By Vincent Kaufmann – CEO of Ethos Foundation, Switzerland
Acknowledging the significant risk of climate change, Swiss asset owners are increasingly considering part of their fiduciary duties to look at how climate risks and opportunities may impact their portfolios.
With 47.24 million tonnes of CO2eq emitted in 2017, Switzerland’s direct CO2 emissions accounts for less than 0.01 per cent of the global CO2 emissions.[1] However, when looking at the financial flows, including assets under management in Switzerland, they totalled just under CHF7,000billion in 2018, thus financing a much larger portion of global CO2 emissions. The Swiss equity market also counts some of the largest CO2 emitters in the world.
The cement producer LafargeHolcim, for instance, emitted about 165 million tonnes of CO2eq in 2018, mainly due to energy consumption. Nestlé, the largest food and beverage company in the world, is responsible for about 113 million of CO2eq mainly in its supply chain which accounts for more than 90 per cent of its total CO2 emissions. These two Swiss companies alone emit six times more CO2 than Switzerland does as a country.
Swiss banks under scrutiny
The Swiss financial centre is also playing a crucial role when it comes to financing the energy transition and achieving the goal of the Paris Agreement to make financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. However, Swiss banks are late to take adequate steps. This creates significant reputational risks for the Swiss financial centre. According to the report Banking on Climate Change 2019, the two largest Swiss banks, Credit Suisse and UBS, remain heavily involved in fossil energy with a total of $57billion of fossil fuel lending and underwriting for Credit Suisse and $25billion for UBS between 2016 and 2018.[2]
The strong involvement of Credit Suisse triggered some climate activists to target the bank over the past years. A recent case even went viral on social media. A dozen climate activists have gone on trial for storming a Credit Suisse office in Lausanne, Switzerland, and playing tennis inside – an allusion to Credit Suisse ambassador, the Wimbledon tennis champion Roger Federer, whom they have asked to cut links with the bank. Using Roger Federer with the hashtag #RogerWakeUpNow gave this case a worldwide echo with the New York Times reporting on it, climate activist campaigner Greta Thunberg re-tweeting it to her four million followers and Federer himself commenting on this issue for the first time while preparing the Australian Open in a burning Australia: “I’m committed to using this privileged position to dialogue on important issues with my sponsors”.[3] The public attention also prompted Credit Suisse to announce in December 2019 that it will stop financing the development of new coal-fired power plants. The district court in Lausanne acquitted the activists and revoked the CHF21,600 fine for trespassing. The president of the court and sole judge deemed their action ‘necessary and proportionate’ given the climate emergency. In his view, their stunt was ‘the only effective way to get the bank to respond’ and ‘the only way to get the necessary publicity’ from the media and the public.
Pension funds: Engage rather than divest
Despite the strong pressure from civil society, many investors remain reluctant to divest from fossil fuels or CO2-intensive sectors as such divestment may create tracking errors against traditional benchmarks. Among investors that want to de-risk their portfolios while decarbonising the real economy active ownership, in particular climate engagement, is gaining traction. Within this approach, investors act as responsible owners of the companies included in their portfolios and use their shareholder rights. By initiating a board-level dialogue, investors encourage their portfolio companies to adopt a long-term perspective, to review their strategy and to steer capital expenditure towards low-carbon solutions. During a climate-related engagement, investors typically urge companies to decarbonise their business models and align them with the goal of the Paris Agreement. Concrete engagement asks are, for example, the disclosure of carbon emissions, emissions reduction targets based on climate science (science-based targets) and collaboration with suppliers to decarbonise supply chains.
As far back as 2004, the Ethos Foundation launched an innovative approach to allow investors to engage in a constructive dialogue with companies on environmental, social and governance issues. The launch of the Ethos Engagement Pool (EEP) Switzerland by two Swiss pension funds and Ethos in 2004 had the goal to pool the assets of Swiss asset owners in order to gain leverage in the engagement activities, facilitating direct access to board members and senior management. Sixteen years after its launch, the EEP Switzerland counts more than 140 members with total assets of more than CHF220billion[4] (See Table 1).
Positive results from engaging companies
As part of Ethos’ engagement efforts on climate change, Ethos takes actively part in the global initiative Climate Action 100+, which targets the largest CO2 emitters in the world, including LafargeHolcim and Nestlé. As a Swiss-based investor leading dialogues on governance issues and sustainability with both companies for many years, Ethos took the role of ‘lead’ engager on both companies, together with APG at Nestlé and Hermes EOS at LafargeHolcim. For both companies, some notable developments have been achieved over the two past years.
‘Despite the strong pressure from civil society, many investors remain reluctant to divest from fossil fuels or CO2-intensive sectors as such divestment may create tracking errors against traditional benchmarks’
Ethos and APG met Nestlé’s chairman of the board and senior management several times for very thorough discussions about the company’s plan to decarbonise its operations and, more importantly, its supply chain. In addition, several telephone calls to follow up the discussion and check on the measures taken took place. Finally, Ethos attended the 2018 and 2019 annual shareholder meetings and made statements urging Nestlé to set ambitious reduction targets, expand its reporting and take concrete measures in its supply chain. At the end of 2018, Nestlé agreed to report in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations and in September 2019 the company committed to net zero emissions by 2050.[5]
The decarbonisation of the construction materials (cement) industry is one of the biggest challenges in the transition to a low-carbon economy.
The fabrication of cement is a very carbon-intensive process with currently only limited technical possibilities to meaningfully decrease associated carbon emissions. It is, however, promising to see some positive signs after a phase of intensive engagement with LafargeHolcim.
After meetings between the chairman of the board, senior management and statements by Ethos at the 2018 and 2019 annual shareholder meeting to underline the demands, the company announced in September 2019 the appointment of its first chief sustainability officer.
The chief sustainability officer has been appointed to the executive committee with a clear brief to decarbonise LafargeHolcim.[6] In December 2019, another key engagement ask was met when the science-based targets initiative approved LafargeHolcim’s carbon reduction target.[7] To execute its decarbonisation strategy, LafargeHolcim also communicated the allocation of CHF160million to reduce its carbon footprint. By installing advanced equipment that allows the increased use of low-carbon fuels and recycled material, the company plans to reduce carbon emissions by 15 per cent over the next three years.[8]
Switzerland is also characterised by its strong insurance and re-insurance industry with two of the world’s largest global players headquartered in the country. Climate change is particularly relevant for the insurance industry as it can impact both sides of the balance sheet: assets and liabilities. Acknowledging these risks and following many years of dialogue with Ethos, the insurance industry has taken several measures in 2019 with Swiss Re and Zurich Insurance Group being the co-founders of the UN Net-Zero Asset Owner Alliance. Zurich and Swiss Re have both committed to net zero-emission investment portfolios by 2050.
Swiss legislation landscape
Despite Switzerland’s indirect contribution to climate change via its financial industry and some of its largest domiciled companies, Switzerland is relying on self-regulation in the fields of sustainable finance and climate stewardship. In comparison to the European Union and its EU action plan on Sustainable Finance, there is currently no plan to reinforce the legal framework towards sustainable finance in Switzerland. There is also no plan to require mandatory sustainability reporting for listed companies, in particular regarding climate risks and opportunities. A legal opinion requested by the Federal Office for the Environment (FOEN) in October 2019 has the goal to find out to what extent the currently applicable Swiss law already prompts financial actors to take into account climate risks and impacts on their activities. This legal opinion concluded that Swiss financial market participants are obliged by law to take climate risks into account in cases where they are required by law to consider all significant risks. This is regularly the case when calculating capital and liquidity requirements. Under current financial market law, however, Swiss financial market participants are not obliged to integrate climate impacts into their investment and advisory processes. Current transparency obligations do not oblige financial market participants to make public the climate impacts of their activities.’
Despite Switzerland’s indirect contribution to climate change via its financial industry and some of its largest domiciled companies, Switzerland is relying on self-regulation in the fields of sustainable finance and climate stewardship’
In Switzerland, the political discussion on whether and how appropriate legislative measures should be taken is still ongoing. The government is charged with clarifying the need for regulation and proposing appropriate measures to parliament. As part of the self-regulation process, the FOEN and the State Secretariat for International Finance (SIF) initiated in 2017 a first round of pilot tests to analyse the compatibility of financial portfolios with the goals of the Paris Agreement. All Swiss pension funds and insurance companies were invited to have their stock and corporate bond portfolios tested. About 80 Swiss investors voluntarily took part in the assessment. The average investment portfolio analysed during this test reached an average of four to six °C global warming far above the two° global warming goal of the Paris agreement. A new test will be organised in 2020 to see if any improvements were achieved.
Regulate for the sake of competitiveness?
As a small country with few natural resources, the competitiveness of Switzerland is based on innovation vand a liberal regulatory framework. The government is hoping to apply a similar approach to financial markets and climate change to avoid placing too much of a burden on its financial centre and companies. Such confidence in the free market to solve the climate crisis may be overestimated. While it may work for some actors for which the license to operate is at stake, it is clearly insufficient for many companies that are not facing the same pressure from their stakeholders and have low incentive to invest over the long term to tackle the climate issue.
In fact, acting on climate is increasingly urgent and civil society is expecting additional measures on the political side. This desire has been reflected at the latest elections in October 2019, which saw a ‘green’ wave and the green party winning 21 additional seats in parliament, thus becoming the fourth largest political force in Switzerland. The pressure will therefore increase on the regulatory side.
Failing to regulate while the EU is pushing its action plan on sustainable finance may also pose a risk for the reputation of Switzerland. The fate of banking secrecy in Switzerland could serve as a warning as to what can happen if the writing on the wall is ignored. For too long the government and representatives of the financial industry tried to save banking secrecy only to have to abandon it completely and, in a rush, once the pressure from other countries became overwhelming.
About the Author:
Vincent Kaufmann has been the CEO of Ethos Foundation and of Ethos Services since June 2015. He has been member Ethos Services’ management in charge of investment since 2011 and deputy CEO since 2013. Vincent Kaufmann joined Ethos in 2004 as a corporate governance analyst, later becoming a senior and deputy head of corporate governance. Since 2014, he has been a member of the supervisory board of the consultant Proxinvest (Paris). Vincent Kaufmann, a Swiss certified Expert for Accounting and Controlling since 2009, holds a Master’s degree in Business Economics from the University of Geneva (2004).
Footnotes:
1.https://www.bafu.admin.ch/bafu/en/home/topics/climate/state/data/greenhouse-gas-inventory.html
2.https://www.banktrack.org/article/banking_on_climate_change_fossil_fuel_finance_report_card_2019
4.https://www.ethosfund.ch/en/products-and-services/company-dialogue
5.Nestlé, Nestlé accelerates action to tackle climate change and commits to zero net emissions by 2050 [Press release] https://www.nestle.com/media/pressreleases/allpressreleases/nestle-climate-change-commitment-zero-net-emissions-2050
6.LafargeHolcim, Appointment of Magali Anderson as first Chief Sustainability Officer to the Executive Committee [Press release]. https://www.lafargeholcim.com/appointment-magali-anderson-first-chief-sustainability-officer-executive-committee
7.LafargeHolcim, CO2-reduction targets validated by Science Based Targets initiative (SBTi) [Press release]. https://www.lafargeholcim.com/CO2-targets-validated-Science-Based-Targets-initiative-SBTi
8.LafargeHolcim, LafargeHolcim allocates CHF 160 million to reduce carbon footprint in Europe [Press release]. https://www.lafargeholcim.com/lafargeholcim-reduce-carbon-footprint-europe
