5 minute read 26 Oct 2021
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How does sustainable finance impact Swiss Financial Institutions?

By Corina Gruenenfelder

Financial Services Consulting | Risk & Actuarial | Switzerland

Enthusiastic quant and analytics leader. Passionate about sustainable finance and climate risk modelling. Diversity and inclusiveness advocate. Mountaineer and backcountry skier. Avid traveler.

5 minute read 26 Oct 2021

The EY Swiss sustainable finance survey shows that ESG is transforming the business models of financial institutions in Switzerland.

In brief
  • How is sustainable finance affecting Swiss financial institutions and their strategic positioning?
  • How do ESG considerations influence risk management and reporting?
  • Why will sustainable finance continue to transform financial institutions in Switzerland?

Regulatory and governmental initiatives worldwide are aiming to create a more sustainable economy. In Switzerland, the federal council is preparing a consultation on binding climate reporting for large Swiss companies and the Swiss Financial Market Supervisory Authority has enforced transparency obligations for climate risks as of 1 January 2022. These developments and the broader societal trend to more sustainability, which was accelerated by the pandemic that revealed the need for greater resilience to external shocks and for a shift in the way business is conducted,  show that sustainable finance will also materially impact the financial industry.

EY has conducted a cross sector survey to assess the Swiss financial sector’s progress and challenges in the ongoing sustainable finance transformation. The EY Swiss Sustainable Finance Survey explores the current state of sustainable finance implementation in banking, insurance and wealth and asset management. The survey was structured along four dimensions:

  • Strategy and Opportunity
  • Regulation
  • Risk Management
  • Reporting

The survey shows that Swiss market participants have been preparing for this shift by expanding their ESG and sustainable finance capacities. For instance, having a dedicated sustainable finance or ESG function has become common practice and increasingly, their reporting lines are directly to the C-suite.

Sustainable finance

85%

of Swiss financial institutions are convinced Sustainable Finance will materially change the financial industry

The survey respondents confirm the expected material impact of sustainable finance on the business models of Swiss financial institutions. The initial focus of institutions has been to provide enhanced ESG product and service offerings, whereas the next challenge will be to transform the business together with clients and transition to more sustainable business models. Currently, ESG products with quantitative KPIs, Paris-aligned portfolios and sustainability risk integration in products are most common. However, with an increasing ESG product offering the risk of greenwashing is also growing. It will harm the reputation of institutions if products are not adequately advertised and distributed. In contrast to the surge in ESG product offerings in the Banking, Asset and Wealth Management Industry, where most players offer ESG products and services and continue to expand their product offering, only few insurers are already taking ESG factors into account for their product development practices. Similarly, client onboarding, distribution and underwriting practices in the insurance industry have not yet materially changed despite accelerating sustainable finance developments.

More than half of the participants have also indicated that the attention of the Board and Executive Committee towards Sustainable Finance will increase, thus reflecting the rising importance of the topic. For example, the role of the chief sustainability officer is becoming increasingly influential and is often embedded in the executive board.

Environmental topics

67%

of Swiss financial institutions anticipate environmental topics, mostly climate, to be the main driver of change of their business model

In their ESG journey, financial institutions currently rank climate topics with highest priority, while governance aspects have lowest priority. The reason being that governance related considerations have been tackled over the last years whereas climate change is clearly the highest priority in the current global context. The recently published report of the Intergovernmental Panel on Climate Change (IPCC) also underpins the importance of climate change. As an example, 75% of survey participants have started or are planning to implement (science-based) net-zero greenhouse gas emission targets. This shows that strategic climate alignment is starting to move from leading to mainstream industry practice.

EY is expecting that climate change considerations are only the start of a large ESG wave and that social and other environmental factors will play an important role in the future of Swiss financial institutions. Initiatives like the Principles of Responsible Banking (PRB), Principles for Responsible Investment (PRI), Principles for Sustainable Insurance (PSI) or the Net Zero Asset Manager initiative are encouraging financial services companies to align their business strategy with the targets outlined in the Sustainable Development Goals and the Paris Agreement. For instance, about 70% of the respondents align to either one or both sets of targets and are thereby driving a strategic shift in the financial market.

Signing up to standards and pledges is good practice, especially with the UN climate change conference (COP26) around the corner, we observe a lot of movement in this regard. These public commitments also trigger measures to be implemented, e.g. setting measurable targets and reporting on progress.

Sustainable transformation

20%

say that the regulation is the key driver for change in the sustainable transformation of the organization

Interestingly, the integration of sustainable finance at Swiss financial institutions is not only driven by the regulatory agenda. The majority of participants claim that other drivers such as client demand or societal changes are more important.

Nonetheless, Swiss financial industry participants expect a strong wave of national and international sustainable finance regulations in the near to mid-term future. On a European level, the legislation of the EU Action Plan on Sustainable Finance directly and indirectly influences the Swiss financial services companies. For instance, 40% of survey participants have started analysing the impacts of the EU Green Taxonomy. Moreover, most Banking, Wealth and Asset Management industry participants do not yet systematically match their product offering with the sustainability preferences of their clients. However, due to upcoming European regulatory changes outlined in the Markets in Financial Instruments Directive (MiFID), ESG factors are starting to be more systematically reflected in the client acceptance and credit approval processes. Further, most of the survey participants are in scope of the Sustainable Finance Disclosure Regulation (SFDR) from the European Union or plan to implement it on a voluntary basis and expect to position their products accordingly.

Almost all financial institutions in Switzerland already report or plan to report on ESG going forward. Currently, the Global Reporting Initiative (GRI) and the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) are among the most widely used reporting frameworks in the Swiss market. As FINMA has based its disclosure rules on the TCFD recommendations, we expect a convergence of Swiss financial institutions to align their disclosures to TCFD.

In addition to reporting, Swiss financial industry participants have also started integrating ESG and in particular climate risks into the risk categories and risk management processes and are further developing these approaches. 

ESG

70%

consider ESG and in particular climate risks within other risk policies, while only 35% have a dedicated risk policy for ESG and climate change risks

Risk management functions have started reflecting sustainability risks in their policies and processes but will need to run transformation projects to implement an end-to-end ESG risk management framework. In particular, sustainability risk identification, assessment, measurement and monitoring need to be established and aligned with the ESG disclosure and reporting processes. The respective governance and control frameworks need to be developed. If non-binding standards such as PRI, PRB or PSI are adopted, the firm must implement appropriate processes and conrols to ensure complance with the respective standards.

Similarly, dedicated ESG risk management processes are typically not yet established and need to be systematically embedded in the traditional risk categories (e.g. market risk, credit risk, insurance risk) to ensure appropriate coverage of risks potentially affected by ESG aspects. Moreover, EY observes a trend of incorporating sustainability risks in the reporting of traditional risk categories instead of stand-alone ESG risks.

ESG

38 %

of all participants are reflecting ESG and in particular climate risks in their risk appetite and limits

Risk appetite and limit considerations with regard to sustainability risks (e.g. exclusion or restriction of companies that derive more than XX% of their annual revenues from the fossil industry) are becoming state of the art as the measurement of these risks evolve. In this context, financial services companies have started performing scenario analyses with focus on climate risk to assess the impacts of various scenario pathways and the financial risks related to the long-term sustainability risks. The current European regulatory trends are showing that scenario analyses will become an integrated part of climate risk management for the whole financial services industry and large efforts are required to address the challenge of estimating the long-term effects of sustainability, in particular climate, risks.

Summary

The Swiss financial services industry is gearing up its sustainable finance undertakings. However, financial institutions will need to continue and strengthen their efforts to keep up with increased demand, societal pressure, and to be prepared for the wave of upcoming ESG-related legislation.

 

Many thanks to Stephanie Arnold for your valuable contribution to this article.

About this article

By Corina Gruenenfelder

Financial Services Consulting | Risk & Actuarial | Switzerland

Enthusiastic quant and analytics leader. Passionate about sustainable finance and climate risk modelling. Diversity and inclusiveness advocate. Mountaineer and backcountry skier. Avid traveler.