Climate and financial markets

Today’s investment decisions, for example concerning energy supply, will also determine the quantity of greenhouse gases that will be emitted in the future. In the 2015 Paris Agreement, the international community set three main objectives, including making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. This means that in the future, more money will be invested in environmentally friendly and future-oriented technologies and energy sources, and less in greenhouse gas-intensive technologies and energy sources. As a signatory to the Paris Agreement, Switzerland is committed to this objective. 

Today's investment behavior not only provides considerable finance for coal and oil production, but also for its further expansion. This is in direct opposition to climate targets. The broad participation of insurance companies, pension funds, banks and asset managers in voluntary climate compatibility tests suggests that climate awareness within the Swiss financial sector is steadily growing.

Finance flows include assets under management in Switzerland. At the end of 2019, these totalled just under CHF 7,000 billion. They come, for example, from private savings deposits at banks, insurance capital, and savings in pension funds and Old Age and Survivors Insurance. It is in the interest of savers and pension schemes for financial institutions and institutional investors to invest money in the most profitable funds possible. If the way in which investment and financing affect the climate is made transparent, everybody will be able to make knowledgeable, climate-relevant decisions.


Testing for climate goal alignment

Financing and investments are considered climate compatible when they are in line with the internationally agreed climate target of keeping global warming under 2 degrees. The parliament implemented this target explicitly in the purpose article of the completely revised CO2 Act. For the time being, this objective should be implemented through voluntary measures taken by the financial sector. The federal government periodically records the climate impact of voluntary efforts.

After 2017, the FOEN and the State Secretariat for International Finance (SIF) initiated a second, comprehensive test in 2020 to analyse the climate goal alignment of financial portfolios. This test is being carried out under the title PACTA 2020 (Paris Agreement Capital Transition Assessment). All Swiss banks, asset managers, pension funds and insurance companies could test their portfolios anonymously on a voluntary basis. The pension fund association ASIP, the Swiss Insurance Association SVV, the Bankers' Association SBA, the Fund and Asset Managers' Association SFAMA and the Conference for Investment Foundations KGAST support the climate compatibility tests.

A total of 179 financial institutions voluntarily participated this time – more than twice as many as in 2017. The results show a representative picture of the whole Swiss financial market: around 80 per cent of investments in global equity and corporate bonds, half of all properties held by institutional investors and three-quarters of Swiss residential buildings covered by mortgages were assessed. Moreover, a qualitative survey provides information about climate-relevant strategies, while a stress test highlights risks.

PACTA 2020 is being coordinated internationally. Switzerland and the Netherlands presented a suitable initiative at the UN Climate Action Summit 2019 in New York. The countries that sign up to the initiative will help their financial institutions to test investments for their climate compatibility in an internationally comparable way and align them with the Intergovernmental Panel on Climate Change's 1.5 °C target (see press release of 20 September 2019).


How climate-compatible are Swiss financial market investments?

The Swiss financial market not only continues to invest significantly in oil and coal production, but even in its further expansion. This is not in line with the Paris Agreement objective of making financial flows consistent with climate goals. Moreover, financial investments like these can imply financial risks if fossil fuels become less attractive because of climate policy measures. However, there has certainly been some progress: the test participants who said they had taken concrete actions as a result of the 2017 PACTA test did better than their competitors.

All in all, the Swiss financial market currently invests four times as much in companies generating electricity from fossil fuels such as coal and gas than it does in those producing energy from renewable sources. 

 

Illustrations: Shares of companies in the portfolio that produce electricity from renewable or CO2-intensive technologies (coal, oil, gas) compared to all electricity producers in the portfolio. Each bar corresponds to a participating financial institution in the 2020 climate compatibility test (source: 2°Investing Initiative).

Two-thirds of the test participants said they pursue climate strategies. However, to get the financial market on the climate track, more measures are needed in all financial sectors, in particular faster and more stringent implementation of the various projects that have been announced. Financial institutions that are contributing significantly towards climate targets include those who are planning to renovate their buildings in an energy-efficient way, and replacing fossil-fuel heating systems with renewables.

Here you can find the results report, which summarises the results of the anonymised metadata. A summary of the report is also available in German and French. 


The PACTA method

The tests were carried out using the PACTA methodology (Paris Agreement Capital Transition Assessment), which enables a standardised analysis of global equity, corporate bonds and loan portfolios. The underlying database contains about a quarter of a million industrial investments around the world. On the website www.transitionmonitor.com/pacta-2020 you will find more information about the PACTA model, which was developed by the independent non-profit think tank 2°Investing Initiative. It is available unlicensed in the market.

A new module added in 2020 makes it possible to analyse how Swiss real estate and mortgage portfolios perform compared with the climate target for Swiss building stock. The PACTA real estate model, which was developed on behalf of the FOEN, is also available without a licence. The analysis of all these climate-relevant sectors can cover 70 to 90 per cent of emissions indirectly linked to the capital markets.


Regulatory work on sustainability in the financial market

In its report on sustainability in the financial sector (June 2020), the Federal Council set itself a target of making the Swiss financial centre a leading location for sustainable financial services. The aim is not only to strengthen competitiveness, but also to make an effective contribution to meeting climate and environmental targets (see press release of 26 June 2020). An internal working group led by the SIF, in close collaboration with the FOEN, is looking in depth at issues concerning transparency, risks and due diligence.

The completely revised CO2 Act obliges the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB) to assess and report on institute-related climate risks and risks to financial stability at regular intervals. The Council of States has also referred three postulates with a view to determining further measures (see 'Law' tab below). In addition, a long-term low greenhouse gas emission development strategy will be developed for all relevant economic sectors, in compliance with the Paris Agreement. This will include measures to ensure the climate alignment of financial flows. The FOEN is conducting research to explore the potential to expand the PACTA analysis to other environmental areas, such as biodiversity and forests. At the same time it undertakes research to highlight which strategies pursued by financial market actors are effective, in order to generate a effective climate and environmental impact in the real economy. At the end of November 2020, the FOEN will publish an overview study on the status of current global research in this area.

Because many Swiss financial market actors also sell financial products in the European Union, EU regulations are particularly relevant. The European Commission intends to extend its strategy on sustainable finance and implement the Action Plan containing 10 measures that it published in March 2018. Various regulatory changes will come into force in 2021, such as the disclosure of sustainability risks and impacts for all financial products and the explicit consideration of non-financial objectives in the advice given to clients. And there is already a classification system (taxonomy) for 'green' economic activities in the field of climate change. 


Risks associated with current investment behaviour

Climate impacts such as flooding and heat waves can affect property values (physical climate risks). In the event of global warming of 4 to 6 °C, the projected value lost is much greater than if warming is successfully contained below the critical threshold of 2 °C compared with pre-industrial levels. If measures are taken around the world (e.g. a CO2 levy) to limit fossil fuel use or directly make fossil fuels more expensive, the affected companies can lose value (transition risks). Climate-friendly investment strategies can reduce these risks while achieving returns in line with the market.

A number of supervisors and central banks came together in late 2017 to form the Network for Greening the Financial System (NGFS). The Swiss National Bank (SNB) and Swiss Financial Market Supervisory Authority (FINMA) are among the members. The aim is to exchange experiences with climate risks on a voluntary basis and contribute to the development of climate risk management in the financial sector. In order to recognise such risks at institutional level at an early stage, an expert group called TCFD, led by the industry and set up by the Financial Stability Board, recommends a number of measures, including 2 °C scenario analyses. By participating in the climate impact tests, a large number of Swiss financial market actors have implemented this recommendation for the first time.  

A legal opinion commissioned by the FOEN shows that material climate risks already have to be taken into account to a large extent in current law. On a voluntary basis, climate impacts resulting from investment and financing decisions can also be measured and reported.

Rechtliches Gutachten «Berücksichtigung von Klimarisiken und -wirkungen auf dem Finanzmarkt» (PDF, 513 kB, 31.10.2019)Gutachten von Prof. Dr. Mirjam Eggen, Bern und Dr. Cornelia Stengel, Zürich, im Auftrag des BAFU, 2019.

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Last modification 09.11.2020

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