This broad, comparable analysis covering all major Swiss financial market participants shows progress on alignment with climate goals, but major gaps remain. Switzerland is the first of several major European financial centers – including France, Austria, Sweden, and Norway – set to measure progress on finance-related climate goals in the run-up to COP26.
There has been a dramatic increase in the number of Swiss financial institutions taking climate action, but overall the sector is still not aligned with the Paris Agreement goals, according to new report published by 2° Investing Initiative (2DII) in partnership with the Swiss Federal Office for the Environment (FOEN) and the consultancy Wüest Partner. The report, “Bridging the Gap,” is based on a climate compatibility assessment of 179 Swiss financial institutions representing around 80% of the market, more than double the number of institutions that participated in the 2017 pilot study. A new module for Swiss real estate and mortgage portfolios also enabled the assessment of three-quarters of all Swiss residential properties.
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The study assessed the alignment of the Swiss financial sector with climate benchmarks, using 2DII’s Paris Agreement Capital Transition Assessment (PACTA) methodology. For the first time, 2DII and its partners were able to measure progress across a vast swathe of the financial sector over the past three years, shedding light on the distinction between portfolio reallocation and real-world emissions reductions.
Critically, the assessment showed that the Swiss financial sector’s consideration of climate issues has increased demonstrably since the 2017 study, resulting in:
- Measurable improvement in terms of climate compatibility across a number of key sectors, e.g. investors holding more companies in their portfolios that have increased electric vehicle production and renewable power capacity.;
- A strong increase in climate actions, such as shareholder engagement, with over 40% of recorded actions taking place in the past two years. Financial institutions that participated in the 2017 pilot led the way, with more than 50% saying they had taken action based on the results of that assessment. On average, those financial institutions performed better in the PACTA 2020 test than their peers.
- Strong progress in mainstreaming this topic: 69% of participants had defined a climate target or aspiration for at least one asset class; 65% were part of at last one sustainability initiative; and around 20% of portfolios submitted were self-labeled as ESG.
But despite improvements from 2017, the 2020 assessment shows that overall, Swiss financial markets are still not aligned with the Paris Agreement goals:
- In spite of increased deployment of new “green” technologies, the retirement of high-carbon technologies like coal power capacity is still far too slow to achieve the 1.5° or even 2°C goal. Some firms held in the analyzed portfolios even planned further expansion of coal mining and oil production;
- In terms of climate actions, portfolio analysis of financial institutions with coal exclusion policies showed that more than 50% of their listed equity and more than 70% of their corporate bond portfolios still contained coal assets;
- The delta between reduction in portfolio emissions and real-world impact may be widening. While Swiss financial institutions reduced their exposure to coal power in their listed equity portfolios by about 15-20%, the companies in the portfolio increased their installed capacity by 50%. The finding highlights the benefit of not just looking at the portfolio level changes, but also changes in the real world.
Concrete actions to help bridge the gap
Given the shortfall, it is clear that further action is needed. To help bridge the gap, 2DII, the Swiss government and other partners have taken a number of steps:
- Recognizing the need to move beyond portfolio alignment towards assessing the climate impact of various portfolio strategies, the 2020 study combines, for the first time, a quantitative analysis of portfolio alignment with a qualitative survey on existing climate strategies. This represents a crucial step towards better understanding the climate impact of financial markets and key drivers of change over time.
- Second, 2DII and the Swiss government are working together to develop a Climate Action Guide, which financial institutions can use to devise and implement climate strategies and actions, as well as to track and measure their real-world impact.
- Third, the assessment also links to other major initiatives, including integrating the Inevitable Policy Response in the stress test scenarios
Expanding the assessment internationally
Finally, the 2020 assessment is set to be implemented in a number of additional countries, as part of a broad effort to better understand the financial sector’s contribution to the Paris climate goals. From 2020-21, the test will be run in Austria, Norway, Sweden, Luxembourg, and Liechtenstein. The assessment is also expected to be deployed in France together with Finance for Tomorrow and as part of the Finance ClimAct project, an EU-funded initiative to align the French and EU sustainable finance action plans.
Jakob Thomae, Managing Director at 2DII Germany, said, “Bridging the Gap represents a landmark study, for the sheer scale of its assessment as well as for the light it sheds on the distinction between portfolio reallocation and real-world emissions reductions over time. With the insights we’ve gleaned from both the quantitative study and qualitative survey, we’ve taken an important step towards better understanding how the financial sector can contribute to climate goals.”
More about PACTA:
Developed by 2DII with backing from the UN Principles for Responsible Investment, PACTA enables users to measure the alignment of financial portfolios with climate scenarios and to analyze specific companies. Open-source and IP rights-free, it is available in different formats for equities, fixed income, and lending portfolios. To date, PACTA has been used by over 1,500 financial institutions worldwide, as well as by supervisors and central banks to assess their regulated entities (the European Insurance and Occupational Pensions Authority, Bank of England, California Department of Insurance, and more). On average, more than 600 portfolios are tested every month using PACTA.
PACTA can be used to set climate targets, to inform climate action strategies, and is currently used by a number of investors and banks in the context of the pledges such as the Principles for Responsible Banking Collective Commitment on Climate Action. By using the PACTA tool, financial institutions are also fully aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations to conduct scenario analysis.
Our funders: This project has received funding from the European Union’s Life program under grant agreement LIFE19/NGO/SGA/DE/000040 for the development of the software infrastructure and methodology.