The Swiss financial sector has particularly strong leverage in international climate policy and the global economy and therefore carries great global responsibility. This chapter shows how it can fulfill this responsibility.
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Some abbreviations are used in this chapter. You can find explanations of all abbreviations in the glossary.
The Paris Agreement requires countries to harmonize their financial flows with the objectives of the Paris Agreement. (Article 2.1.c of the Paris Agreement (United Nations 2016)).
The impact of the financial sector on the climate crisis cannot be deduced as directly as, for example, in the transport sector, where a car running on petrol directly emits CO2. Rather, the problem here is that all branches of the economy and sectors that emit CO2 directly receive their money through financial institutions. Banks, pension funds, insurance companies etc. are so-called "financial intermediaries", i.e. they mediate between the supply and demand for capital. Through them, the money of customers who want to invest their money flows to all kinds of companies, which can be climate-friendly, climate-damaging or climate-neutral. For example, the company includes companies that produce crude oil or carry out fracking abroad. These financial intermediaries help these companies to raise more capital, which in turn helps them to remain profitable despite the competition from renewable energies. This example shows that the market is not simply neutral. Risks are wrongly assessed by the financial market because many financial institutions have not built up expertise internally about the climate and financial risks of fossil fuels and the opportunities offered by alternative investments. So as a financial institution, you feel safer and more comfortable investing in the time-tested fossil infrastructures instead of promoting a change in thinking. Many financial institutions have long denied their responsibility to the climate and society. Financial intermediaries are not just passive vessels through which money flows, they can actively control where the money goes and therefore have a great responsibility and obligation. Unfortunately, very few financial institutions do this.
So, if the Paris Agreement states that financial flows must be brought into harmony with the 1.5 °C objective, this means that money must no longer be allowed to flow into fossil infrastructure. Our economy and society must make the transition to a net zero economy and society. Even if all the technological achievements are in place, this will not work as long as financial intermediaries continue to direct financial flows towards the promotion of fossil energy or other emitting projects.
The Bank of International Settlements (BIS) made clear in a new report in early 2020 that the climate crisis is a major financial, material risk and that all financial market regulators and central banks must immediately start to address climate change (Bolton et al. 2020).
In order to meet the objectives of the Paris Agreement, various international initiatives have been formed in recent years. The Addis Ababa Action Agenda (United Nations 2015) creates a global framework to make financing flows compatible with the Sustainable Development Goals (SDGs). The UNEP FI (United Nations Environment Programme Finance Initiative) initiatives of the UN (UNEP Finance Initiative n.d.) create a platform for commitments of financial institutions, both banks and insurance companies. The NGFS (Network for Greening the Financial System) (NGFS n.d.) creates a platform for central banks and regulators to address the issue.
Many other initiatives create the basis for SDG (sustainable development goals) and ESG (ecological, social and governance) reporting standards and transparency, but it is often difficult to assess whether these commitments are merely lip service. So far, there has been too little sign of a noticeable change in the Swiss financial sector.
The FOEN concludes in a report in 2015 that Swiss financial flows alone support a climate warming scenario of 4-6 °C (Oehri et al. 2015; Thomä et al. 2017). The FOEN emphasizes here above all the financial risks and losses for the Swiss financial sector that will follow if the world complies with the goals of the Paris Agreement. In this context, economists speak of the "carbon bubble" (Clark 2015). The financial sector runs the risk of overestimating the yield from fossil fuels. If this bubble bursts, this could lead to considerable losses for the Swiss financial sector.
Some countries, such as the United Kingdom and more recently the EU, are taking a leading role in implementing these demands. For example, years ago, the former governor of the Bank of England, Mark Carney, obliged British banks to carry out stress tests on climate risks (Bank of England 2020). In Switzerland there has been a lack of comparable forward thinking so far. The EU is also tackling the issue proactively. It is committed to a far-reaching and ambitious reform of the financial system. In 2018, the EU Commission published the action plan for financing sustainable growth (European Union n.d.). The new EU laws will also have a major impact on Switzerland. There are no measures or projects on the Swiss side comparable to those that have been pushed forward for years in other European countries, but so far the regulators and the financial sector have avoided the issue. In terms of the size and importance of its financial sector, Switzerland brings up the rear in Europe.
It would be particularly important for Switzerland to address this issue. With its financial sector, Switzerland has a large climate lever which, if consistently implemented, can bring great benefits for the global climate and also for the Swiss economy. On the one hand, financial markets should be protected against climate risks, such as stranded assets or losses due to extreme weather events. On the other hand, capital needs to be diverted away from fossil fuels towards renewable, efficient technologies to enable the transition of our economy and society to a net zero economy and society.
The Swiss financial sector, in particular Zurich and Geneva, is one of the most important in the world and Switzerland is one of the most important global asset managers (GFCI 2018). Our financial sector therefore has particularly strong leverage in international climate policy and the global economy, which is an opportunity for Switzerland to reduce its foreign emissions and a commitment to the world, because if we do not do so, the whole world will never be able to achieve the targets of the Paris Agreement. It is in keeping with the polluter-pays principle to demand action from the Swiss financial sector and regulators now.
But the Swiss financial institutions also have a great deal of leverage here in Switzerland. A few large banks have many capital investments abroad, but smaller banks, such as cantonal banks, mainly grant loans in Switzerland. Mortgage lending accounts for the largest part of their business. The building sector has the second highest share of domestic CO2 emissions after transport, as many buildings are not energy efficient or have oil heating systems. In other European countries, the transparent information of market participants through mandatory energy efficiency labels for buildings has been enforced to address this problem. In Switzerland, however, the corresponding building energy certificate issued by the cantons (GEAK/CECB/CECE) has so far mostly been voluntary. In this respect, banks could intensify their activities in the field of building refurbishment (Cousse, Kubli, and Wüstenhagen 2020). Companies operating in Switzerland, for example industrial companies or those involved in transport, are also financed by loans from banks. Here too, banks are not only passive vessels through which money flows, they can also actively make claims. In addition, on the financing side in general, more commitment can also be made by domestic banks. In summary, the financial sector has the power to drive forward the transition of our entire economy, both here in Switzerland and globally. And with great power comes great responsibility, as is well known.
Today, the Swiss financial sector is responsible for a heating scenario of 4-6 °C, which not only falls far short of the goals of the Paris Agreement, but will also have devastating consequences for humanity, biodiversity, the environment and everything we know, and last but not least threatens to destabilize the financial market itself. But it could also be quite different. This is how we envision the Swiss financial sector of the future:
The Swiss financial sector will be climate-neutral in terms of direct and indirect investments by 2030.
There is transparency about financial flows, not only in the climate area. Both as an investor and as a customer, you have the right to know exactly where the money is flowing to and what effect it has.
Divestment and investment are two sides of the same coin: By 2030, financial players will have found ways to replace the previous income from financing fossil fuels with value creation in the area of financing low-emission technologies and projects.
The Swiss financial sector has built up a great reputation worldwide in the field of sustainable investment and is considered a leader in this field. It is a pioneer in the field of digital technologies for financing climate-friendly products (Clean Fintech). Switzerland of the future is also a center for international green funds.
Today there are a handful of systemically important financial institutions. These are "systemically relevant" because they are so large that if one of them makes bad decisions and thus falls into a crisis, they can pull the entire Swiss economy into a crisis. This is not only unfair, it also harms the stability of our economy. Furthermore, a few large financial institutions have particularly strong power in the market and can distort it in their favor. In such cases, one speaks of oligopolists.
The financial sector of the future is more diverse and is not dominated by a few oligopolists. The Swiss financial sector is therefore no longer a cluster risk for our economy and contributes to its stability.
In the future, the tasks of the Swiss National Bank will focus more strongly than today on pursuing a comprehensive understanding of the long-term stability of the financial markets. Acting in the best interests of the Swiss economy also means consistently pursuing climate neutrality and sustainability goals.
As part of the solution, the entire financial sector will contribute to making mankind better prepared for future crises! In particular, it proactively supports the early identification of negative external effects in the area of the climate crisis and beyond, and the development of solutions.
Different actors play different roles in regulating the financial sector. We subdivide the chapter into regulators and financial institutions to better distinguish what regulators can do and what private actors would have to do.
The most important instruments for this are the following:
Divestment: The withdrawal of capital from emission-intensive parts of the economy, for example oil companies.
Investment: Capital is directed specifically into climate-friendly sectors or companies that are necessary for the transition of the entire economy to a CO2-neutral economy.
Engagement: If CO2-intensive companies are not able to drive change internally, they will not be able to survive on the market in the long term. It is preferable that the management in these areas actively approaches the change on its own initiative. However, management is often reluctant to face the facts and develop new strategies. Shareholders can actively exercise their voting rights and influence to drive internal change in such parts of the economy.
Transparency: A major problem is the lack of transparency about the climate-damaging effects of financial flows or information about financial flows in general. Customers, both private and institutional, are not well informed and cannot make conscious decisions, even if they want to invest their money climate consciously. Such information and transparency provide the basis for informed customers to express their demand for sustainable financial products. This information also provides the basis for science, which can only make meaningful analyses in this way.
The policy proposals in this chapter revolve largely around these instruments and various approaches to their use. We focus primarily on measures that can be implemented in the current system rather than on fundamental criticism of the system itself. Time is running out, and it is becoming more challenging every year, week by week, day by day, to achieve the goals of the Paris Agreement. However, the solutions are ready, and this chapter should make a significant contribution to bringing these implementable solutions to the general public, politics and business. More fundamental criticism of the system is discussed in more detail in the chapter Economic and Political Structures.
Introduction of Regulators
The Swiss financial sector is mainly regulated by the Swiss Financial Market Supervisory Authority (FINMA). The Federal Constitution as well as various laws and ordinances of the Federal Council provide the legal basis on which FINMA operates. Its competences are very broad and are implemented in the FINMA Act (Die Bundesversammlung der Schweizerischen Eidgenossenschaft 2007).
FINMA's objective is to protect creditors, investors and insured persons and to maintain the functionality and systemic stability of the financial markets. In practice, this means in concrete terms: combating money laundering, monitoring companies under their control, providing an overview in the event of bankruptcy proceedings, etc. FINMA is empowered to issue its own ordinances of a legislative nature. However, the financial market is largely self-regulating. The Swiss Bankers Association (SwissBanking) adopts rules of conduct and other guidelines which can be recognized by FINMA as minimum standards.
Finally, it is the Swiss Federal Assembly that creates the legal framework for FINMA's activities. It is also entitled to lay down drastic regulations in the law, even if it does not usually do so.
The Swiss National Bank is the second regulatory body of the Swiss financial sector. The SNB itself is also a financial intermediary, in fact the largest in Switzerland. The SNB's objective is to ensure the stability of the economy and price stability. In practice, the SNB regulates the financial sector primarily through its interest rate policy, by reacting to fluctuating economic conditions (recession or boom). The legal basis for the SNB is also explained in our legislation and in the constitution. The SNB is an independent national bank, which means that the legislator, i.e. the parliament, can very rarely intervene in its investment or interest rate policy. Nevertheless, the SNB is free to intervene in the financial market in other regulatory ways, as the Bank of England, another independent national bank, does.
The State/FINMA/Swiss Banking
Policy 8.1: Legislative Reduction Targets / Adaptation of the CO2 Law
Policy 8.2: Obliging Financial Institutions to Perform Stress Tests
Policy 8.3: Green Investment Facility
Policy 8.4: Adopt EU Green Taxonomy
Policy 8.5: Carbon Accounting
Policy 8.6: Defining Fiduciary Duties More Clearly
Policy 8.7: Include Sustainability Targets for SNB
Policy 8.8: SNB Shall Exercise Vote as Shareholder
The financial institutions themselves can play their own part in proactively implementing the regulatory measures required above internally with their own policies, without necessarily waiting for the regulator. The following sub-chapter contains suggestions for appropriate policies.
At this point, reference should be made to the Climate Strike Working Group Banks, which has concrete demands on the financial institutions themselves and is in dialogue with them:
Policy 8.9: Climate Reporting for Financial Institutions
Policy 8.10: Education and Training for Employees of Pension Funds, Banks and Insurance Companies
Policy 8.11: Tax Incentives for Green Pillar 3a
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