts, UBS was included
in the Dow Jones Sustainability Group Index (DJSGI) and the FTSE4Good Index.
Both indices attempted to identify companies that met globally recognized
corporate responsibility standards. Whether the indices succeeded was a matter
of dispute.13 Flarvard University Professor Michael Porter and Mark
Kramer, managing director of FSG Social Impact Advisors, for example, argued
that the groups that created these indices lacked the resources to audit
companies and that they relied on easy-to-observe but questionable indicators
to measure social performance.14 While UBS management understood
these issues, competition among firms for inclusion in the indices was
nevertheless seen as positive. Markus Jaggi of UBS Communications explained:
DJSGI and FTSE4Good provide good examples of how companies
can track their performance against peers in the area of corporate
responsibility. The indices also act as a discipline and an incentive for
companies, since those that fail to meet the criteria of the indices lose their
place, and other companies can always strive to enter the indices by improving
their performance in the areas under assessment.
UBS, a sophisticated marketer that received a prestigious
Ogilvy Award for the research underlying its 2005 "You and Us"
campaign, carefully measured the economic effects of its brand. In surveys, the
company tracked the relation between the popularity of its brand and consumers'
knowledge of UBS sponsoring activities. UBS marketers also studied the
likelihood that respondents would become UBS customers after learning of the
bank's sponsorships. In contrast, as of 2005, the company did not measure the
economic effects of CR. "We don't know to what extent CR activities
influence the value of our brand," said Oliver Loch, UBS global head of
brand research. Fie added, "We also don't know how our customers feel
about CR. Do they really want us to support the communities in which we
operate?"
Unlike many other companies,
which assigned CR activities to the general counsel's office or communications,
UBS had created a special Corporate Responsibility Committee. In its
activities, the committee relied on the input of business groups and corporate
functions (risk, communications, 13
legal, HR) (see Exhibit 6). The committee's task was to judge how UBS could best meet
the ever- evolving expectations of its stakeholders. Suter outlined the task:
If the CR Committee comes to the conclusion that there is a
gap between what our stakeholders expect and what we practice—and that this gap
represents either a risk or an opportunity to the firm—the committee suggests
appropriate measures to management, which is then responsible for implementing
solutions.
The CR Committee comprised many of the company's most
senior managers. In addition to Suter, there were two other members of the
board of directors, and four members of the group executive board, including
Peter Wuffli, the group CEO. The involvement of top managers reflected a deeply
held belief. "Corporate responsibility is a function of management at all
levels. One cannot simply delegate one's responsibilities to an expert
body," explained Mark Branson, chief communication officer. Suter agreed:
Our commitment to corporate responsibility must be a matter
of conviction, not something that is driven primarily by reputation-related
considerations. We must do what we believe to be right, what ties in with our
corporate culture and, ultimately, what is right for the UBS name.
While the earth's climate had not changed much since the
Industrial Revolution—the average surface temperature rose by only 1.1 °F
during this period—industrial activity had substantially increased levels of
carbon dioxide in the atmosphere, from 280 parts per million (ppm) before the
Industrial Revolution to 380 ppm in 2005 (see Exhibit 7).c The most important sources of CO, and other greenhouse
gases were electricity generation (24.5%), deforestation (18.2%), agriculture
(13.5%), and transport (13.5%). These gases had formed a layer that trapped a
part of the sun's heat, hence warming the planet. Svante Arrhenius, a
nineteenth-century scientist and winner of the Nobel Prize, was first to
speculate about the link between CO, concentrations and increases in
temperature.[6]
Because he was from Sweden, a warmer climate seemed just fine to him. But
by 2005, many scientists were deeply concerned about the prospect of global
warming. At current trends, CO, concentrations would reach 800 ppm by the end
of the twenty-first century, and the Intergovernmental Panel on Climate Change
(IPCC) expected the average global temperature to increase by 2.5°F to 10°F
during this period.[7]
Predicting long-run changes
in climate, however, was exceedingly difficult. The earth's climate system was
complex, with many poorly understood feedback loops. For example, melting ice
decreased the planet's albedo, leading to quicker warming.d In a
similar vicious cycle, warmer oceans absorbed less CO,. In 2005, scientists
agreed that global warming had the potential to seriously affect the earth's
ecosystem. Some of the direst consequences included a shutdown of the Gulf
Stream and a rise in sea levels. The Gulf Stream carried warm, salty water from
the tropics to the north Atlantic, leading to a milder climate in northern
Europe.e As the stream approached the Arctic, it cooled down and
began to sink because its salty water was heavier than the surrounding waters,
thus keeping up the stream's circulation. Melting Arctic ice, scientists
feared, could dilute the
Gulf Stream, reduce its salt content, and lead to its
slowing or perhaps even a shutdown. This was more than a theoretical
possibility. The Gulf Stream had come to a standstill about 8,000 years ago
when a sudden flood of fresh water from a North American lake poured into the
north Atlantic. If the Gulf Stream shut down, the consequences could be grave.
"You could have icebergs around Britain," said David Griggs, director
of climate research at Britain's Met Office.18 Other scientists,
however, predicted far less frosty consequences.
Rising sea levels were a second major concern. Melting
Arctic ice would not have a big impact on sea levels because it was already
swimming at sea. In contrast, ice in Greenland and Antarctica was sitting on
land. If all of Greenland's ice melted, sea levels would rise by 23 feet.
Recent data presented a complex picture. Sea levels were falling in the
northern Pacific, the northwest Indian Ocean, and Antarctica. They were rising
in the tropics and subtropics. Changes in water temperature as well as wind and
land movements—the Northern Hemisphere was still bouncing back from the weight
of long-melted glaciers—all contributed to fluctuating sea levels. Whether
melting glaciers also played a role was an open question. Emma Duncan of The Economist explained:
Nobody knows what is happening to the mass balance of
Antarctica. Greenland's does seem to be shrinking very slightly—by around 0.4
mm a year, in sea-level equivalent. That would be only 4 cm a century, if the
rate stayed constant. But there is no reason to think that the rate will stay
constant—nor, if it did accelerate, that anything could be done to stop it.19
Some scientists also maintained that warmer ocean
temperatures contributed to the increase in the number of hurricanes. The Pew
Center on Global Climate Change, for example, linked Katrina's development from
a tropical storm to a Category 5 hurricane to the abnormally warm surface
temperature of the Gulf of Mexico in the summer of 2005.20
Given the complexity of predicting climate change, it was
no surprise that scientists, policymakers, and the general public varied in
their opinions about the degree of warming, the intensity of its effects, and
consequently the efforts that should be undertaken to mitigate them (see Exhibit 8). Economists struggled to predict the economic impact of
climate change. One study, by Professor William Nordhaus, the father of
climate-change economics, predicted that a 4.5°F increase in temperature would
reduce global output by 3%.
Until the late 1990s, most companies and consumers were
shielded from the cost of global warming. While taxes on energy consumption and
transport were common, these charges did not reflect concerns about greenhouse
gases. Even the increased risk of major storms, which could be expected to
result in increased insurance rates, were hardly felt because governments kept
prices artificially low. Commenting on insurance rates in Florida, Robert
Muir-Wood of Risk Management Solutions quipped: "Communism survives in three
parts of the world ... North Korea, Cuba and the American insurance
market."21
Efforts to slow climate
change gained momentum in the late 1990s when developed-country governments
established the Kyoto Protocol, committing to decrease their greenhouse-gas
emissions on average by 5% below 1990 levels before 2012. To achieve these
goals in an efficient manner, governments set up a number of trading
mechanisms, including the Kyoto-wide Clean Development Mechanism (CDM) and the
European Emissions-Trading Scheme (ETS). As a result, UBS had various options
to lessen its impact on climate change: reducing its own emissions and
purchasing offsets in carbon markets.
A first possibility was to adjust activities in the
company. UBS's carbon footprint showed that energy consumption (31% of the
bank's electricity was produced from fossil resources) and business travel (UBS
personnel took more than 300,000 flights annually) were by far the most
important sources of emissions. Replacing flights with videoconferencing was
one way to reduce the company's carbon footprint. In 2005, UBS held over 20,000
videoconferences, a 47% increase over the prior year. The company also strove
to effectively manage its energy use. For example, when UBS renovated one of
its buildings in Zurich, improved cooling, heating, and lighting systems
resulted in 41% energy consumption savings. In London, UBS purchased climate
change levy-free electricity, guaranteed to be generated from an energy source
with lower emissions than fossil fuels.
UBS could also purchase offsets to neutralize its own
emissions. These offsets represented investments in third-party projects that
reduced greenhouse-gas emissions. Several markets existed.
Certified
emissions reduction units (CERs) These
certificates came from carbon-reducing projects in developing countries. Often
project-management companies such as Cameo and AgCert identified polluters and
studied ways to cut emissions. Niche investment banks such as Climate Change
Capital and Natsource acted as brokers and sold these projects to companies
seeking to offset their carbon emissions. To facilitate trades, exchange
markets were set up (European Climate Exchange, Nord Fool), and the World Bank organized
a carbon fair in Cologne for bilateral exchanges. Carbon-reducing projects in
poor countries were particularly attractive because the marginal cost of
abating a ton of CO, was only $5 to $10. In 2005, the market price for CERs
hovered around $20 (see Exhibit 9). The
markup represented the substantial demand for CERs. Frices also reflected the
decision of the Chinese government to levy a 65% tax on carbon-reducing
projects in the country. In 2005, roughly two-thirds of carbon deals involved
projects in China. While the country had been skeptical of carbon markets early
on, arguing trading allowed richer nations to pay their way out of obligations
to reduce emissions, China eventually warmed up to the idea of carbon trading.
Jiang Weixin, a senior official of the National Development and Reform
Commission, welcomed the opportunity to attract foreign investment:
Developed countries get opportunities to
emit greenhouses gases at a relatively low
economic cost and achieve their emission reduction targets,
while developing countries obtain
benefits such as
funding and technology transfer.22
Emission
reduction units (ERUs) The company
could also offset its emissions by purchasing ERUs. These certificates
represented carbon-reduction projects in industrialized countries that had
signed the Kyoto Frotocol.
Verified
emission reductions (VERs) These
voluntary certificates represented carbon- reduction projects that were traded
in over-the-counter markets. The projects were verified by independent
consultants, but they had not yet undergone the procedures for verification,
certification, and issuance of CERs or ERUs. Because it was uncertain whether
VERs would eventually qualify as CERs or ERUs, buyers tended to pay a
discounted price for these certificates.23
Froponents of market-based approaches argued that they
allowed countries to cut emissions at reduced cost. The EU Commission estimated
that ETS saved European companies €3 billion, one- third of the cost of Kyoto
compliance.24 On the other hand, critics of carbon markets saw these
institutions as an
easy way out for polluters. Larry Lohmann of the U.K.-based nongovernmental
organization (NGO) The Corner House explained:
[Offset] projects are merely supplementing fossil fuel use;
they are not replacing it. The institutions most eager to set up offset
projects—from the World Bank to Tokyo Power—are precisely those most committed
to burning up more and more fossil fuel. Covering the land with windmills and
biofuel plantations will be of little use unless fossil fuel extraction is
stopped.25
While they did not share these views, some UBS managers
thought the bank should take them into account when deciding how to reduce its
carbon emissions. Liselotte Arni, head of Group Environmental Policy, argued
for this approach:
It is important that internal and external audiences
understand the value of the program. While we obviously focus on
cost-effectiveness, for example by buying offsets when breakeven or in-house
investments cannot be reached in a reasonable time frame, we also have to
accommodate critical voices. People argue, "Banks are rich; they can
afford to buy their way out of reducing emissions." So we need to optimize
across climate change and the UBS reputation.
In reviewing the UBS climate-change proposal, Suter thought
about the policies that other banks had adopted (see Exhibit 10 for summary information).
Citigroup Citigroup served clients in more than 100 countries and
managed over $1 trillion in assets.26 The company's measures to protect
the environment were part of its corporate citizenship agenda. Starting in
2002, Citigroup compiled data on energy use in its 13,000 buildings. Based on
these analyses, the firm was refurbishing some of its U.S. facilities.
Citigroup planned to purchase 10% of its electric power in the U.S. as green
power through 2007. In 2004, Citigroup began disclosing the carbon emissions
from power plants that it financed. Two years later, the company announced it
would lower its greenhouse-gas emissions to 10% below their 2005 level by 2011.
Credit Suisse Credit Suisse Group (CSG), UBS's main competitor in
Switzerland, emitted 450,000 tons of greenhouse gases in 2005. Most of these
stemmed from its business travel and the use of electricity. In an initial step
towards reducing its impact on climate change, in April 2005, CSG's
Sustainability Committee approved a plan that called for all of the company's
buildings in Switzerland to be greenhouse-gas neutral by 2006. CSG also ordered
243,000 tons of carbon credits for 2006-2008 so that its operations in
Switzerland and its business flights out of Switzerland would be carbon
neutral. The firm expected to spend CHF 2.2 million on certificates.27
HSBC HSBC Holdings, the world's
largest bank by assets, led the banking industry in its commitment to mitigate
climate change. In December 2004, HSBC committed to neutralize 100% of its
carbon emissions by purchasing green electricity and offset certificates. It
accomplished this goal ahead of schedule in September 2005. HSBC's offset
credits came from a wind farm in New Zealand, an organic waste composter in
Australia, an agriculture methane reducer in Germany, and a biomass
co-generator in India. The average price of each metric ton of offset was
$4.43. In mid-2005, HSBC pledged to reduce its carbon emissions by another 5%
by 2007, and it set up a Carbon Management Task Force to oversee the project.28
HSBC's efforts were widely recognized. The Financial Times
named HSBC as the top
bank in its first Sustainable Banking Awards for "its leadership in
merging social, environmental and business objectives."29
Morgan Stanley Investment bank Morgan Stanley began trading carbon credits
in 2004. It hoped to acquire deals valued at over $3 billion in the next five
years. "We strongly support the use of market-based solutions to meet
environmental policies and objectives," said Simon Greenshields, managing
director and global head of power at the company.30
Climate change was not the only issue on Suter's desk. All types
of environmental impacts as well as the alleged tax evasion among the wealthy
and human rights were other concerns. Suter explained:
NGOs use the globalization process to export rich-country
standards to the rest of the world. There is a trend to make financial
institutions responsible for their "sphere of influence." Some groups
think we are accountable for all the activities that we support financially.
Take the Global Compact, a United Nations initiative, as an example. The
compact asks companies to make sure they are not "complicit in human
rights abuses." What does complicity mean? And where does our
responsibility end?
Which issues and groups UBS should address was a
complicated question. Christian Leitz, NGO facilitator at UBS, explained:
"The issues that NGOs bring up can certainly not be ignored. These groups
are increasingly concerned about the activities of financial services
providers; their expertise in financial-industry issues has grown markedly in
recent years. It is therefore important both to monitor NGO activities and to
engage in constructive dialogue."
Many analysts pointed to the important role of the media in
bringing particular problems to the attention of the public. But this simply
begged the question why the media reported on some issues and not on others.
Professor David Baron of Stanford University argued that the media's stance
depended on the societal significance of a topic and on intrinsic audience
interest in the matter.31 Rating an issue on these two dimensions,
Baron believed, could help predict the response of the media (see Exhibit 11). Determining societal significance, however, was no easy
matter. For example, experts often disagreed with the risk perceptions of the
general public (see Exhibit 12). Suter wondered whether
UBS should follow common perceptions or expert judgments in these instances.
In the upcoming meeting of the Corporate Responsibility
Committee, Suter wanted to reach three decisions. Which of the four options, if
any, should UBS adopt? For any given option, what was the right mix of
mitigating measures? And finally, how should the new policy be communicated?
Suter was well aware that views sharply differed among UBS managers. Some
business units feared that even stabilizing carbon emissions might be too
ambitious in view of the bank's growth prospects. There were also important
geographical differences. U.S.-based businesses had shown decidedly less
enthusiasm than other units. Finally, some managers had expressed concerns
about the cost of the proposed programs. Was it realistic to assume that carbon
certificates would only double in price in the next seven years, as the working
group had assumed?
Suter glanced at the chart on his desk one more time. Was
it time to take action?
---
“UBS and Climate Change: Warming Up to Global Action?”
1) What are the benefits for UBS of reducing its carbon emissions? What are the risks?
2) Which option should Suter support?
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