The global financial system has a strong influence on the future of our planet. By directing finance flows into sustainable activities (sustainable finance), the financial industry has great potential to change markets and contribute to shaping economic systems in a sustainable way. The Swiss financial centre plays a leading global role in this area and is therefore making a positive contribution.
The role of the Swiss Bankers Association
Swiss financial institutions are global leaders when it comes to their sustainable finance offering and distributing investment products in this segment. Switzerland is on course to become a premier international hub. However, this is not something the sector can achieve on its own. All financial market stakeholders must work together to achieve this goal.
In September 2018, the Board of Directors of the Swiss Bankers Association (SBA) decided to make sustainable finance one of the SBA’s strategic priorities. The SBA published its position paper on the topic in 2020 (see also brochure and table below). The paper outlines the ideal political framework conditions for enabling Switzerland to become a hub for sustainable finance. Together with the members of the Sustainable Finance working group, employees of the SBA also developed guidelines for the advisory process for private clients in 2020.
As the umbrella organisation of the Swiss banks, the Swiss Bankers Association actively advocates the removal of existing regulatory hurdles in Switzerland and further improving the overall framework conditions for sustainable investment products. To this end, the SBA is in dialogue with all the relevant stakeholders in the sector, the authorities and civil society.
The banks have launched a series of own initiatives targeting Sustainable Finance:
- Swiss banks contribute towards the drafting of international standards on transparency. These include, for example, the G20 Task Force on Climate-related Financial Disclosure (TCFD), as well as voluntary participation in the climate alignment tests of the Federal Office for the Environment (FOEN).
- A growing number of banks are aligning their business models with the goals of the Paris Agreement (PACTA), by committing to incorporate ESG guidelines such as the UN Principles for Responsible Banking (PRB) in their banking business or by joining the Net-Zero Banking Alliance. At the sector level, the SBA has set up working groups addressing the topics of disclosure and taxonomy.
- Swiss banks support the disclosure of climate risks under the TCFD framework and have worked closely with the Swiss financial markets authority FINMA on revising the circular on disclosure.
- The SBA has drafted a guideline for integrating ESG factors into the investment advisory process for private clients.
- Most banks have expanded their range of financial instruments and services in order to incorporate sustainability preferences.
- By integrating ESG guidelines into their investment activity, numerous banks are aligning their business models with global initiatives such as the Principles for Responsible Investing (PRI).
- A growing number of banks have integrated ESG factors into their lending practices on their own initiative.
- Depending on their business model, many banks are aligning their processes with global initiatives such as the PRB by incorporating ESG guidelines into their banking operations.
- The SBA encourages all members to participate in voluntary climate compatibility tests and has formed a working group on sustainability of real estate financing.
- Various standards are currently being developed for sustainable financial instruments, such as the EU Green Bond Standard. These are aligned with emerging taxonomies and transparency standards in whose development financial institutions are directly involved.
- Swiss banks and asset managers have developed a broad range of financial instruments focused on sustainability principles, such as green bonds, micro finance and sustainability bonds.
In addition to banks’ own initiatives, an optimal political framework is required that gives the Swiss financial centre enough flexibility to turn sustainable finance into an international competitive advantage. Taking inspiration from the successful Swiss approach in economic policy-making, rules should be based on principles. From the SBA’s viewpoint, the focus is on the following ten action areas:
- Internationally coordinated approach to transparency rules: The SBA supports the drive towards greater transparency regarding the opportunities and risks affecting financial flows as a result of ESG factors. Here it is important for measures to be internationally coordinated, as this is the only way of ensuring that the products and services of Swiss financial institutions are exportable and compatible with international guidelines.
- Involvement of the real economy: It is essential that not just banks as financial intermediaries, but also investors (who make decisions) and the real economy (which seeks financing) are involved in the process. As intermediaries, banks play a pivotal role in ensuring their clients make informed decisions that match their needs. For banks to be able to provide their investors with reliable information about the ESG compatibility of their investments, the recipients of financial flows must provide transparency on the sustainability-related opportunities and risks of their activities. Such transparency is therefore only meaningful if the real economy, as the recipient of financial flows, is included in the scope of the transparency requirements. We welcome the Federal Council’s decision of 18 August 2021 to define key parameters for mandatory climate reporting by large Swiss companies.
- Differentiated transparency standards: Appropriate transparency standards should be commensurate with the size, complexity, risk profile and structure of the business model. Excessively complex regulations must be avoided, as they could become an obstacle to sustainable finance, depending on the bank’s business model. Transparency requirements should be adapted according to a materiality assessment. On this basis, companies can focus on the main ESG factors relevant to their business activity.
- Expand market access: Swiss financial institutions require adequate international market access to be able to export services and financial instruments in the field of sustainable finance. This is the only way to develop the full potential of the vast pool of sustainability expertise built up over the years by Swiss financial institutions.
- Up-to-date regulations in occupational pension provision: The investment regulations for pension funds in the area of occupational pensions must be brought up to date. The SBA calls for the “Prudent Investor Rule” to be consistently applied. This is essential for ensuring that sustainable investment by pension funds is no longer complicated by unnecessarily restrictive conditions.
- Tax relief on the trading of sustainable financial instruments: The SBA advocates the removal of fiscal and bureaucratic obstacles to sustainable financial instruments and sustainable investment, so as to encourage supportive framework conditions. In particular, stamp duty places the trading of sustainable financial instruments in Switzerland at a disadvantage. The SBA calls for the general dismantling of stamp duty, in order to make sustainable products and services more attractive for international investors too.
- Pricing external factors into real economy activities: Measures that influence the conduct of economic players should follow market-based principles and tackle the root of the problem. This avoids a potential investment dilemma created by inadequate pricing of external factors. The SBA advocates targeted pricing of external factors into real economy activities, for example in the form of selective incentive fees combined with market-oriented incentives to encourage the reduction of negative external factors.
- No interference with Too-Big-To-Fail regulation: The stability of the financial centre is paramount. The Too-Big-To-Fail (TBTF) regulation and the requirements concerning capital adequacy and liquidity, which also affect non-systemic banks, should not be undermined. The SBA clearly rejects any tightening or loosening of these requirements due to sustainability aspects. On the other hand, appropriate integration of ESG factors in risk models is thought to be a sensible idea (as long as sustainability criteria also have an influence on risk assessment).
- No ban on the financing of legal activities: The SBA firmly rejects restrictions and bans on the financing of legally permitted activities. These would force banks into an inappropriate supervisory and decision-making role in the area of sustainability. Aside from that, bans on financing are counterproductive, as they would simply encourage flows to switch to other providers in Switzerland or alternative financial centres with less stringent sustainability rules. If politicians want to prohibit specific activities or products (such as oil-fired heating), outright bans are more effective.
- Tax relief on the issuance of sustainable financial instruments: Swiss withholding tax places financial instruments issued in Switzerland at a disadvantage to the international competition and restricts their exportability due to higher costs. The SBA calls for a rapid and pragmatic reform of withholding tax, so that sustainable products and services in particular can be positioned competitively in the international marketplace. Only in this way can ESG-compatible Swiss financial instruments and the Swiss capital market realise their full potential in the service of sustainability.
Importance of Sustainable Finance
The global financial system has an important role to play in implementing the United Nations’ Agenda 2030 (Sustainable Development Goals) and the Paris Agreement. These intergovernmental agreements aim to secure the livelihoods of future generations by enabling a shift towards a sustainable economy and society.
A financial system is considered sustainable if it financially supports and accelerates the transition of the economy and society towards sustainability. The financing of a sustainable economy requires that the financial system facilitates the transition to sustainability and at the same time reduces the financing of harmful activities. Clean energy, resource-efficient infrastructures and nature conservation are just a few examples of the areas for investment of a sustainable economy. Both public funds and private finance flows are important and must make a significant contribution to financing the future.
Sustainable finance refers to any type of financial service that integrates environmental, social and governance (ESG) criteria into business or investment decisions for the sustainable benefit of clients and society as a whole.
Sustainable finance as an opportunity for the Swiss financial centre
Social and environmental factors are becoming increasingly important for investors and therefore play a central role in investment behaviour. Sustainable finance is on its way to becoming the new norm for investments in the Swiss financial centre. This is impressively demonstrated by Swiss Sustainable Finance’s figures on sustainable investments in Switzerland over the past few years.
Sustainability affects the activities of banks in all relevant areas of business (wealth and asset management, lending, etc.), in their interaction with customers, as employers and in their public perception. In order to become more sustainable and to take advantage of the associated business opportunities, financial actors must systematically integrate sustainability factors into financing and investment decisions. Examples of relevant sustainability factors, so-called ESG criteria (environmental, social and governance), are climate change, water use, child labour and the effectiveness of management structures to ensure good corporate governance.
Sustainable investments can achieve doubly positive results. On the one hand, they have great potential on the business side and, on the other, the financial sector is making a concrete contribution to achieving global climate targets and a sustainable economy. The financial system in Switzerland, with its diverse range of stakeholders and its technical expertise, can play a leading role in the area of sustainable finance and take advantage of these opportunities.
Links & Documents
SBA and BCG Study: Investment and financing needed for Switzerland to reach net zero by 2050
Guideline for the integration of ESG considerations into the advisory process for private clients
Position paper Sustainable Finance