Financing Switzerland’s climate transition
The transition required for Switzerland’s economy to reach its net zero target by 2050 carries major challenges. Financing is not the biggest obstacle, however, as confirmed by the joint study published by the Swiss Bankers Association (SBA) and Boston Consulting Group (BCG).
Financing Switzerland’s climate transition is manageable
If Switzerland is to achieve its net zero target by 2050, the Swiss economy must adopt more sustainable practices. The investments needed for this transition will be substantial, but from a current perspective still look manageable:
- Switzerland’s transition to a low-carbon economy will require total investments of CHF 387.2 billion over the next 30 years, equivalent to an average investment of CHF 12.9 billion every year. This equates to around two percent of Switzerland’s gross domestic product (GDP). Investments on this scale will allow the necessary reduction in greenhouse gases in the ten highest-emitting sectors of Light Road Traffic, Buildings and Heavy Road Traffic.
- Over 90 percent of the investment needed for the transition can be financed by banks’ traditional offering. In addition to bank loans and mortgages totalling CHF 10.7 bn (83 percent of the annual investment requirement), another CHF 1.0 bn (8 percent) could be financed through the Swiss capital market. Based on current volume, the bank loans needed to finance the transition would equate to around 10.8 percent of the mortgages and business loans issued every year by Swiss banks. The funding required through the capital market – around CHF 1.0 bn – would account for 1.6 percent of annual bond issuance on the Swiss stock market.
- The remaining investments required concern public goods, such as the expansion of public transport, which is traditionally financed by the state (CHF 0.9 bn). The remaining CHF 0.3 bn presents certain challenges because the technologies required are not yet mature enough. Approaches such as blended finance or public-private partnerships (PPP) may be able to offer solutions that plug the gap.
Interplay is a collective challenge for the state, investors and the financial centre
Implementing the climate transition is a collective challenge: the state is called upon to create suitable framework conditions and incentives to encourage both companies and citizens to invest in green initiatives. Companies across all sectors, as well as private citizens in their capacity as home-owners and transport users, must continuously adopt sustainable practices and invest accordingly. Banks can actively support this transition by offering suitable products and services, as well as advice on financing options.
Optimal framework conditions encouraged by the state:
- The regulator can take a “green supporting” approach by creating regulatory incentives for eco-friendly financing.
- Suitable disclosure of climate-related information about the companies and projects being financed is an important prerequisite for financing.
- Regulatory or tax hurdles, along with restrictions on financing activity, must be avoided. Only a strong financial centre will be in a position to play a key role in financing Switzerland’s transition to a low-carbon economy.
What is the role of financial centres?
The transition to a sustainable economy must be rapid. “We need suitable framework conditions to speed up the transformation,” says Jörg Gasser, CEO of the SBA. This was the overall consensus at the UN Climate Conference COP26 in Glasgow. Switzerland’s economy and banking sector are strong enough to meet this challenge, as set out in the study “Investment and financing needed for Switzerland to reach net zero by 2050”.