What will the new Swiss Climate Scores mean for sustainable finance
Current science indicates that global warming beyond 1.5 degree Celsius could have a catastrophic impact on the natural world and humanity. Switzerland and its financial sector are gearing up their efforts to transition to net-zero greenhouse gas emissions by 2050. In the latest edition of finance.swiss, Tanya König speaks to Christoph Baumann, head of sustainable finance at the State Secretariat of International Finance, to learn more about the newly-implemented transparency metrics.
Why is it important to have a common standard for climate transparency?
Switzerland and the Swiss financial market is very much committed to aligning the
financial flows with the goals of the Paris Agreement, meaning trying to limit global
warming to 1.5 degrees above industrial levels. And for that there’s a huge transition
needed in the real economy globally. And Switzerland—as the largest center for
cross-border wealth management and as a huge reinsurance and insurance center—is
ideally placed to support this global transition. But to do so effectively, we need a
common language. We need to understand what it means to be climate-aligned, and
this understanding needs to be credible. And what credible means to me is it needs to
be science-based, it needs to be forward-looking, and it needs to be comparable and
easy to communicate to investors.
And just to better understand the Swiss Climate Scores, what indicators are included in these scores?
Obviously it would be easiest to have only one indicator that is very easy to
communicate, but we are dealing with a 27-year forward-looking transition to 2050,
when Switzerland has committed itself to be net-zero. And it’s not that easy,
unfortunately. So we came up with six indicators grouped on one side into current state
indicators looking at what are the current state of companies, such as their current
emissions and emission intensity, their current exposure toward fossil fuel activities, and
forward-looking indicators. On the one hand, we show the percentage of companies in a
portfolio that have committed science-based net-zero targets. We look at the global
warming potential, meaning if all the companies globally act with the same ambition as
the companies in the portfolio, what would be the global warming resulting from that?
And other indicators include the stewardship of the asset managers. So how do they
utilize their power in their engagement with the companies? And lastly, do they have
annual or multi-annual goals to reduce emissions in the portfolio?
You mentioned these commitments: How can you verify if the commitments to net-zero are adhered to? Is there a way to check?
There are two levels. On the one hand, all these indicators mentioned are obviously not
Swiss inventions. They are very much international best practices. They appear in
multiple regulations but also multiple standards, such as the TCFD [Task Force on
Climate-Related Financial Disclosures] recommendations. So there’s global monitoring
on the quality of this data. On the other hand, the Swiss Climate Scores itself, they’re
voluntary. So it’s a voluntary exercise. As such there’s no mechanism to verify how
financial institutes use these scores, that they are perfectly adequate. However, the
Swiss associations and AMAS [Asset Management Association Switzerland] and SSF
[Swiss Sustainable Finance] are currently working on templates to ensure consistent
and easy to use implementation of these scores, which I believe will reduce massively
the risk of non-coherent implementation.
How do you collaborate with companies and financial institutions in achieving a more sustainable financial center?
I think there are three main areas of work we’re focusing on. On the one hand, it’s so
important to have decision-ready sustainability data from the real economy. And
decision-ready meaning that they can be utilized by the financial market to form their
investment decisions. And we’re working very closely, also with the real economy, on
climate-related data but also on nature-related data. When it comes to climate, we are
currently doing a mandatory implementation of the task force for climate-related
financial disclosure recommendations, which are the global standard for climate
disclosures. We believe that they’re absolutely instrumental for financial institutes to
then act upon that. The second area is the net-zero commitments of financial
institutions. So there were many pledges around COP26 last year in Glasgow and many
more this year. All the main associations in Switzerland are committed partners of these
international alliances, and the Federal Council recommended to financial institutions to
join them. So there’s an ongoing dialogue with financial institutes: What does it mean to
be part of them? How can we facilitate that more join these alliances? And how can we
ensure credibility? And the third area, it’s exactly what we just discussed, it’s
transparency on financial products.
Transparency is actually a key word because transparency has been an issue when it comes to sustainable finance, as there are no common metrics that have been established yet. There have been a few prominent cases of greenwashing investments lately, which also forced regulators to take a closer look at what financial institutions advertise as sustainable investments. So what are the challenges you’re facing in making sure that transparency is given?
To start, I’m very encouraged that there is an absolute common understanding in the
financial market in Switzerland that greenwashing does not have a place in Switzerland.
And all the associations have been very forward in their communication against
greenwashing. So I think we have been fighting a common goal: How can we combat
greenwashing or avoid greenwashing in the market. To one degree, greenwashing is
natural given that these days markets are much more sophisticated than five or 10
years ago. So I think 10 years ago, as soon as there was something to do with an
environmental or social aspect or governance aspect in a product no one would have
doubted that that’s a sustainable investment. Today’s investors want to know, ‘Well, how
exactly is this aligned with my sustainability goals? How exactly does this have an
impact?’ I think there lies the two main questions: A sustainable investment to me is one
that is either aligned with a sustainability goal—for instance, you’re invested in
companies that have a credible net-zero path—or it has an impact. The standard thing
would be you’re investing to ensure that there are more wind farms or more renewable
energy or you’re investing into a product where the asset manager is actively trying to
bring down emissions. So they might invest on purpose in brown companies but through
engagement and stewardship they push down the emission path of these companies to
a more green trajectory. However, what is not a sustainable investment to me is if you
simply optimize your performance or your risk profile of your financial investment by
reducing climate risks or biodiversity or any other sustainability risk. It has to do with
sustainability because those are risk factors to your portfolio, but it’s pure financial risk
management you’re doing, and it has not necessarily—or very likely not—an effect on
sustainability goals, and it very much might not be aligned with sustainability goals. And
I think today that’s still mixed up. So there’s a clear need to clarify that, I would say.
You might consider sustainability as a financial risk anyway…
It’s a fiduciary duty when you’re managing a third-party asset. It’s a fiduciary duty to
minimize relevant risks. And I think it’s a common consensus that at least climate is a
financial risk to your portfolio, which you need to assess.
Compared to other international financial centers how does Switzerland differ?
I would say on the one hand we have a traditionally very market-based approach where
we work very closely with the financial institutes and with other stakeholders—like
NGOs and universities as well—before we act upon it from a regulatory perspective.
And I think especially in the area of sustainability or in sustainable finance that’s the
right approach because there’s a huge amount of dynamics. So if we implemented
regulation based on the standing three, four years ago, it would have been the wrong
regulation. I’m very much convinced of that. So we work very closely with the industry
and we see in what areas is the market not able to efficiently reach the necessary steps,
and there we step in as we do now with the TCFD regulation. We’re really trying to have
a supportive role, and it’s a unique collaboration I would say compared to other financial
markets. The other area, I believe, is that in Switzerland all the main market players try
for the highest possible credibility. So when you come forward and you suggest actions
to increase credibility you get a lot of support, and I think that’s a very encouraging key
feature of the financial center.