Fundamental change requires time – and a stable operating environment

Swiss banks have grasped that sustainability in general, and combating climate change in particular, is more than simply a compliance exercise: it also secures the long-term foundations of their business. Changing precipitation patterns or a substantial increase in the number of heat days entail significant financial risks and higher costs, and are therefore highly relevant to companies and, by extension, banks. The financial sector has also identified the economic potential inherent in this essential overhaul of the energy use on which our prosperity is founded, and in the protection of ecosystems. Although the financial sector accounts for less than 1% of Switzerland’s direct greenhouse gas emissions, the banks’ specific economic functions mean that they can make a key contribution to transforming the real economy at various levels.

For example, they provide capital for renewable energy projects and innovative companies focusing on climate solutions. Increasingly, they are incorporating environmental, social and governance (ESG) criteria into lending decisions. This expanded risk management boosts their resilience and benefits savers at the same time. When it comes to investments, Swiss banks are talking to their clients about the rationale for factoring ESG criteria into investment decisions over and above purely financial considerations. The country’s asset managers, meanwhile, offer sustainable investment solutions: indeed, they are the biggest provider of funds with a primary sustainable investment objective (Article 9) in Europe.

Good intentions don’t always translate into good results

That said, there is no room for complacency. Two unwelcome developments give particular cause for concern: highly detailed regulation of sustainable finance that has been hastily cobbled together in many parts of the world; and a focus on the financial sector as the supposed key to solving all sustainability problems. The immensity of the challenge and the sluggish pace of economic transformation seem to have given politicians a serious case of the jitters over recent years, even though they have themselves helped to make the issue more acute. The international community agreed on the need for a global change of course back in 1997, when it signed up to the Kyoto Protocol. But between then and the Paris Agreement of 2015, a further third of the “braking distance” needed to achieve net zero by 2050 was used up to almost no effect, with global greenhouse gas emissions rising from 24.4 gigatonnes to just under 35.4 gigatonnes annually.

The first unwelcome development is the rush to enact regulation. The EU’s “Action Plan: Financing Sustainable Growth” was a highly complex set of regulations drawn up at great speed that was not coordinated internally, and whose scope and level of detail left many practitioners scratching their heads. The Draghi Report of September 2024 also concluded that substantial parts of the current EU regulations represent a major burden for companies, which is further exacerbated by the absence of guidelines and a lack of clarity regarding the interaction between the various legal provisions governing sustainable finance.

The “tsunami of global regulation” unleashed by the European Commission spilled over into many other financial markets, including Switzerland. Here, though, the approach remains very cautious and principles-based. Last year, for example, the Federal Council resolved not to introduce state regulation by ordinance for the time being, because it views the financial sector’s own self-regulation as adequately reflecting its own position on the prevention of greenwashing in the financial sector.

The second unwelcome development is the current focus on the financial sector as the supposed key to overcoming all the challenges of sustainability. This is putting the cart before the horse: greenhouse gas emissions must first and foremost be tackled directly through measures targeting the activities that cause them. Requirements imposed on banks and measures taken by them can do no more than provide support.

What’s really needed

What do the banks feel they need if they are to play an effective part in sustainable development? In general, a dynamic market environment and the right political frameworks are indispensable. That is the only way to deliver the necessary innovations and internalise external costs. Specifically, all economic actors – politicians, the financial sector and companies in the real economy – need to play their full part and work together. As a matter of principle, market-driven solutions should be favoured over state action. External factors need to be priced into activities in the real economy in a way that is targeted and as simple as possible, especially when it comes to levies on greenhouse gas emissions, which should be shared out so as to prevent undesired distribution effects.

When it comes to regulation, the attendant bureaucracy should be kept as lean as possible. This can be achieved through proportionate, consistently principles-based structuring, the avoidance of conflicts or duplication with the legal frameworks of other jurisdictions, and focusing reporting requirements on the absolute minimum of data points needed, for example by publishing some data only once every two years. Finally, a steady hand is required. Once regulation has come into force, it must be given time to take effect.

Swiss banks are gearing up for the challenges of climate change and can make a major contribution to combating it. The up-and-coming issue of biodiversity is also already on their radar. But if capital is to be used to achieve an effective environmental impact in the real world, there needs to be a shift in approach: away from the current managed economy and detailed regulation towards clear market signals, planning certainty for companies, and patience from politicians.