First step towards climate-aligned financial flows

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Bern, 23.10.2017 - In the context of the Paris Agreement, Swiss pension funds and insurance companies were invited by the Federal Office for the Environment FOEN and the State Secretariat for International Financial SIF to test the climate compatibility of their portfolios. The offer attracted widespread interest. The Swiss financial sector remains insufficiently focused on climate-friendly investments. The testing of climate compatibility can contribute to the realignment of financial flows.

Switzerland ratified the Paris Agreement on 6 October 2017. As a Party to the Convention, it is also committed to aligning financial flows with the aim of limiting climate warming to well below 2°C compared with pre-industrial levels. The Federal Council is reliant on the voluntary action of the financial sector in achieving this and, in response to various requests from Parliament, held out the prospect of working towards internationally comparable measurement methods and thereby reducing the associated costs for financial institutions and institutional and private investors. The climate-alignment tests initiated by the FOEN and the SIF also play a role in this context. From April 2017 all Swiss pension funds and insurance companies were invited to have their  equity and corporate bond portfolios tested voluntarily, anonymously and free of charge for their compatibility with the 2°C target. The invitation was accepted by 79 pension funds and insurance companies, which together manage around two thirds of assets. The tests were carried out by the independent think tank 2°Investing Initiative.

A long way to go but positive developments in sight

Tests were carried out to determine the extent to which the plans of companies in four sectors - fossil-based energy production, electricity generation, transport and industry (see box) - in which investments were made are consistent with a climate-compatible emissions pathway. The results show that, on average, the investments made in most sectors today tend to support a 4-6°C temperature increase, which largely corresponds to the trend on the world market as a whole. However there are considerable differences between the tested portfolios. Some are already fully climate-aligned and others are aligned in selected sectors at least. On the other hand, on average, investments by Swiss pension funds and insurance companies lag behind the world market in relation to the expansion of renewable energies, for example. For oil and gas production, the portfolios tested reflect the world market, which assumes that a global peak will arise in 2020.

Climate-alignment tests as a starting point for climate-conscious strategies

The individual test reports provide all participants with a basis for improving their alignment with the 2°C target, if they wish so. The investment decisions of participants in the Swiss financial market can have an influence on future greenhouse gas emissions. On the other hand, climate change could pose potential risks for the financial market - the test does not evaluate these risk quantitatively but increases awareness about them. If a smooth transition to a climate-compatible world economy cannot be achieved, significant losses could occur in certain sectors, as production and investment plans would be forced to undergo sudden and unexpected adjustments in the future. In order to recognise such risks at an early stage, the industry-led Task Force on Climate-related Financial Disclosure, set up by the international Financial Stability Board, recommends conducting 2°C scenario analyses. By participating in the climate-alignment tests, many Swiss insurance companies and pension funds have already implemented this recommendation.

CO2 footprint versus 2°C scenario analysis of financial portfolios
In 2015, the FOEN examined the indirect climate impact of the Swiss equity fund market using the carbon-footprint methodology (see study "Carbon Risks for the Swiss Financial Centre"). Based on this, investors were allocated CO2 emissions in proportion to the number of company shares they held. Climate-friendly alternatives were not considered. The analysis was based on past emissions data and was of limited suitability for future-oriented issues. 
The climate-alignment tests, on the other hand, are based on 2°C scenarios. The production plans of the companies included in financial portfolios are compared with the development deemed necessary by the International Energy Agency IEA to attain the 2°C target. The analysis covers the four sectors of energy production, electricity generation, transport (automotive production, shipping and aviation) and industry (cement and steel), for which both climate-damaging and alternative, climate-compatible technologies are examined.


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