Michele Salvi All articles by Michele Salvi
Sustainable finance: an overall approach to sustainability
Over the last decade, rapid progress has been made in the field of sustainable finance. A sustainable investment volume of almost CHF 2 trillion indicates just how seriously the finance sector takes this issue. But it’s about more than just climate-neutral investment. An overall, integrated approach to sustainability also requires successful interaction between the financial sector and the real economy. A position paper from economisuisse sets out how this might be accomplished.
The term ‘sustainability’ has grown out of all proportion and can now be applied to anything and everything. Google the term and you will find hundreds of millions of hits in less than a second. This and its adjectival form – ‘sustainable’ – are words you just cannot avoid these days. The same applies in the finance sector; ‘sustainable finance’ is the term on everyone’s lips. And in December 2022, the Federal Council issued a report on the subject. But what is behind these words? The business umbrella association economiesuisse has addressed this issue, in cooperation with the Swiss Insurance Association (SIA).
Almost CHF 2 trillion in sustainable investment
One thing is clear: by steering financial flows towards sustainable activities, the financial sector has great potential to transform markets and help shape economic systems sustainably. And Swiss financial institutions are increasingly turning to sustainable investment. In 2021, the total value of sustainable investments in Switzerland reached almost CHF 2 trillion – an almost 50-fold increase in just 10 years. Financial services companies also implement guidelines that cover issues such as voting rights. This serves as a means for shareholders of companies to express their ideas of good, sustainable management – and thus exert influence on the company.
Numerous insurance companies began years ago to manage their investments with sustainability criteria in mind and to restructure their portfolios accordingly. A classic example is the quest for climate neutrality: for example, 17 Swiss private insurers have signed up to the Net-Zero Asset Owner Alliance (NZAOA). By entering the alliance, each has committed to ensuring that their portfolios are climate-neutral by 2050. That means that more than half all investments by Swiss private insurers are already subject to this pledge. But even insurers that have not signed up to the alliance are pursuing the goal of climate neutrality in the medium and long term.
We need an overall approach
But sustainable finance involves much more than just climate-neutral investment. In today's debate on climate targets, sustainability is often wrongly reduced to a solely ecological dimension, which ignores the comprehensive nature of sustainability. The UN’s 17 Sustainable Development Goals clearly indicate that sustainability encompasses three dimensions – environmental, social and economic. Only a stable, innovative economy enables generation of the necessary resources for decarbonisation and development of new, more climate-friendly technology.
Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.
European Commission definition
Market-oriented regulation and a tax-friendly environment are essential. The guidelines from economiesuisse are intended as orientation. However, the state merely sets the parameters for an innovative economy; prosperity is created by companies and their employees. As such, the focus of the legislator – along with its subsidiary role in regulation – is primarily on creating attractive framework conditions. For example, by capping sovereign debt to avoid diminishing the innovative capacity of companies through taxes or an unstable monetary environment – in other words, ensuring financial sustainability.
And this is precisely where private insurers play a leading part – their core business also gives them significant leverage. The protection of private and corporate clients against risks that could pose a threat to their material existence is the core mission of the Swiss insurance industry. It provides protection against all manner of risks – flooding, cyber risk, disease – and thus contributes to social security and macroeconomic stability. It also supports the public sector in the prevention of natural hazards and in preventative healthcare.
Hand in hand with the real economy
Insurance companies are a central catalyst on the path to a more sustainable economy. Demarcating individual business activities into a rigid, black-and-white system does not do justice to this role. Prohibitive thinking is the wrong approach: regulatory restriction of legally permissible business models and products under the guise of sustainable finance should be rejected. On the contrary, sustainable insurance and finance solutions must facilitate innovation. They can provide targeted support to companies, helping them to meet their goals as they transition towards greater sustainability. The finance sector would like to provide optimal support on this path.
But this requires better framework conditions. For example, the availability, quality and transparency of sustainable investment opportunities still has room for improvement. In addition, in monitoring and reporting their own business activities according to various sustainability criteria, companies face high transaction costs and administrative burdens. The finance sector is already doing an enormous amount to address these challenges, including in the form of the annual sustainability report of the Swiss insurance industry. However, many bureaucratic hurdles remain.
Turning words into deeds
The ubiquity of the word ‘sustainability’ reflects the importance and urgency of the topic – in particular in the finance sector. But a promise of sustainable solutions must also demonstrate what lies behind these promises. That means not just lip service, but creating added value. This can be done by setting out positions and targets transparently, and translating these targets and positions into reality in order to turn promises into concrete action. The economiesuisse position paper sets a good example and forms a solid basis for advancing the topic efficiently and successfully in macroeconomic terms.
About the position paper
In addition to the definition and purpose of sustainable finance, the economiesuisse position paper also adopts six specific guidelines. These are intended as an initial macroeconomic foundation to provide orientation for all members of the umbrella association for the Swiss economy. The six guidelines are also designed to facilitate proactive, dynamic positioning in individual companies.
As a member of economiesuisse, the Swiss Insurance Association (SIA) played a significant role in development of the position paper and fully supports its guidelines.