Swiss Climate Scores: Will they bite?

We are excited about this new climate initiative by the Swiss Federal Council.

In order to establish Switzerland’s position as an international leader in credible climate transparency, the Federal Council launched the Swiss Climate Scores in June 2022.

The Swiss Climate Scores encourage institutional and private investors to use and disclose measurable and comparable information on the extent to which their financial investments are compatible with international climate goals.

Swiss financial market players are recommended to use the scores as a framework and metric of alignment in relation to the climate impact of their financial investments and client portfolios.

By the end of 2023, the Federal Department of Finance (FDF) and the Federal Department of the Environment (DETEC) will have monitored and assessed the voluntary uptake of the initiative by Swiss financial market players.

It is now up to financial institutions to decide where to apply the Swiss Climate Scores. Typical coverage will include financial products that are offered by asset managers, banks, and insurance companies to institutional and private clients.

Markets need help to make climate-informed decisions

The Swiss Climate Scores will have a tangible impact on climate targets by helping investors make climate-informed decisions about their investment portfolio. The Scores will provide measurable and comparable information as to how alternative investment products and portfolios fare in relation to international climate goals.

The Scores are framed around multiple indicators. Some indicators reflect the current (actual) carbon profile of companies in an investment portfolio. The investor could see and assess the actual carbon intensity and/or carbon footprint of alternative portfolios. The other indicators inform investors about how investees are positioned in terms of their commitments to net-zero targets, typically by 2050. This allows the investor to make a climate-informed decision to channel their investment into a transition portfolio.

The Swiss Climate Scores will also have positive impacts through encouraging investees themselves to take progressive steps in their climate actions. Since investees are looking to attract funding from investors, they have a strong incentive to invest in their own climate footprint/intensity and to join international net-zero initiatives.

The Climate Scores also encourage financial service providers to work with both the investors and investees to offer greener portfolios.

Climate impact, from soft to hard

Given that nearly one-quarter of global cross-border wealth management is carried out in Switzerland and that the Swiss market share of European asset management amounts to 11%, the Swiss Climate Scores have the potential to make a significant contribution to achieving global climate targets.

Environmental regulations often tend to be introduced in a “soft” policy format, the uptake of which is voluntary. They later turn into “hard” policies, with legal obligations that are binding for the parties and related enforcement mechanisms. We expect a similar process to occur, whereby the Swiss Climate Scores will eventually become mandatory with clearly defined obligations and monitoring and enforcement mechanisms in place. It is likely that financial organisations will be obliged to disclose their climate risk/commitment profiles, which will be verified by officially accredited third parties.

While it is difficult to estimate how quickly the regulation will get “harder” in this field, the speed with which regulatory bodies, including central banks and financial regulators, across the globe have been stepping up their policies in relation to ESG has been remarkable over the last five years. Given the urgency of action in addressing climate change, as well as the growing public pressure pushing policy makers to act, we believe that we may not be far away from seeing increasingly stringent climate regulations imposed on the financial services industry.