The UBS-GHI is constructed using liquid, actively traded futures contracts. Weather exposure is derived from Heating Degree Day and Cooling Degree Day futures contracts traded on the Chicago Mercantile Exchange (CME). Emissions exposure is provided by futures on carbon credits associated with the EU Emission Trading Scheme traded on the European Climate Exchange and the Kyoto Clean Development Mechanism traded on Nord Pool. When the index launches, it will be weighted 50% weather and 50% carbon; of which 40% is EU Allowances (EUA) credits and 10% Nord Pool Certified Emission Reductions (CER) credits.
The governance committee for the index will meet annually to review the composition and weightings of the UBS-GHI and its family of sub-indexes. At the moment there are three sub-indexes tracking the performance of a weighted average of EUA and CER futures. The carbon futures contracts used in the indexes cover the entire Phase II Kyoto commitment period, from January 1, 2008 until the end of 2012.
“We have ensured the UBS-GHI and its sub-indexes can adapt to changes in the carbon trading markets. They are set up to continue past Phase II and are able to include any other types of emissions credits, such as those from another national trading scheme outside the EU, if their markets are liquid enough,” said Murisic.
The UBS-GHI is the latest development in a trend of investment banks creating indexes with a climate change theme. Barclays Capital also has an index tracking carbon credits, called the Global Carbon Index, launched in December 2007. In May last year, UBS launched its Global Warming Index (UBS-GWI), which tracks temperature-linked futures contracts on 15 US cities traded on the Chicago Mercantile Exchange. The theme extends to indexes that track stocks of environmentally friendly companies, such as HSBC’s family of climate change indexes launched in September 2007.