EU Sustainable Finance Disclosure Regulation

Sustainability risk factors may have a material impact on the value of an investment. They may increase volatility, may affect liquidity, and may result in a loss to the value of investments.

To enhance the long-term performance of clients' investments, UBS integrates sustainability risk into its investment decision making process, investment advice and insurance advice where relevant. The integration of sustainability risk is implemented in line with UBS`s policies governing the creation of investment research views, portfolio construction and product selection.

The policies, amongst other things, include guidelines that analysts need to observe when forming their independent views. The investment decision and advisory processes of UBS are multi-step processes, a part of which is the selection of preferred instruments based on their market outlook.

When assessing securities of single issuers (equity and bonds) or investment funds, sustainability risks, among other financial risks, are considered when conducting the financial analysis of issuers and fund due diligence:

• The evaluation of sustainability risks and their materiality is one of the numerous factors determining whether or not securities of single issuers are recommended and, therefore, in how far such instruments should be selected in investment management mandates and in investment advice. Sustainability risk is explicitly referred to in the Principles and methodology of research in Global Wealth Management CIO Investment Office (available at ubs.com/cio).
• Fund due diligence focuses on strategy, and how a fund manager captures risks and opportunities (including ESG risks and opportunities) in their investment process. It is not an assessment of the individual holdings within a portfolio. As part of standard fund due diligence, UBS WM evaluates an ESG rating to each fund. While sustainability and other risk topics should be considered by every manager, it is likely that funds with higher ESG intentionality ratings carry less sustainability risk given that more focus and resources are placed on research, investment decisions and/or active shareholder engagement. A fund manager`s lack of integration of sustainability risks in its investment decision making process will typically result in a lower ESG rating.

During investment research and due diligence, UBS aims to identify financial risks (including sustainability risks) with a view to managing overall portfolio risk.

Relevant for GWM Luxembourg, France, Germany and Italy, where investment advice is provided.

UBS integrates selected Principal Adverse Impact (PAI) indicators, based on data availability and alignment to UBS Advice SI sustainable objectives, in its investment decision making process:

Funds

UBS Advice SI considers principal adverse impacts on sustainability factors via its investment in funds with sustainable investments. Investment managers of these funds must provide information related to how the fund considers PAIs on sustainability factors, including contraventions of the “UN Global Compact” principles.

Single Securities

At present, the consideration of principal adverse impact is based on UBS CIO sustainability scores methodology for issuers, where sustainability data from the best-in-class data providers is sourced and systematically processed to calculate a score for six sustainability topics: (i) Climate Change, (ii) Water, (iii) Pollution and Waste, (iv) People, (v) Governance and (vi) Products and Services. The score of a topic, ranges from zero to ten, (zero demonstrating weak performance and ten demonstrating a strong performance in a given topic). The companies that score below the bottom 20% percentile threshold of the topics (i)-(v) are considered not to pass principal adverse impact requirements and thus are excluded from the sustainable share of portfolio. The selection of PAI indicators corresponds to the environmental and social topics on which UBS focuses as part of the scoring methodology and screening process. The UBS scores are used as a proxy for PAI:

Climate change. The Climate Change topic score identifies companies that manage their carbon footprint and use energy effectively and transparently. The following PAI indicators are considered as part of the Climate Change score:

•  “GHG Emissions (tCO2e)” which is used to calculate the carbon intensity
• “Renewable energy consumptions”, and
• “Renewable energy use”

Water. The Water topic score identifies companies that manage their water consumption efficiently and transparently. The following PAI indicator is considered as part of the Water score:

• “Water consumption (m3)” is used to calculate water intensity which is integrated in the Water topic.

Pollution & waste. The Pollution & Waste topic score identifies companies that have good environmental policies and systems, reduce packaging, recycle materials, manage hazardous waste, and limit toxic emissions. The following PAI indicator is considered as part of the Pollution and Waste score:

• “Hazardous products” which demonstrates if products with important human health or environmental concerns account for company´s total revenues.

For the topics People and Governance, the UBS SI methodology is applied but no PAI indicators are considered. The People topic score identifies companies that retain, develop, and promote wellbeing among their employees, encourage diversity and promote human rights across their operations. The Governance topic score identifies companies that are fair and transparent on issues such as executive pay, board independence, tax and anti-corruption.

In addition to the scoring methodology, the following PAI indicators are considered in the screening of companies for controversial business activities or/and sustainability-related incidents which might lead to exclusions of companies from the sustainable share of a portfolio:

• Violations of UN Global Compact principles through a number of underlying indicators related to the individual principles on human and labor rights, and the environment, rather than a single pass/fail indicator
• Land use and biodiversity negative impact
• Exposure to controversial weapons

Furthermore, the screening also considers:

• Controversial business activities: adult entertainment, alcohol, gambling, genetically modified organisms, nuclear power, thermal coal, tobacco, as well as
• Issuers with severe sustainability-related incidents.

UBS is continuously reviewing the sustainability data landscape and assessing the possibility to onboard further indicators.