Bridging the Gap: Measuring progress on the climate goal alignment & climate actions of Swiss financial institutions

Over 4,000 portfolios from 179 financial institutions representing roughly 80% of the market have been assessed in a first-of-its kind study of the Swiss financial sector’s alignment with climate goals.

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.

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.

Key findings

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.
  • 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.

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