Hugh Wheelan: There’s a lot happening on ESG in ‘understated’ Switzerland

From April 26-30, the RI Switzerland conference spotlights what’s happening in the €750bn pension fund market

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We kick off our RI Switzerland conference next week, part of our Country Spotlight series of responsible investment in Europe’s biggest institutional markets, leading into our flagship RI Europe conference in June, which will focus on the EU Green Deal and Sustainable Finance Action Plan.

Switzerland is a fascinating market, if understated. Its numerous pension funds (collective AUM €750bn+), have traditionally focused on exclusion and ESG integration (mostly for risk management purposes). But recently, engagement, voting, and impact investing have grown significantly. Swiss HNW/private bank investors have stepped up their ESG attention, and in the retail space ESG mutual funds represent just under 6% of the market, albeit growing.

Swiss pension funds are thinly resourced and tend to rely heavily on consultants and external asset managers.

Under its Paris Nationally Determined Contribution (NDC), the government has committed to reduce its greenhouse gas emissions by 50% by 2030 compared to 1990 levels; a 35% cut in the next 9 years. The country’s energy production is already nearly carbon free and there is little heavy industry, so emission reduction potential lies in housing and transport. Real estate holdings are relatively high in Swiss pension funds, so expect action here.  

Swiss pension funds and insurers are subject to bi-annual PACTA (Paris Agreement Capital Transition Assessment) measures by the Swiss Federal Office for the Environment (FOEN), which test their alignment against Paris 2 degrees targets.

In the last PACTA Assessment  from November 2020, 179 financial institutions, including 106 pension funds – around 80% of the total institutional market – participated in the assessment, more than twice the number of institutions that participated in 2017.

The assessment found that around 72% of climate actions had been taken after the first assessment in 2017. But it noted that the Swiss financial sector across all types of financial institutions is still not Paris aligned, so there is plenty of investment adjustment to come in the next decade. 

Disclosure is certainly going to increase after the Swiss Government became an official supporter of the Task Force on Climate-related Financial Disclosures (TCFD) earlier this year, with plans to embed the recommendations in law. 

The country adopted a sustainable finance policy that will see lawmakers draft a bill to make the TCFD guidelines ‘binding’ and consider amendments to existing financial market legislation to prevent greenwashing in 2021. It is not yet known whether the new rules will be enforced on a comply-or-explain basis or made mandatory.

In addition, the government created a Green Fintech Network in November last year, which will shortly publish its first report.

The Swiss State Secretariat for Economic Affairs (SECO) has also backed a new finance tool outlining natural capital risks and finance opportunities called ENCORE.

On the S front, Switzerland is, of course, home to many of the UN agencies in Geneva, so it is unsurprising that its referenda-infused democracy was recently subject to The Swiss Popular Initiative on Responsible Business, which sought to introduce social and environmental due diligence rules for companies into the Helvetic constitution.

As RI reported, the Initiative failed to meet the necessary qualified majority, despite persuading 51% of voters to back it, but failing to get a majority of Switzerland’s 26 cantons to vote in favour. 

But, as we wrote, it caused quite a stir in the finance world on its way, and it did get agreement on the introduction of ESG reporting in Switzerland based on the EU’s Non-Financial Reporting Directive, which, as RI reported, was radically updated this week.

The human rights due diligence proposal was based in part on the UN Guiding Principles on Business and Human Rights, also known as the Ruggie Principles after Professor John Ruggie – an early supporter of the Swiss referendum.

I’ll be interviewing John Ruggie as part of the RI Switzerland Swiss conference, and we hope to see you there with your questions!

PS. If you missed any of the excellent sessions at the recent RI Netherlands conference, you can catch them on replay here.