Climate and financial markets

Today’s investment decisions concerning energy supply, for example, will also determine the quantity of greenhouse gases that will be emitted in the future. In the 2015 Paris Agreement, the community of nations set three main objectives, including making finance flows consistent with low carbon 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, 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 behaviour supports global warming of 4–6 degrees Celsius. The broad participation of insurance companies and pension funds 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. As of the end of 2016, these totalled over CHF 6,500 billion. They come, e.g., from private savings deposits at banks, insurance capital or 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 how investment and financing affect the climate is made transparent, all can make knowledgeable, climate-relevant decisions.


Voluntary climate compatibility tests

In 2017, the FOEN and the SIF initiated pilot tests to analyse the climate alignment of financial portfolios. All Swiss pension funds and insurance companies could voluntarily have their portfolios of stocks and corporate bonds tested, anonymously and free of charge, for their compatibility with the 2°C target. The pension fund association ASIP and the Swiss Insurance Association SVV supported the tests carried out by the Think Tank 2°Investing Initiative.

79 pension funds and insurance companies, which represent about two thirds of the total market as measured by assets under management, accepted this invitation. The volume of the assets under examination and the participation of various sizes of pension funds and insurance companies made a representative analysis possible. Further information about the model can be found on the website www.transitionmonitor.ch. Pension funds and insurance companies can still benefit from the test offered on that website until the end of 2017. In contrast to the pilot test, the reports will not show a ranking in comparison with other participants. Upon completion, the model will be made available unlicensed in the market.


Findings obtained from the tests

Financing and investments are considered climate compatible when they are clearly in line with the internationally agreed climate target of keeping global warming under 2 degrees. The implementation of this objective should be achieved through voluntary measures taken by the financial sector. The climate-impact tests carried out in 2017 show that investments currently support a path towards 4-6 degrees Celsius. But there are large differences between individual insurance companies and pension funds. Some are already making climate-friendly investments, while others in certain sectors or classes of investment. In other sectors, such as the expansion of renewable energies, however, investors on average lag behind the world market. The tests can contribute to a further rethinking within the Swiss financial sector.

See the English report «Out of the fog: «Quantifying the alignment of Swiss pension funds and insurances with the Paris agreement» summarizing the results of the anonymised metadata. The summary of the report is also available in German and French. Also available are the test results, as received by the participants, with the figures of an average portfolio.


Risks of current investment behaviour

Climate impacts such as flooding and heat waves can affect property values (physical climate risks). In the event of a climate change of 4-6°C, the projected loss of values is enormously higher than if it is successfully contained below the critical threshold of 2°C as 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, affected companies can lose value (transition risks). These risks vary widely, depending on whether the decarbonisation of the affected economic sectors takes place gradually or abruptly. If production and investment plans are currently consistent with a 2°C scenario, this suggests a smooth transition. If these plans still show a misalignment, then the likelihood is high that the adaptation will take place suddenly and swiftly, thus endangering assets. A report by PRI, Global Compact and UNEP-FI notes that the inclusion of long-term risks such as climate change is one of the fiduciary obligations of investors. If these are not observed, claims could be made against investors for damage caused by climate change (liability risks).

In order to recognize such risks at an early stage, an expert group led by the industry and set up by the Financial Stability Board recommends carrying out 2°C scenario analyses (FSB TCFD 2017). With their participation in the climate-impact tests, several Swiss insurance companies and pension funds have implemented this for the first time.


Return on climate-friendly investment strategies

Even with climate-friendly investment strategies, market-compliant returns can be achieved. A FOEN study (2016) shows that the emissions intensity associated with investments could be reduced by 10 to 90 percent. Climate-friendly indices that implement the appropriate strategies already exist. Ten of the eleven cases studied showed higher returns for these investment strategies. Eight of the eleven climate-friendly strategies achieved a better return-risk ratio compared to their respective conventional benchmark indices.


The Confederation supports standardised measurement methods

An international ISO standard (14097) is being developed to measure the climate impact of financial portfolios.
The Confederation supports these and other efforts to develop standardised indicators and incorporates its findings from the various basic studies into the international committees. This will also enable the public to obtain a consistent picture of the indirect impacts of financing and investments on the climate. The Confederation also supports industry efforts to move the Swiss financial centre in a sustainable direction. With their individual test reports, all participants receive a basis for orienting themselves better towards the 2°C target in the future if they aspire to do so.


National and international efforts

In France, institutional asset owners are obligated to report on the climate compatibility of their financial assets and their climate strategies starting in 2017. Sweden is especially active in issuing national recommendations and the supervisory authority of the Bank of England warns about potential liability risks for boards of directors in the finance and insurance sectors.

The EU has set up a High Level Expert Group on Sustainable Finance, the recommendations of which are expected in 2018. The Financial Stability Board (FSB) has set up an industry-led Task Force on Climate-related Financial Disclosures, which published its recommendations for the voluntary disclosure of climate-related financial risks in 2017. This work is guided by the State Secretary for International Finance Matters (SIF).

In 2014, the Swiss Sustainable Finance association was founded with the goal of strengthening Switzerland's position in the international sustainable finance market through information and education. The FOEN collaborates with the association on various environmental issues.

Further information

Documents

Klimafreundliche Investitionsstrategien und Performance (PDF, 1 MB, 08.11.2016)CSSP – Center for Social and Sustainable Products; South Pole Group, im Auftrag des BAFU (in German)

Kohlenstoffrisiken für den Finanzplatz Schweiz (PDF, 1 MB, 23.10.2015)CSSP – Center for Social and Sustainable Products; South Pole Group, im Auftrag des BAFU (in German)

Trails for Climate Disclosure – a regulatory review (PDF, 2 MB, 08.11.2016)2°Investiting Initiative, supported by FOEN, 2016

Measuring Progress on Greening Financial Markets (PDF, 1 MB, 10.06.2016)2°Investiting Initiative, supported by FOEN, 2016

Reports 

Contact
Last modification 23.10.2017

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