Switzerland and the challenges of regulating sustainable finance

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Switzerland and the challenges of regulating sustainable finance

Patrick Odier - Senior Managing Partner

Patrick Odier

Senior Managing Partner

Published Monday 8 March 2021 in Le Temps Spotlight

Amid growing concerns about the challenges arising from climate change – declining biodiversity and growing inequality – governments around the world are drafting and implementing new regulations designed to speed up the transition to a more sustainable economy.

The real economy and financial sector have made significant progress over the past decade, improving commercial practices and realigning their business models. However, there is still a sizeable gulf between the current situation and where we need to be. The latest estimates from Climate Action Tracker suggest that the planet is on track to heat up by 2.9°C, above the 1.5–2°C limit set by the Paris Agreement.

The financial sector can play a vital role in the transition, but the quality of readily-available data determines the quality of information that the sector can collate and pass on. The absence of agreed terminology for describing and measuring supposedly sustainable economic activities is a major obstacle when trying to tackle greenwashing. The lack of consistency has generated widespread confusion among consumers and investors, but also for companies, civil society and decision-makers. By taking an active role in addressing these issues, Switzerland has the opportunity to promote its national and international interests.

The financial sector can play a vital role in the transition, but the quality of readily-available data determines the quality of information that the sector can collate and pass on

A number of legislative and regulatory proposals on sustainability are currently in the pipeline, many of them focused on classifying economic activity. There are at least a dozen different taxonomies in use around the globe at the moment, including classification systems devised by the European Union, Canada, the United Kingdom and China. With the aim of putting all these initiatives on a common footing, the European Union created the International Platform on Sustainable Finance (IPSF) to work towards a common-ground taxonomy in collaboration with other public authorities – including those of Beijing. Switzerland is a member of the IPSF, which is set to become the international benchmark for different taxonomies.

The European Union generally has a pivotal role to play in developments of this nature, and it is currently blazing a trail by implementing the different features of the EU action plan for financing sustainable growth. The EU has a very comprehensive regulatory framework, which is also among the most interventionist models in the world.

…. a number of Swiss banks have already taken steps to alter fund prospectuses for European investors

While Switzerland is considering the best path to follow nationally, a number of Swiss banks have already taken steps to alter fund prospectuses for European investors. Under the EU regulations, financial institutions are required to define and commit to their own objectives for funds labelled as sustainable. From 2022, banks will have to report on the eligible sections of each investment fund using the EU taxonomy. To take into account the rapidly evolving nature of this issue, Switzerland should engage in dialogue with economic players to promote an agile regulatory framework based on fundamental principles, access to high-quality information and self-regulation.

At a political level, the Swiss Federal Council officially expressed its support for the Task Force on Climate-related Financial Disclosures (TCFD) in January 2021. The task force was created to develop recommendations for corporate financial transparency in relation to climate change. The recommendations provide a common international framework, enabling companies and businesses in the financial sector to assess and quantify their exposure to climate risk accurately, with a view to implementing suitable business strategies. In other words, it creates a factual basis on which investors can make informed investment decisions. The Swiss authorities' official support was accompanied by an appeal for Swiss companies across the board to implement the TCFD's recommendations on a voluntary basis. However, the Swiss Federal Council indicated that it plans to introduce legislation to make the recommendations binding, as is already the case in the UK.

…the Task Force on Climate-related Financial Disclosures (TCFD)…was created to develop recommendations for corporate financial transparency in relation to climate change

Given the urgency of climate change, a number of market mechanisms could provide attractive solutions, but will need to be modified. The COP26 climate conference in Glasgow in November 2021 will address the issue of carbon pricing, which is currently set too low. Carbon prices can then finally be factored into economic models at their true value.

Measuring corporate decarbonisation trends

Regulatory issues generate a lot of debate, but let's not lose sight of the ultimate aim: we urgently need rules that will boost investment in companies that can rise to the environmental and social challenges facing our planet and its inhabitants. Without the ability to predict companies' future carbon intensity, investors are flying blind through this period of structural economic change. Meanwhile, the fiduciary duty of financial intermediaries requires them to have as complete an understanding as possible of the approach to sustainability, which has a direct impact on the quality and security of the investment. Despite its necessity, corporate carbon footprint reporting is currently inadequate when it comes to identifying decarbonisation trends in individual companies. And yet those very trends will determine whether we are on track to meet the objectives defined in the Paris Agreement.

We urgently need rules that will boost investment in companies that can rise to the environmental and social challenges facing our planet and its inhabitants

One option is a toolkit for determining whether an investment is consistent with the temperature targets set out in the Paris Agreement, which could become a TCFD standard. The idea has the support of the powerful Net Zero Asset Owner Alliance. Ensuring that investors have access to this kind of forecasting data is essential if we are to shift private capital into companies that are aligned with the target of limiting global warming to 1.5–2°C above pre-industrial levels. Developing reporting requirements for this kind of information also presents an opportunity for the Swiss financial sector to become a world leader in sustainable finance.

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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