Climate benchmarking in the Swiss financial market

Bern, 09.11.2020 - For the first time, the entire Swiss financial market has undergone voluntary climate compatibility testing. The initiative came from the Federal Office for the Environment FOEN in collaboration with the State Secretariat for International Financial Matters SIF. The results of these representative tests create transparency while supporting the efforts of the financial institutions involved to guide their investments onto a climate compatible pathway. The results show initial progress, but do not meet the target if the Swiss financial centre is to play a leading role in sustainable financial flows. It is still investing too heavily in oil and coal extraction. Pension funds can make an important contribution to the climate targets if they implement their planned building renovations.

In 2018, the Intergovernmental Panel on Climate Change (IPCC) showed that global warming must be kept below 1.5 °C if dramatic changes to ecosystems are to be prevented. This can be achieved only if financial institutions' investments and loan books are also aligned with the 1.5 °C target.

Using the international PACTA methodology (see box), the Federal Office for the Environment FOEN and the State Secretariat for International Financial Affairs SIF conducted climate compatibility tests on 179 financial institutions, including banks and asset managers for the first time. That is more than twice as many institutions as were tested in 2017, when the programme was available to pension funds and insurance companies only. The results are representative of the Swiss financial marketplace as a whole.

Growing transparency within the financial sector

The 2020 climate test results show that the test in 2017 has demonstrably led to greater transparency for financial institutions regarding climate damaging and - friendly investments and has triggered tangible action. By their own account, half of all participants in the two rounds of testing implemented climate-related initiatives in the wake of their 2017 test results, and now on average score more environmentally friendly than their competitors.

A mixed picture on climate compatibility

All in all, the Swiss financial marketplace 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. Eighty per cent of participants include coal-mining firms in their portfolios. On aggregate, Switzerland's financial centre is supporting further expansion in coal and oil extraction around the world - in direct opposition to climate targets. Furthermore, investments in fossil energies may pose financial risks for investors if these fuels lose their appeal as a result of future action on climate policy. There has been progress, however. A number of financial institutions now maintain holdings in companies that are developing renewable energies and electromobility.

Climate strategies on the up, but implementation lacking

In the survey accompanying the test, more than two-thirds of participants indicated that they pursue a climate strategy. However, more must be done to ensure that this has an effect in practice, and that clients are sufficiently informed about the climate-related risks and impacts of their investments. More than half of the financial institutions which state that they exclude coal from their portfolios continue to hold equities and bonds in companies that mine coal or operate coal-fired power stations. Although one third of participants maintain that they take account of their clients' climate and sustainability aims, only five per cent regularly take the initiative in addressing the issue. Most participants wait for their clients to raise the subject before asking further questions.

Further efforts are needed

The Federal Council intends Switzerland to become a leading location for sustainable financial services. For the financial marketplace to play its part in achieving the climate targets, there must be more targeted action by the financial industry.

Owners of real estate portfolios can have a major influence on the direct reduction of emissions. Pension funds, for example, are currently planning to switch heating systems from fossil to renewable energies in 30 per cent of their buildings. By contrast, other segments of the financial industry said they had similar plans for only one or two per cent of their properties. Along with their test results, financial institutions are offered an interactive Climate Action Guide to help them plan and implement effective climate action.

Greater transparency and regular benchmarking remain important. The next round of climate alignment testing is scheduled for 2022.

The climate-alignment test - PACTA methodology

Climate alignment testing is conducted using the PACTA 2020 (Paris Agreement Capital Transition Assessment) methodology. PACTA is a standardised approach to analysing global equities, corporate bonds and loan portfolios. It was developed by 2°Investing Initiative, an independent, international, non-profit think tank, and is applied by numerous financial institutions and national governments.
PACTA compares the production plans of portfolio companies with a trend determined by the International Energy Agency as necessary to limit warming to a maximum of 1.5 degrees Celsius. The analysis covers the four sectors of fossil fuel extraction, electricity generation, transport (vehicle manufacture, shipping and aviation) and industry (cement and steel), and examines both climate-damaging and alternative climate-friendly technologies in each case. The methodology now allows for an exploration of how Swiss real estate is performing compared with the climate target for the national building stock. The underlying database includes approximately a quarter of a million industrial facilities world-wide, as well as all buildings in Switzerland. Analysing these climate-relevant sectors permits the capture of 70-90 per cent of emissions related indirectly to the capital markets. Alongside the tests, a qualitative survey provides information on participants' climate-related investment strategies, while a stress test highlights risks.
A representative number of Swiss pension funds, insurance companies, banks and asset managers participated voluntarily in PACTA 2020 testing, allowing developments since the 2017 testing round to be observed at the aggregated financial marketplace level. Overall, PACTA 2020 testing was able to analyse around 80 per cent of equity and corporate bond investments, half of all properties owned by institutional investors, and three-quarters of mortgage-financed Swiss residential buildings. The standardised test shows financial institutions how their financial products and investments align with the climate target in comparison with their competitors. Participants may decide for themselves to publish their results, or to use them for internal follow-up work only.

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