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 behaviour supports global warming of 4 to 6 °C. 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. At the end of 2018, 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.

1.1 Voluntary measures for the time being
1.2 Regular progress measurement and international coordination
1.3 Findings obtained from the climate compatibility tests
1.4 Risks of current investment behaviour
1.5 Return on climate-friendly investment strategies
1.6 The Confederation supports standardised measurement methods
1.7 National and international efforts
Further information

1.1 Voluntary measures for the time being

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 Council of States 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 wants to record periodically the impact of voluntary efforts on the climate.

The Federal Council has also set up a working group within the Federal Administration, led by the State Secretariat for International Finance (SIF) in close cooperation with the FOEN (see press release of 26 June 2019). This will determine the framework conditions that will enable the Swiss financial centre to be competitive in the area of sustainable finance. The Federal Council intends to hold discussions by the end of 2019 on the issue of whether and how the financial market should be regulated. The working group should also work towards the conclusion of industry agreements with financial market players. The aim is that such voluntary commitments by the sector to implement the Paris Agreement will result in greater transparency and representative participation by financial market players in the climate compatibility tests designed to measure the progress made. 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.

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1.2 Regular progress measurement and international coordination

In 2017, the FOEN and the SIF initiated the first pilot tests to analyse the climate compatibility of financial portfolios. All Swiss pension funds and insurance companies were able to have their portfolios of stocks and corporate bonds tested, voluntarily, anonymously and free of charge, for their compatibility with global warming of less than 2 °C. The pension fund association ASIP and the Swiss Insurance Association SVV supported the tests carried out by the think tank 2° Investing Initiative.

The next climate compatibility test will be initiated in 2020, for pension funds, insurance companies and now also for asset managers and banks. The existing model will be expanded to cover, for example, global loans or Swiss real estate investments. Qualitative aspects such as investor dialogue with companies (engagement) will also be taken into account. The tests are being coordinated internationally under the title 'PACTA Initiative 2020' (PACTA stands for Paris Agreement Capital Transition Assessment).

Switzerland and the Netherlands presented the initiative ahead of 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).

Further information about the existing PACTA model, which is available unlicensed on the market, can be found at www.transitionmonitor.com. The website will also contain practical details of the 2020 test procedure, along with expansions of the model once these have been completed.

1.3 Findings obtained from the climate compatibility tests

79 pension funds and insurance companies, representing about two thirds of the total market as measured by assets under management, tested their portfolios for climate compatibility in 2017. The volume of the assets under examination and the participation of various sizes of pension funds and insurance companies made a representative analysis possible. The results show that investments currently support global warming of 4 to 6 °C. There are, however, great differences between individual insurance companies and pension funds. Some are already making climate-friendly investments, while others favour particular sectors or classes of investment. However, in other sectors, such as the expansion of renewable energies, the average investor tends to lag behind the world market. The tests may contribute to a further rethinking within the Swiss financial sector.

See the report “Out of the fog: Quantifying the alignment of Swiss pension funds and insurances with the Paris agreement”, which summarises the results of the anonymised metadata. A summary of the report is also available in German and French. Also available are the test results, as received by the participants, using the figures of an average portfolio.

Quantifying the alignment of Swiss pension funds and insurances with the Paris Agreement (PDF, 1 MB, 23.10.2017)Supported by the FOEN

23.10.2017

First step towards climate-aligned financial flows

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1.4 Risks of 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).

In order to recognise 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). By participating in the climate-impact tests, several Swiss insurance companies and pension funds have implemented this 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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1.5 Return on climate-friendly investment strategies

Even with climate-friendly investment strategies, market-compliant returns can still be achieved. A FOEN study (2016) shows that the emissions intensity associated with investments could be reduced by 10 to 90%. 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.

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1.6 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 contributes its findings from the various basic studies to international bodies. This will also enable the public to obtain a consistent picture of the indirect impacts of financing and investments on the climate.

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1.7 National and international efforts

The European Commission published an Action Plan containing 10 measures in March 2018. Various regulatory changes, 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, are due to come into force soon. A classification system (taxonomy) for 'green' economic activities is also being developed.

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, on a voluntary basis, to exchange experiences and contribute to the development of climate risk management in the financial sector.

In France, institutional asset owners have been obliged to report on the climate compatibility of their financial assets and their climate strategies since 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.

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.