The online magazine of the Swiss Bankers Association
September 26, 2019


Sustainable investing – a priority with potential for the financial centre

Sustainable investing – a priority with potential for the financial centre

The Swiss financial centre already plays a leading role in the sustainable economy. Sustainability is also becoming increasingly important for investors. Switzerland has the opportunity to become a leading global hub for sustainable finance.

The traditional banking business has always been one of the world’s key industries and indispensable for an economy. Financial intermediaries keep the economic cycle going and influence it. Banks therefore have a significant impact on how money is used. Through lending and investments in various sectors, they are part of steering how these assets develop and their sustainability impact. In Switzerland in particular, the banking sector has made a substantial contribution to the prosperity of society and economic growth.

But finance also plays a key role in achieving the goals of the Paris Accord. The European Commission estimates, for example, that according to the goals of the European Union (EU), there is still an investment gap of around EUR 180 billion per year in the area of climate-friendly infrastructure. Article 2.1c of the Paris Agreement calls for all financial flows to be brought into line with the climate targets within a binding framework under international law. This redirection has two dimensions: to tie capital flows to climate compatibility and to mobilise more private-sector investments and financing for climate protection. This also implies systematically reducing all those financial flows that are not in line with the Paris objectives.

Initial reduction target needs adjustments

The Federal Council wants to align Switzerland’s climate policy with a global warming limit of 1.5 degrees Celsius compared to the pre-industrial period. Following an analysis of the IPCC’s Special Report (Intergovernmental Panel on Climate Change), the Federal Council recently concluded that the indicative reduction target for greenhouse gas emissions for 2050 announced under the Paris Agreement was not in line with the latest scientific findings. For this reason, it decided on 28 August 2019, following a preliminary analysis, to aim for a net zero target by 2050.

Climate risks are also economic risks. For financial market stakeholders, sustainability is therefore not only an ethical issue, but also an economic and existential one. The Swiss financial centre, with its broad range of stakeholders and its technical expertise, already plays a leading role in sustainable finance today. Sustainability is also becoming increasingly important for investors. This matter is a strategic priority for the SBA, as Switzerland has the potential to become one of the world's leading hubs for sustainable finance. At its most recent meeting, the SBA's Board of Directors determined its position on sustainable finance and set it out in a position paper.

"The Swiss financial centre, with its broad range of stakeholders and its technical expertise, already plays a leading role in sustainable finance today"

A combination of measures is required in order to reach the ambitious goal of becoming a leading hub for sustainable investing. On the one hand, the banks want to develop their own guidelines for financial intermediaries, or in other words, recommendations for how sustainability criteria can be incorporated into products, services and advisory processes. On the other hand, the elimination of competitive disadvantages in the issue of sustainable financial products is intended to create an additional incentive for customers. For existing requirements, e.g. for pension funds, negative incentive structures are to be replaced by modern provisions.

The Swiss economy can, however, only make a multi-layered contribution to sustainability if the expertise that exists in Switzerland can be exported. Exportability must, therefore, be improved and market access ensured. Isolated efforts and not effective, meaning that Switzerland must take international developments into account as part of a coordinated approach.

EU leads the way with smart pension investment regulation

In this context, it is also worth taking a look at the EU. Almost parallel to the EU Action Plan on Sustainable Finance, the EU Directive on the activities and supervision of institutions for occupational retirement provision (IORPs) was adopted in December 2016. These are minimum requirements which the countries of the European Union had to implement by January 2019. The 2003 IORPs Directive already stipulated certain minimum standards. Governance and information obligations have now been introduced, in particular the obligation to regularly conduct and document own risk assessments. Solid risk management is ensured on the basis of the prudent person principle1 . This requires that risk analyses also take into account environmental, social and good corporate governance (ESG criteria for short) factors. However, there is no obligation to take these ESG factors into account when investing assets.

"Switzerland must take international developments into account as part of a coordinated approach."

With the revision of the IORPs II Directive, the EU wants to ensure that pension funds have an appropriate degree of investment freedom within the framework of their risk management. To this end, quantitative ceilings for asset classes will be abolished in all member states, which from a Swiss perspective appears to be downright visionary. The consideration of ESG factors in investment decisions is also increasingly being observed in Switzerland (on a voluntary basis). However, this consideration is not an explicit, integral part of the due diligence obligations of the responsible bodies. Such developments should also have a signal effect for Switzerland with its pension-related backlog of reforms.

Overcoming the current social and environmental challenges requires significant funds, which exceed the means available to individual nations. As the largest managers of global wealth, the banks are therefore called upon and prepared to take responsibility.

The SBA will advocate for a catalogue of dedicated, coordinated measures that can be implemented rapidly and are committed to the matter in hand.

1 when referring to investments, we speak of the prudent investor rule