Swiss companies need to develop a decarbonization plan

On 18 June 2023 Swiss voters accepted the “Federal Act on Climate Protection Targets, Innovation and Strengthening Energy Security”.

The law formalizes Switzerland’s commitment to climate mitigation and adaptation, with three main objectives:

1. The reduction of greenhouse gas emissions and the use of negative emission solutions
2. The adaptation to the effects of climate change and the protection against such effects
3. The orientation of financial capital flows towards low-carbon development and climate change resilience

Coupled with the previously ratified Paris Climate Agreement (2017) and the nationally adopted ordinance on climate disclosures (2022), it is becoming abundantly clear that Switzerland has substantiated its pledges regarding greater transparency and action on climate issues. The latest law includes specific mid and long-term targets, and focuses on incentives, rather than prohibitions. This latest development highlights the urgency for companies to develop and strengthen their climate strategy to be in line with the targets set by the Federal Council

Most importantly, the law mandates “net-zero” greenhouse gas emissions by 2050. Not just simply by means of compensation, but by reducing greenhouse gas (GHG) emissions to a minimum before compensating the remaining emissions using negative emission technologies. After 2050, the amount of CO2 removed and stored through negative emissions solutions, must outweigh the remaining GHG (“net negative”) (Art. 3).

On the road to 2050, the law stipulates intermediate reduction targets (versus the 1990 baseline) that mean significant action is already needed over the next 20 years, not just by 2050, specifically:

1. 2031–2040: reductions of at least 64 percent (average over the period),
2. By 2040: reduction of at least 75 percent, 
3. 2041–2050: reduction of at least 89 percent (average over the period).

To achieve these targets, the law prescribes sector-level targets for the following sectors (Art. 4):

Building sector:

1. -82 percent, by 2040, and
2. -100 percent by 2050.

Transport sector:

1. -57 percent, by 2040, and
2. -100 percent, by 2050.

Industrial sector:

1. -50 percent, by 2040, and
2. -90 percent, by 2050.

While other sectors are not mentioned explicitly, the Federal Council may decide to set additional targets applicable to other sectors subsequently, considering the latest scientific and technological developments, as well as EU policies.

Consequently, the law explicitly calls for all Swiss companies to achieve a net-zero status by 2050 on the direct and indirect GHG emissions from their operations (Scope 1 and 2) – and it encourages the development of long-term decarbonization roadmaps before 2029 (Art. 5).

Recognizing that this will trigger large-scale economic transformation, the Swiss Federation will grant companies and private individuals financial aid for CHF 3.2bn in total, including CHF 1.2 billion over six years for new technologies and processes to accelerate industrial decarbonization, and CHF 2 billion over ten years to support the replacement of fossil fuel-based heating in buildings (Art. 6).

The law further calls for the state to play an exemplary role, making the Confederation, the Cantons and federal companies subject to an accelerated schedule (net-zero by 2040, 10 years ahead of the country-level targets) as well as a significantly more challenging scope (not just Scope 1 and 2 emissions, but also “upstream and downstream”, i.e. Scope 3, emissions).

Noting the importance of the financial sector in financing the upcoming economic transformation, Article 9 calls for the Swiss financial markets to “effectively contribute” to investments for low-carbon and climate-resilient development. Indeed, FINMA has already kicked off work on the revision of FINMA-Circulars 2017/1 and 2017/2 (“Corporate Governance”) to include binding requirements on governance, risk management and scenario analysis for environmental risks (see our dedicated article on this matter here).

Switzerland’s formal commitment towards climate mitigation and adaptation is now clear. This means that:

First, all Swiss companies (whether listed or not) should develop a decarbonization roadmap – or potentially review and strengthen their existing plans. Decarbonizing individual operations and entire sectors is a complex challenge. Multiple points need to be addressed, from technical to economic feasibility, as well as understanding the subsidies made available by the Federal authorities. Developing an effective and science-based GHG reduction plan also implies setting the right governance structure, control mechanisms, internal incentives, initiatives, and the design of intermediate targets, in line with the latest law.

Second, there is a commercial opportunity in certain sectors. The law specifically calls for a 100 percent reduction in certain sectors, which clearly commercially favors certain technology (e.g. zero emission transport technologies to decarbonize traffic, heat pumps or geothermal heating systems for buildings, negative emission technologies such as carbon capture utilization and storage, etc.) This means that some commercial business models that may have been feasible in the past will no longer be feasible in the near future – or, vice versa, there is a commercial re-positioning opportunity for many firms.

Third, there is no time to lose. As discussed above, many of the support measures described above are targeted towards significant action before 2030. This means that for many companies, there will be a “fast mover advantage” in taking aggressive action and tapping into the available incentive schemes in a timely manner. Particularly, industries with longer investment cycles will need to act quickly to take relevant decisions today to achieve the desired impact by 2030 and ultimately 2050. In our view, action should not be postponed until the 2030 deadline, but should be taken now – not least due to upcoming disclosure regulations (e.g. Swiss Climate Ordinance, or the EU’s CSRD) which will render corporate efforts on climate within the coming 2-3 years. 

Finally, stay vigilant. While we consider this a landmark law in the Swiss context, we expect global and national policies to intensify in the years ahead, as the effects of climate change increase in scope and magnitude. For international Swiss firms, this means not just tackling their “Swiss” decarbonization challenge, but actively working on organizational resilience and value preservation globally – by developing climate strategies with ambitious targets and innovative solutions. The decade of action, as defined by the United Nations, is here.