Swiss pension funds consider high costs arising from the integration of ESG standards into their investments as the main obstacle for the implementation of an effective sustainability strategy, according to a study consulted by the Swiss government.

ESG investments require a certain amount of capital to deploy for research, as those strategies can be carried out internally or through the involvement of external service providers, mandating asset managers or advisors, or via the providers of ESG financial products, for example investment funds or foundations, the study added.

The research report – commissioned by the Federal Social Insurance Office (Bundesamt für Sozialversicherungen, BSV) – showed that pension schemes therefore incur an internal cost, or costs in the form of fees, or high asset management costs.

A negative impact on performance by implementing sustainable investment strategies, a lack of standards, understanding the fiduciary due diligence, a lack of knowledge and lack of consensus among members of the governing bodies of pension funds are further reasons hindering pension funds from adopting a sustainable investing strategy, the study continued.

Rules relating to investments of pension schemes, instead, do not curb the ability to invest in assets in line with ESG standards, it added.

Investment regulations have a “high degree of flexibility”, according to the report, not representing an obstacle to achieving returns and risk-based optimisation of investments, it said.

Therefore, regulations currently in place in the second pillar pension system should not be changed to create incentives for sustainable investments.

The government added in the report that pension funds can already invest directly in sustainable projects, for example in infrastructure, and in non-listed assets to invest in green technology.

Climate risks vs climate impact

The Federal Council was asked by the Environment, Spatial Planning and Energy Committee of the lower house of the Swiss parliament, the Council of States (UREK-S), to assess whether investment rules in the second pillar, considered an obstacle and harmful to invest according to ESG standards, could be adjusted to free up capital for sustainable investments.

In its report, the government said the current legal framework and guidelines are explicit enough with regard to climate risks when investing pension funds’ assets.

For example, an expert opinion commissioned by the Federal Office for the Environment (FOEN) stated that the current law leads to assume an (implicit) obligation to consider climate risks in investments.

Climate risks are part of the management of pension assets necessary insofar as the principles specified in Art. 71 of the occupational pension law on asset management of pension funds can only be met if material risks are taken into account, it added.

Moreover, the reporting standard published by Swiss Pension Fund Association (ASIP) last December referred to relevant investment risks and opportunities, including those relating to ESG.

The current law instead takes a different approach towards climate impact, and pension funds are not required to take it into account when investing, the report said, mentioning the Climate and Innovation Act (KlG) approved in a referendum in June.

According to Sustainable Investment Market’s latest Market Study 2023, the negative market performance of 2022 hit sustainable investors just as much as their mainstream peers.

Furthermore, many banks and asset managers chose to take a more conservative approach in reporting their sustainable offerings in order to manage greenwashing risks and rising regulatory complexity attributable to the absence of commonly agreed definitions, the market study showed. As a result of these and other factors, volumes saw a decline in 2022 to CHF1.61trn from CHF1.98trn in 2021.

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