• Patrick Schmucki, Director |
  • Maya Kostina, Expert |

Due to recent legislative updates, Swiss financial institutions are anticipated to advance the development of their practices concerning climate- and nature-related risks and transition plans. What should financial institutions consider to embrace these evolving expectations?

What are the key regulatory drivers in this transformative landscape?

Ordinance on mandatory Climate disclosures:
The ordinance entered into force on 1 January 2024. Large financial institutions are required to publicly disclose information on climate-related matters for the 2024 business year, with the first reports to be published in the first half of 2025. The climate disclosures will form part of the disclosures on environmental matters pursuant to Art. 964a of the Swiss Code of Obligations and therefore need to be submitted to the Annual General Meeting.

Climate Protection and Innovation Act:
The “Federal Act on Climate Protection Targets, Innovation and Strengthening Energy Security” enters into force on 1 January 2025. The law formalizes Switzerland’s commitment to net zero under the Paris Accord. In addition, the Federal Council opened the public consultation for the accompanying ordinance this January. Financial institutions will be impacted by the general requirement to have a decarbonization plan in place for Scope 1 and 2 emissions and will have the opportunity to participate in voluntary bi-annual climate compatibility tests.

Draft FINMA Circular on Nature-Based Financial Risks:
FINMA published the draft circular on 1 February 2024 and is currently under consultation until 31 March 2024. It is planned to enter into force on 1 January 2025, with transition periods depending on the size of institution. It addresses a broad spectrum of environmental risks, including but not limited to climate risk. Unlike the Ordinance on climate disclosures, which primarily targets large financial institutions, the Circular applies to almost all banks and insurers (with exemptions for certain small banks and insurers). Crucially, the Circular emphasizes governance and environmental risk management methods, complementing the disclosure requirements outlined in the Ordinance. As a supervisory law, its enforcement will be subject to rigorous scrutiny by financial institution's supervisory auditors.

How should financial institutions approach the current and upcoming requirements?

Due to the condensing regulatory environment in this area, financial institutions should pay particular attention to the interlinkages between the different requirements.

Governance Enhancement:
While the TCFD offers foundational guidance, the FINMA Circular mandates a more nuanced approach to governance, necessitating function-specific knowledge and expertise across various organizational tiers. This requires financial institutions to invest in tailored internal training programs to augment external sustainability trainings.

Risk appetite:
The TCFD provides broad guidance on considering climate risks and opportunities in business objectives, strategy, and financial planning. In contrast, the new FINMA circular mandates integrating climate risk into risk appetite and tolerance, setting thresholds and limits, and reporting on impacts on traditional risk categories. Despite efforts by institutions to understand and manage climate risk, challenges like data availability and quality, and the absence of accepted risk methodologies, make many cautious about using such insights for investment or lending decisions. They often view it as supplementary information in a holistic decision-making process.

Pursuant to the climate disclosure ordinance, financial institutions are required to disclose decarbonization plans aligned with Swiss climate goals. These are now enshrined in the Climate Protection and Innovation Act that focuses on Scope 1 and 2 emissions, however, the reality is that Scope 3 emissions constitute the vast majority of emissions of financial institutions. Thus, institutions should strive to include financed emissions in their transition plans and carbon footprint disclosures. However, due to varying data availability and approaches to achieving net zero across asset classes, a phased approach is likely the most credible option. Find more information on the state of bank’s transition plans in our blog Banks' TCFD alignment and transition plans.

Scenario Analysis and Stress Testing:
Compliance with disclosure requirements necessitates the implementation of forward-looking scenario-based analyses and stress tests. Leveraging the voluntary, biannual climate compatibility tests run by the Swiss Government as foreseen in the draft of the Climate Protection and Innovation Ordinance can provide additional insights into climate risk management strategies and inform strategic decision-making processes.

What comes next on the horizon for financial institutions?

Regulators acknowledge financial institutions' challenges with data availability, quality, and methodological standards. To meet regulatory expectations, institutions must commit to long-term improvements in climate management and disclosures. This entails expanding decarbonization plans across asset classes, investing in precise data, and enhancing the significance of climate-related scenario analyses and stress tests.

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