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Showing leadership in sustainable finance through climate transparency
Article published in Le Temps, 13 March 2022
The conflict initiated by President Putin in Ukraine threatens the European and global balance, and reminds us that the freedom and peace we enjoy in Europe are the result of constant efforts and negotiations. However, this war should not divert our attention from another crisis, the climate crisis, in which we are the actors and which threatens our way of life on a global scale. The recent IPCC report urges us to redouble our efforts in the area of sustainable finance in order to support the economic transition.
In Europe, much of the regulation on this topic has been designed to distinguish between what is green and what is not. The recent inclusion of natural gas and nuclear in the European taxonomy has mired these efforts in controversy. The strong opinions in this debate highlight that the distinction between green and non-green is not always clear. This has led some observers to describe it as a "giant greenwashing operation" (Taxonomygate).
Controversy aside, while it is essential to distinguish between what is green and what is not, there is an even greater need for transition actors, investors and savers to know what is going green – and what is not. Many companies in the industrial and materials sectors, for example, will be characterised by high emissions, heavy reliance on fossil fuels and large waste footprints. Similarly, the food industry can lead to the production of significant plastic waste or water consumption. These impacts can only be reduced by channelling capital to companies with credible and ambitious transition plans. It would therefore be unfortunate to limit ourselves to the carbon footprint.
Read also: What are our top tips to reduce plastic pollution?
Switzerland as a leader in sustainable finance
At the end of 2021, the Federal Council announced its intention to "be an international leader in sustainable finance with climate transparency". To this end, the State Secretariat for International Finance (SIF) has spearheaded the development of a minimum quality criterion for a voluntary, industry-led climate score. In practice, this climate score aims to provide market participants with guidance on how their investments are aligned with the key objectives of the Paris Agreement, namely to limit warming to well below 2°C and, if possible, 1.5°C. As such, the climate score seeks to provide a scientific perspective on the adequacy of the decarbonisation trajectory of financial market investments.
Read also: Switzerland paves the way in sustainable finance
Such a score that informs investors and savers of the level of global warming their investments are aligned with could be remarkably intuitive and effective, as it would bridge the gap between the investment world and climate science.
A climate score as a measure of transition
The federal government's climate score initiative includes a forward-looking component in the form of implied temperature rise (ITR) measures. The calculation of these ITRs requires scientific rigour and expert judgement, and necessarily involves a degree of estimation and assumption. As a result, different approaches may lead to different conclusions about the climate alignment of an investment or portfolio. These may include, for example, different views on the credibility of companies' emission reduction commitments, the estimation of companies' emissions, or differing views on the economic viability of various decarbonisation pathways in a given sector.
To some extent, these differences are desirable and reflect the complexity of climate change and the uncertainty that surrounds it. It is possible to promote convergence of approaches and eliminate unwanted sources of variation. This is precisely the objective of the federal government's initiative, building on the work of the Portfolio Alignment Team (PAT), itself mandated by the Task Force on Climate-related Financial Disclosures (TCFD).
Read also: Switzerland, sustainable energy and the challenges of net zero
Ultimately, the objective of the SIF is to provide a quality label for approaches that can legitimately be used to assess the alignment of portfolios with the climate transition. As such, it is designed as an incentive to promote best practice.
Perhaps most importantly, recognised climate scores would allow investors to identify companies and portfolios that are becoming green in the most credible way – and to identify cases where views diverge (as in the case of gas, nuclear, or individual companies).
In the short term, the use of these labels should encourage investors to start taking a broader perspective. This means looking beyond companies’ current footprints and focussing on the quality and adequacy of a company's plans to mitigate that footprint over time.
The Federal Council's initiative is therefore to be welcomed. Not as an additional source of regulation, but as a means to encourage critical thinking and scientific examination of the measures and capabilities that will be needed to assess portfolio alignment during the transition to net zero.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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