Swiss pension funds are likely to benefit from the cabinet’s recent decisions on climate policy for green investments, according to industry executives.
The Swiss Federal Council outlined the Long-Term Climate Strategy to reach its net-zero target by 2050. It has also declared its support for the Task Force on Climate-related Financial Disclosures (TCFD).
“Investors, including pension funds, will certainly benefit [from the decisions] to better assess the risks they are taking by investing in companies,” Christoph Ryter, chief executive officer of Migros Pensionskasse, and Adrian Ryser, the fund’s head of asset management, told IPE.
The focus of Switzerland’s climate strategy and the TCFD is primarily on individual companies to improve reporting on climate risks, initially on a voluntary basis, they said. “It is also important to demand greater transparency in a dialogue with companies to explain how firms intend to implement the TCFD requirements or the climate strategy,” the duo added.
For Sabine Döbeli, CEO of Swiss Sustainable Finance, the TCFD requirements on climate-related disclosures and the country’s climate strategy will have an indirect impact on the pensions industry.
“They will increase transparency on climate risks in the market and will set new regulations that foster low-carbon economic activities,” she told IPE.
This will support pension funds’ actions to take climate risks into account and to improve the climate alignment of their portfolios, she added.
The Federal Council commissioned the Federal Department of the Environment, Transport, Energy and Communications (DETEC) to draw up a long-term climate strategy, now based on 10 principles.
The climate strategy can reduce greenhouse gas (GHG) emissions in areas such as transport, buildings and industry by almost 90% by 2050, it said.
In 2050, the remaining GHG emissions from industry, waste management and agriculture areas will amount to around 12 million tonnes of CO2 equivalents, offset by technologies, it explained.
Investing in renewable energies, wind and solar power, meaning in the direction of impact investing, is another option for pension funds to reduce climate risks and CO2 emissions next to the efforts to improve ESG ratings in their portfolios, Ryter and Ryser said.
“However, such investments must increasingly be checked in a due diligence process and monitored after investment: the effort should not be underestimated and not every pension fund can do this,” they said.
Swiss companies can follow TCFD recommendations on a voluntary basis, but the government plans to draft a bill to make such recommendations binding – most likely this year – by consulting the private sector and associations.
“The road is therefore still long but we do welcome this first step. In parallel, we also expect further timelines on the implementation of the new bill requiring listed companies to publish a sustainability report,” Vincent Kaufmann, CEO of Ethos Foundation, told IPE.
But transparency of companies’ climate risk profiles is essential for Swiss pension funds to better integrate risks in investment strategies and to be able to better report their portfolios’ climate footprint, Kaufmann added.
The CEO thinks, however, that the government should take further measures to build up on the existing climate strategy to reach its net-zero target. “It is necessary that companies set ambitious reduction targets for their CO2 emissions,” he said.
Ethos believes that companies should submit climate progress reports to an annual shareholder vote.
“We are currently in discussion with several large Swiss CO2 emitters to propose such a vote at their AGM. This would certainly increase transparency and make boards accountable in achieving reduction targets,” Kauffmann said.
New green index
The integration of ESG criteria into pension funds’ investment processes is high up on the funds’ agenda, with some having already worked out a climate strategy and others still in the process to do so.
SIX, the Swiss stock exchange, recently added new ESG indices to equity and bond markets. Migros considers the new indices “fundamentally positive”, but “it remains to be seen what investors will have to pay to index providers for their use: If the price is too high, they will hardly find widespread use,” Ryter and Ryser said.
The pension fund already excludes investments in companies with very low ESG ratings or that do not comply with international treaties.
It is the first time that investors have at hand broad indices to cover a large share of relevant Swiss asset classes, Döbeli said. The indices can be used as benchmarks in portfolio management or to illustrate the financial performance of a sustainable portfolio compared to the overall market.
But Döbeli believes that for investors aiming to focus on sustainable companies with an above-average sustainability performance, “the indices may be too broad”, as they only screen out around 30% of all issuers.
Ethos launched its own corporate governance indices on the Swiss market in 2017 and 2019. “The replication volume will soon reach CHF1bn, which demonstrates that institutional investors have an appetite for such approach,” Kauffmann said.