Two weeks before a key vote on the revision of the Swiss CO2 Act, the Ethos Foundation publishes a report dedicated to climate risks for pension funds and their policyholders. While there are various means for pension funds to manage these risks, a regulatory framework remains more necessary than ever to supervise and encourage sustainable and responsible investments. For this reason, the Ethos Foundation supports the revised CO2 Act. In addition, a public online conference is being organised on 10 June to discuss these questions.
Climate change is a threat for everyone. The pension funds, which aim to invest over the long term and generate stable returns for their policyholders, are no exception, as a report released today by the Ethos Foundation shows. If they want to guarantee long-lasting pensions in the future, they must be able to invest in companies capable of adapting to the challenges of the energy transition while contributing to the battle against climate change. Otherwise, they might be incurring losses and endangering the future pensions of their policyholders.
All economic sectors affected by climate change
The fossil fuel industry remains at the forefront of long-term financial risks for pension funds, especially since the International Energy Agency itself has just called to end any development of new oil and gas fields this year if the world is to stay within safe limits of global warming (+1.5°C). However, all sectors are affected by climate change risks today, from automotive to aviation, as well as finance and construction. Climate change not only represents a physical risk for corporate assets, but also legal and regulatory risks, technological risks in relation to the rise of new greener and more efficient technologies, as well as the stranded assets risk, as those assets are no longer able to generate positive returns even before the end of their economic life.
Experts from Carbon Tracker estimate that around a quarter of the equity market and nearly half of the bond market are now directly or indirectly linked to fossil fuels and therefore under the threat of risks related to climate change. At the level of Swiss pension funds, which manage more than CHF 1’000 billion in assets – of which approximately a third in equities and a third in bonds – this could represent an exposure of over CHF 200 billion, enough to compromise an important part of future pensions.
Solutions exist to allow pension funds to better manage these climate risks, whether through shareholder dialogue or by completely divesting the most vulnerable industries and those most reluctant to change. However, the establishment of a regulatory framework is still necessary to promote sustainable and responsible investments. The revision of the CO2 Act is therefore an essential step to encourage economic transformation and thus help protect second pillar pensions.
A pragmatic and incentive law
The climate fund will accelerate the shift towards a lower carbon economy, thereby helping to maintain the competitiveness of the Swiss economy. It will allow to finance climate-friendly infrastructure, such as charging stations for electric vehicles and night trains, but also renovate aging buildings and replace oil fired-heating systems with renewable solutions. The new law will incentivise companies willing to invest in climate protection measures by exempting them from the CO2 tax. In addition, the financial market supervisory authority (FINMA) and the Swiss National Bank will have to assess the climate risks incurred by financial institutions and ensure that financial flows are compatible with the objectives of the Paris Agreement.
The Ethos Foundation is convinced that these measures represent the minimum necessary and long overdue to help maintain the productivity of the economy and protect the actuarial capital invested over the long term. This is why the Ethos Foundation strongly recommends that its members support the revision of the CO2 Act.
These questions will be discussed during a conference-debate organised by Ethos on Thursday the 10th of June from 1:30 p.m. following its 2021 general assembly. This free event will bring together a panel of Swiss and international experts, with the aim of raising awareness among investors to climate risks, to present effective ways to take them into account and address them and, finally, to detail Switzerland's policy response and its consequences for investors. It is mainly intended for representatives of pension funds but remains open to anyone interested in this topic.