Path to the Sustainable Financial Centre Switzerland - The Sustainability Forum Zürich (TSF) and Sustainable Finance Geneva (SFG) - A call to action
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The Sustainability Forum Zürich (TSF) and Sustainable Finance Geneva (SFG) Path to the Sustainable Financial Centre Switzerland A call to action May 2013
Path to the Sustainable Financial Centre Switzerland
Contents
Foreword�������������������������������� 2 4 Five pillars for
The project � ����������������������������� 4 sustainability success –
Executive summary � ������������������ 6
our proposals������������������� 34
1 Sustainability’s 4.1 Build trust through
seeds are growing� ����������� 10 client centricity��������������������� 34
4.2 Foster competition, innovation
1.1 A strong financial centre����������10 and growth within an appro-
1.2 A strong record in priate legal framework � ����������� 36
sustainability�������������������������� 11 4.3 Adopt a long-term
investment perspective����������� 39
4.4 Integrate environmental,
2 Lessons from other
social and governance factors
financial centres�������������� 14 into mainstream business� �������� 42
2.1 Define sustainability strategy����14 4.5 Lead in green and
2.2 Mobilise the movement������������16 social finance������������������������� 44
2.3 Use public funds���������������������17
2.4 Rewrite the rules� ��������������������17 5 Outlook and next steps 48
2.5 Make the market���������������������18
6 Acknowledgements�������� 50
3 Five key challenges of 7 About TSF / SFG� ��������������� 52
sustainable finance��������� 20
8 Appendix � ������������������������� 54
3.1 Clients and trust � �������������������� 20
3.2 Innovation and legislation��������23
3.3 Investment and long-term������� 24
3.4 Extra-financial factors and
performance � ������������������������� 28
3.5 Investors and green and
social issues����������������������������31
1Path to the Sustainable Financial Centre Switzerland
Foreword
The Sustainability Forum Zürich and Sus- a strong tradition of democratic values and high
tainable Finance Geneva strongly believe in the environmental standards. The country is there-
important role of the financial sector in con- fore placed at the forefront in a journey towards
tributing to the current and future prosperity of a sustainable financial system. Many experts,
Switzerland. The two organisations also share interviewed in the course of the preparation of
a vision of a financial sector that systematically this paper, share this opinion with us.
considers social and environmental challenges
of our time in their operations as well as prod- Of course, Switzerland is not the only
ucts and services. place where such opportunities are addressed.
A number of other financial centres have taken
This vision of sustainable finance offers first steps to turn them into profitable business.
the opportunity of a proactive response to the Yet, we are convinced that Switzerland with
current and foreseeable challenges the sector its well-anchored commitment to sustainable
and its stakeholders are facing. Making sustain- development has the assets to create a com-
ability an inherent part of the Swiss Financial petitive advantage. The window of opportunity
Centre brings tangible and lasting benefits for is open and now is the time to act.
its actors in terms of positioning, attractive-
ness and competitiveness on an international The Sustainability Forum Zürich and Sus-
level. Furthermore, Switzerland can build upon tainable Finance Geneva publish this White
2Path to the Sustainable Financial Centre Switzerland
Paper in order to analyse these opportunities The Sustainability Forum Zürich and Sus-
and propose actions to best take advantage of tainable Finance Geneva would like to thank the
them. The paper is intended to stir a discussion members of the Steering Committee, the Edi-
amongst important actors in the financial cen- torial Team, the experts being interviewed, as
tre. An on-going dialogue will be required to fur- well as the lead authors PwC Switzerland and
ther sharpen our suggestions and come up with everyone who contributed to the paper, shar-
concrete next steps. We look forward to leading ing extensive time and insight with us in its
it with you. elaboration.
Zeno Staub Angela de Wolff
Chairman Founding Chairperson
The Sustainability Forum Zürich Sustainable Finance Geneva
3Path to the Sustainable Financial Centre Switzerland
The project
Our vision increasing number of studies addressing the
impacts of inaction have been published, and
For The Sustainability Forum Zürich (TSF) there is strong evidence of the business oppor-
and Sustainable Finance Geneva (SFG), the tunities linked to sustainable development to be
aim of a “Sustainable Financial Centre Swit- grasped in the next few decades.1 2 3
zerland” is a financial centre that contributes
to sustainable development and value creation The ambitious, yet achievable objec-
in economic, environmental and social terms. tives of this White Paper, mirror the missions
In other words, one that ensures and improves of both TSF and SFG, and are centred on:
economic efficiency, prosperity, and economic
competitiveness both today and in the long- (i) Making people aware that positioning
term, while contributing to, protecting and Switzerland as a sustainable financial
restoring ecological systems, and enhancing market will require a joint effort from
cultural diversity and social well-being. stakeholders in industry, government
and civil society;
(ii) Focusing the dialogue between regu-
Objectives lators, financiers and the general pub-
lic on sustainability and stability of the
Much has been published on the ever financial system and finance industry;
substantiating evidence of the negative effects (iii) Increasing Switzerland’s financial inno-
of unsustainable business models. Aspects vation and its attractiveness to finance
range from climate change or resource deple- companies;
tion over to social unrest, large-scale migration (iv) Strengthening the Swiss Financial Cen-
and the increasing occurrence of governance tre’s reputation for integrity, thereby fos-
scandals in a globalised economy. At last, those tering future growth, and
megatrends and their impact on human devel- (v) Creating a dedicated network for all
opment and business models have entered stakeholders to contribute to a sustain-
political and business agendas. able financial market and ultimately to a
sustainable real economy.
Progress to meet the sustainable devel-
opment challenges has so far been limited, Methodology
especially on the political agenda (e.g. Kyoto-
Protocol, UN Climate Change Conference in This White Paper represents TSF’s and
Copenhagen 2009 and Rio 2012). However, SFG’s opinions and proposals which have been
numerous concrete initiatives are in place, an shaped by structured interviews with more
4Path to the Sustainable Financial Centre Switzerland
than 30 people who have important roles in Structure
and around the financial sector. These include
stakeholders in ‘mainstream’ finance, sustaina- The White Paper is presented in four main
bility-related finance as well as the political, cor- chapters. The first of these summarises the
porate and academic arenas. We’d like to thank strengths Switzerland may build upon in this
them and everyone who contributed to this pro- market, chapter two analyses the current state
cess, sharing extensive time and insight with us of affairs internationally, chapter three focuses
(see chapter 6). on identifying issues in sustainable finance to
be addressed in Switzerland, and chapter four
details the consequent five pillars of the Sus-
A White Paper tainable Financial Centre Switzerland, which
describe our proposals to go forward.
A White Paper in our view is one that builds
awareness with readers through the factual doc-
umenting of information around a specific topic Next steps
which is supplemented by views of the partici-
pating organisations behind the content, with the An important question remains: Who will
intention of being persuasive. In this regard, it is make this happen? In the long run, everybody:
not our intention to present a detailed blueprint the industry, its customers and its regulators. In
or action plan that simply must be implemented, the nearer term, the relevant actors have to join
but rather to give direction, make proposals and forces in order to be the brain, the voice and the
highlight opportunities of a path towards posi- motor of the Sustainable Financial Centre Swit-
tioning Switzerland as the Sustainable Financial zerland and clear leadership is required from
Centre over the course of the next decade, rec- important actors of the Swiss financial sector.
ognised amongst peers.
Dialogue and further research, catalysed
The White Paper is a document for all by this White Paper, will be the best way to
stakeholders of the financial services sector in identify more-concrete actions and timeframes.
Switzerland. We acknowledge that some of the Initial dialogue sessions, planned by TSF and
topics as well as our proposals will be more rel- SFG in the coming months, are aimed at formu-
evant for specific players in the market, how- lating concrete recommendations and creating
ever, we believe that the financial sector as a detailed action plans.
whole has an intrinsic interest to learn of the
value of the “Path to the Sustainable Financial
Centre Switzerland”.
5Path to the Sustainable Financial Centre Switzerland
Executive summary
This White Paper on the “Path to the Sus- Leadership in
tainable Financial Centre Switzerland” is a joint
sustainable finance
initiative of The Sustainability Forum Zürich
(TSF) and Sustainable Finance Geneva (SFG).
Both institutions have committed to editing Leadership in sustainable finance offers a
a high-quality, thought-provoking publication highly promising business case today and going
to spark the discussion and push the Swiss forward:
finance community to look beyond the current
market turmoil, to anticipate change, and to The systematic consideration of aspects
address the chance to leverage the potential related to the concept of sustainability is
market opportunities rooted in sustainability- a fast-growing and irreversible trend in
related mega trends that will lead to shared finance.
value creation for different stakeholders.4
Financiers of successful sustainability
technologies, products and services will
For TSF and SFG, the aim of a “Sustain- prosper, generating jobs, tax revenues
able Financial Centre Switzerland” is a and prosperity.
financial centre that contributes to sus-
tainable development and value creation in Investors taking such aspects into account
economic, environmental and social terms. will profit from better risk-adjusted returns
In other words, one that ensures and in the long-term – empirical evidence indi-
improves economic efficiency, prosperity, cates that companies with stronger sus-
and economic competitiveness both today tainability performance are more likely to
and in the long-term, while contributing to, outperform their peers in terms of stock
protecting and restoring ecological sys- price.
tems, and enhancing cultural diversity and
social well-being. And last but not least, sustainable finance
and the innovation around the topic can
catalyse change in the real economy,
bringing social and environmental ben-
Our discussions and research revealed a efits, both to Switzerland and to the world
genuine consensus behind why we are advo- at large.
cating the “Path to the Sustainable Financial
Centre Switzerland” which can be best sum-
marised as follows:
6Path to the Sustainable Financial Centre Switzerland
Swiss sustainability’s seeds The time to act is today
are growing
Maybe most importantly – act now or fol-
low later:
The positioning of the Sustainable Finan-
cial Centre Switzerland optimally leverages the The global financial system is going
existing and externally perceived “Swiss” val- through a significant change in various
ues of stability, security, reliability, transparency, dimensions right now – and so is the
diversity and performance while being aligned Swiss financial industry, notably with
with the Swiss Federal Council’s Sustainability regard to its strategic positioning.
Strategy 2012 – 20155:
Establishing Switzerland as the centre
Finance is available, the country’s bal- of choice for sustainable finance offers
ance sheets, both public and private, are opportunities others will not wait to seize.
strong enough to finance global leader-
ship and Switzerland enjoys a disciplined While most financial organisations – and
financial budget. clusters – are finding it difficult to look beyond
the current market turmoil, their survival and
Added to that, many Swiss banks and success will also depend on being able to deal
insurers as well as academics, NGOs with the longer term trends that are transform-
and supranational institutions have taken ing the market and competitive landscape.6
great strides in sustainability and Swit-
zerland is home to a growing number of
thought leaders and pioneers in sustain- Five pillars of
able finance.
sustainability success
This combination of an inherently ‘sus-
tainable’ image with leadership in process and Our proposals are built on five pillars.
product development provides the Swiss finan- The first two pillars of principle are
cial centre with a strong opportunity to create most critical and fundamental. These,
a competitive advantage over other financial when lived out by professionals and
centres. institutions, are the bedrock of sus-
tainable finance and enable the three
pillars of operation to be achieved.
7Path to the Sustainable Financial Centre Switzerland
The pillars of principle: The pillars of operation:
1. Clients and trust 3. Investment and long-term
Build trust through client centricity – Adopt a long-term investment perspec-
‘your interest is our interest’ – this is a sustain- tive – Taking the long view – this needs to be
able finance institution’s omnipresent message. standard procedure for institutional asset own-
To bring this pillar solidly into effect requires ers such as pension funds, insurance compa-
successfully addressing the alignment of the nies or foundations. This pillar is about them
financial sector with its clients, we propose that leading in sustainability by taking a more holis-
this includes: tic view of investing, thereby guaranteeing prof-
itable investment and shared value creation. We
appropriate incentives and broader propose:
capacity building of finance professionals
a broader application of leading interna-
transparency in the value and impact of tional responsible investment principles
products and services both to clients and to raise the level playing field
society as a whole
to Swiss pension funds to signing-up the
strong leadership to embed values of stewardship guidelines on exercising vot-
integrity and sustainability throughout the ing rights in public companies presented
financial sector. by the Swiss Pension Fund Association
ASIP, Swiss Federal Social Security Funds
OAI / II / IC, economiesuisse, Ethos, Swiss
2. Innovation and legislation Bankers Association, and SwissHold-
ings (Federation of Industrial and Service
Foster competition, innovation and Groups)
growth within an appropriate legal framework –
competition should be fierce, but fair, allowing reporting on sustainability policies
support for new market entrants while also fuel-
ling innovation and growth. We feel that through acknowledging again the need to bolster
the design of an effective risk and regulatory research and capacity building.
environment, many of the specified goals of the
other 4 pillars in the Paper may be strongly cat-
alysed. Our proposals include: 4. Extra-financial factors and performance
enhancing transparency and disclosure Integrate environmental, social and gov-
ernance (ESG) factors into mainstream busi-
critically building bridges across actors in ness – ESG criteria need to move from their cur-
the sector to shape together an effective rent ‘nice-to-have’ niche into the mainstream
regulatory framework geared to support- where they are applied regularly and consist-
ing the development of the Sustainable ently to the broadest range of decisions. There
Financial Centre Switzerland. is a strong business case for doing so, empirical
8Path to the Sustainable Financial Centre Switzerland
evidence demonstrates positive contribution to Financial Centre Switzerland and clear lead-
portfolio performance, and clients, investors ership is required from principal actors of the
and society at large are demanding it. We pro- Swiss financial sector.
pose that:
the Swiss financial sector actively sup-
ports and concretely builds on authorita-
tive international initiatives that address
and request the integration of ESG criteria
the evaluation, accounting and report-
ing of ESG risks is broadly promoted and
integrated.
5. Investors and green and social issues
Lead in green and social finance – these
areas of finance, already growing significantly,
are potentially huge. Total investment for
decarbonisation alone could amount to US$
700 – 850 billion, around 10 % of global infra-
structure investment per year7. Environmentally
and socially beneficial projects and companies
will continue to grow, and by definition these are
funded and insured by sustainable financiers.
This pillar is about building and deepening that
relationship, and identifying long-term growth
potential. We propose that:
the relevant players in Switzerland come
together, create awareness, analyse the
current data to discern market needs and
assess impacts
opportunities are identified and a formal
strategy for green and social finance is
developed and implemented.
Who will make this happen? In the long
run, everybody: the industry, its customers and
its regulators. In the nearer term, the relevant
actors have to join forces in order to be the
brain, the voice and the motor of the Sustainable
9Path to the Sustainable Financial Centre Switzerland
1 Sustainability’s seeds
are growing
Establishing Switzerland as the recognised Sustainable Financial
Centre is no greenfield project. The country already has powerful bases
in finance and in sustainability.
These can be built upon further, and inter- industries, exports twelve times as much busi-
linked, to create a global leader in the field. ness as it imports.10
Research and interviews for this paper have
identified five key areas where this building Switzerland has long set high standards
should focus. These five ‘pillars of sustainable in private banking. Banks are service-minded,
finance’ will guide discussions and activities, and their advisors offer in-depth knowledge of
and they will also underpin the finance sector’s financial markets and innovative products.
mainstreaming of sustainability.
1.1 A strong financial centre
Switzerland is clearly among the world’s Swiss story, in numbers 1
leading financial centres (see box 1). With some
10 % of global securitized assets under its man- 1 Switzerland’s rank in The World
agement8, the country trails the United States Economic Forum’s Global Competi-
and is slightly behind the UK in market size. tiveness Report 2011 and 2012, and
Switzerland is world number one in cross-bor- in the INSEAD Global Innovation
der private banking (USD 2.1 trillion).9 Index 2012
Banks are the most visible players in 3 Swiss banks among the 10 largest
finance, followed by primary and secondary wealth managers
insurers. Commodity and trade financiers also
have a strong presence and history. As would 27 % Swiss market share in cross-bor-
be expected for a country with only 8 million der private banking – making it the
people, a majority of the business is export global leader
based. The primary customer base is in Europe,
with substantial representation in the Americas 70 % + Share of Swiss insurance premiums
and Asia. OECD figures illustrate that Switzer- earned abroad
land, in the combined banking and insurance
10Path to the Sustainable Financial Centre Switzerland
Not surprisingly, finance accounts for a seri- Sustainability is part of the nation’s fabric
ous slice of Switzerland’s economy though this
has decreased over the last few years. The Swiss It is one of the few countries to include sus-
financial centre accounted in 2011 for 10.3 % of tainability in its constitution (see box 2). Its com-
gross domestic product, 10 % of income tax and mitment to environmental quality is renowned:
5.7 % of employment in Switzerland.11 according to Yale University’s Environmental
Performance Index, it is the world leader in pro-
A recent Credit Suisse study analysing tecting environmental health and in ecosystem
the overall challenges facing the Swiss financial vitality.14 It is also known for good governance,
centre highlights the high quality of advice in ranking among the top ten nations, as rated by
financial services, political, economic and social Transparency International.15 Zurich, Geneva
stability, a flexible labour market, a high-quality and Bern consistently come out favourably in
educational system and a strong industrial tra- rankings of the world’s cities with regard to the
dition supporting innovation and research and quality of living; all three cities appear in the top
development as traditional strengths of Swit- ten list in the yearly Mercer survey which takes
zerland on which a successful and competitive into consideration aspects including the natu-
financial centre can be built.12 ral and social environment.16 Finally, the Swiss
population recognises the strength of the home
The strong attributes of political and eco- market as illustrated in the World Bank Gov-
nomic stability, legal security along with the ernment Effectiveness Index which assesses a
Swiss franc as a stable currency are widely population’s perception of the quality of pub-
recognised as key supporting elements of the lic and civil services and their degree of inde-
current strength of the Swiss financial centre pendence from political pressures, the quality of
as well as the fundament for future growth and policy formulation and implementation, and the
success in the industry.13 credibility of the government’s commitment to
1.2 A strong record in Swiss Constitution, Article 73 2
sustainability
The Confederation and the Cantons shall
endeavour to achieve a balanced and sus-
Switzerland is well known in sustainabil- tainable relationship between nature and its
ity, and not only through its financial sector. capacity to renew itself and the demands
placed on it by the population.
11Path to the Sustainable Financial Centre Switzerland
such policies, all aspects that underpin a stable, Intergovernmental Panel on Climate Change
secure and sustainable market.17 (IPCC), the World Business Council for Sustain-
able Development (WBCSD), the World Wildlife
Fund for Nature (WWF) and the International
Long term durability of social welfare Union for Conservation of Nature (IUCN). It also
hosts several supranational organisations that
Switzerland’s policy to curb public debt are devoted in part to sustainability: the World
has resulted in the reduction of debt of around Health Organisation (WHO), World Meteorologi-
CHF 20 billion in the last 5 years.18 It is a strong cal Organisation (WMO), United Nations Chil-
fundament of a sustainable financial policy; it dren’s Fund (UNICEF), the International Labour
is coherent with ensuring the long-term dura- Organisation (ILO), the UN Conference on Trade
bility of social welfare and has an international and Development (UNCTAD) and the World
acceptance such that the European Union is Trade Organisation (WTO).
adopting a similar mechanism to manage coun-
tries with structural deficits and growing pub-
lic sector debts. Public debt in Switzerland has Pioneers in sustainable finance
been reduced from 53 % to 40 % of GDP in the
last 5 years whereas the euro area has seen the Sustainable products and finance are
same average public debt figure rise from 70 % researched and practiced in Switzerland to a
to 85 % of GDP over the same period. certain extent (see box 3). It is home to the Dow
Jones Sustainability Indexes (DJSI) as well as
the UN Environment Programme’s Finance Ini-
Home of international organisations tiative (UNEP-FI). With approximately 25 % of
the world market, microfinance is dominated by
Switzerland is the home of many organi- Swiss asset managers.19 Roughly 4 % of Swiss
sations devoted to sustainability, such as the funds are sustainability funds – applying strict
sustainability principles in investment selection
– and a growing number of other funds inte-
Seeds of Swiss sustainable finance 3 grate sustainability criteria into the investment
process. Some insurers also apply them in their
Switzerland already is the leading contender portfolios, and they are pioneering management
for world leadership in sustainable finance. of environmental risks as well. Renowned univer-
sities contribute to the development. Institutes
The country is home to the UN Environmen- such as Chair of Sustainability and Technology
tal Programme’s Finance Initiative, the World at the Swiss Federal Institute of Technology or
Business Council for Sustainable Develop- the Center for Microfinance at the University of
ment, the World Economic Forum, and the Zurich (to name only two) contribute innova-
World Wildlife Fund. tive research on sustainable finance. The Ethos
Foundation has pioneered thought leadership
Switzerland also hosts innovators such as on responsible corporate governance and has
the Dow Jones Sustainability Indexes, the been rewarded for its work with the International
first retail microfinance fund and an index Corporate Governance Network Award in 2009.
for reputational risks.
12Path to the Sustainable Financial Centre Switzerland
13Path to the Sustainable Financial Centre Switzerland
2 Lessons from other
financial centres
Switzerland has a strong base in sustainable finance – one of the
strongest of any financial centre. It also is attractive to finance in gen-
eral, because it offers a stable economic climate, an environment of
low corruption and ease of doing business20. But for long-term, global
leadership in sustainable finance, this is not enough. Others – London,
Luxembourg, New York, and Singapore, and to a lesser extent Hong
Kong – have claims to the title themselves.
A recent study21, commissioned as part of 2.1 Define sustainability
this project, surveyed the strategy and actions
strategy
of these competitors. In all of these financial
centres, sustainability is gaining momentum.
Still, none has emerged as an undisputed Switzerland has currently no coherent
leader. Five actions appear to be those where strategy for sustainability of the
any pretender – including Switzerland – should financial sector. The Swiss Constitu-
be focusing its efforts: tion encourages all Swiss actors
to contribute, given their individual
Define sustainability strategy
means, to sustainable development.
Any future strategy of the Sustainable
Mobilise the movement
Financial Centre Switzerland should
Use public funds
be based on this reference.
Rewrite the rules
London: Sustainability driven by politicians
Make the markets
The city continues to reign at or near the
top of the world’s financial centres in conven-
tional measures such as turnover, jobs, tax
receipts and global reach. In recent years, Lon-
don has also set its sights upon sustainability.
Leading politicians and financiers have clearly
expressed their ambition to become the global
14Path to the Sustainable Financial Centre Switzerland
leader in sustainable finance, noting the many called “Luxembourg for Finance”, which repre-
benefits this will bring to the economy, the envi- sents an agency primarily tasked with improv-
ronment and society at large. ing the image of Luxembourg as a financial cen-
tre abroad.
Richard Sermon, Sheriff of the City of Lon-
don, together with Lady Susan Rice, a strong
advocate of integrity in banking, are spearhead- New York: Promoting governance
ing an initiative begun in 2011 entitled “Restor- and cleantech
ing Trust in the City”. The project provides a
template of best practice that financial services The United States enjoys a culture of pub-
companies in the City of London can adopt and lic policy engagement that is truly world class.
which should guarantee integrity and ethical Although the US generally suffers from political
corporate behaviour. and regulatory deadlock on environmental and
social issues, the financial centre of New York
City has nonetheless spearheaded important
Luxembourg: Building a hub for developments in sustainable finance. These
sustainable funds include attention to corporate governance
issues, shareholder proxy voting and engage-
Luxembourg is Europe’s largest investment ment, the cleantech investing industry where it
fund domicile, and has made recent noise about came out in first place in the G20 clean energy
its intention to make responsible investment the investment table with $ 48.1 billion worth of
‘third pillar’ of its € 2 trillion funds industry. It is clean energy investments22, and emerging
arguably Europe’s domicile of choice for sustain- ‘social or impact investing’.
able funds and is targeting 10 % of assets, over
time, going into responsible investment.
Singapore: Attracting clients through
Luxembourg, led by HRH Grand Duchess green and social finance
Maria Teresa of Luxembourg and senior mem-
bers of government, has committed to quickly The Asian city-state is among the leading
and efficiently ensuring the right regulatory global financial centres – in conventional terms.
environment; structures and processes are put Located between India and China, Singapore
in place from the outset to support their ambi- sits at the nerve centre of the region, and is
tions. Furthermore, Luxembourg aligns its inter- often referred to as ‘Switzerland of the Far East’.
nal ambitions with external promotion and has Recently, it has begun to see sustainable finance
set-up an interesting public-private partnership as an opportunity for competitive differentiation.
15Path to the Sustainable Financial Centre Switzerland
Thanks to its concentrated governance, Singa- Get organisations going
pore is able to fast track its growth in sustain-
able finance. It has upped its stake in cleantech London financiers started the UK Sustain-
investment to enhance its industrial strategy, able Investment and Finance Association that
and it has grown in social finance to increase its “aims to ensure that the UK finance sector is the
attractiveness in private banking. world leader in advancing sustainable develop-
ment through financial services.” The London
Corporation founded and supports TheCityUK,
Hong Kong: Taking care of reputation a think-tank and lobbyist that (among other
things) promotes UK sustainable finance. Most
This Asian finance hub, ranked second in recently it launched an initiative called “The
the World Bank’s latest ease of doing business Next Generation Vision – A positive future for
index23 and where more than 70 of the world’s financial services.”25 The national government
top 100 banks have branches24, is progressing has funded a variety of multi-stakeholder sus-
more slowly on sustainability. There is a strong tainable finance programmes, including a social
focus on ensuring that companies listed on the investment task force.
stock exchange do not pose reputational risks.
The local regulator also pays close attention The US is home to a number of organi-
to the centre’s reputation, by enforcing high sations with a strong record in mobilising and
accounting and disclosure standards. lobbying for legislation. The Forum for Sus-
tainable and Responsible Investment (US SIF)
actively works and engages with the Securities
2.2 Mobilise the movement and Exchange Commission (SEC) to promote
the development of rules favourable to sus-
tainable finance. More for Mission is a growing
Leadership in sustainable finance will association of foundations dedicated to broadly
have to be earned. First, Switzerland promoting responsible investing, its member-
needs to declare its ambition to lead, ship now includes 75 foundations that represent
and then openly pursue this. The approximately USD 30 billion in total assets.
UK and to some extent the US have
been particularly effective at this:
Build the international network
Express the ambition London has become home to impor-
tant institutions in sustainable finance. These
The UK national government and the City groups employ fewer than 100 people collec-
of London Corporation (the local government) tively, but they leverage London’s knowledge
have been vocal about this and are strong at and visibility in sustainable finance. The UN-
marketing themselves, claiming leadership in backed Principles for Responsible Investment
sustainable finance – especially with regards (PRI)26 convenes over 1,000 asset owners, asset
to carbon finance, Islamic finance and social managers and sustainable finance service pro-
finance. Statements of support have been made viders with assets under management exceed-
all the way to the top, including the Prime Min- ing $ 30 trillion27. The International Corporate
ister’s office. Governance Network has over 500 institutional
16Path to the Sustainable Financial Centre Switzerland
investor members with $ 18 trillion in assets, Push the policy
and the Carbon Disclosure Project28 works on
behalf of 655 investor members representing In the UK, a number of consultations and
$ 78 trillion in assets29 to advocate for green- reviews have been done to discover and to
house gas emission reporting and management define areas where government can encourage
by companies and cities. or promote sustainable finance. These include
broad inquiries and public policy reviews such
as the Myners Principles, the UK Stewardship
2.3 Use public funds Code and the Kay Review. These initiatives
explore notably the role of finance as an inter-
mediary and its relation to the real economy.
Governments are, by far, the largest The government has also sponsored research
single movers in modern economies. and convened seminars to spread knowledge.
So it makes sense to harness their
financial power in the service of sus
tainability. In Switzerland, a few 2.4 Rewrite the rules
public pension funds have already
declared a commitment to responsi-
Through rules and regulations,
ble investment.
governments also define many features
of finance. Nonetheless, there is no
country, including Switzerland, that
Invest public money sustainably has substantial, comprehensive sup-
port from regulators for sustainable
CalPers, the US’s largest public pension
finance. The following examples show
fund, has a historically strong position in sus-
positive regulatory initiatives from
tainable finance. This year CalPers released its
first report on sustainable investing30. This out-
competing countries:
lines the journey to create a fiduciary framework
for integrating sustainability across its portfolio,
and explains how this will improve long-term, Use legal incentives
risk adjusted returns.
The UK government has taken numerous
Singapore has been even bolder, desig- measures to see that these are aimed more at
nating a substantial amount of its sovereign- supporting sustainability. Two notable results
wealth fund, Temasek, for sustainable invest- have emerged from this. One, the government
ment. In France, the state reserve fund (which has offered tax incentives (Community Invest-
complements the state pension) “Fonds de ment Tax Relief) to social investment.31 The
Réserve pour les Retraites” (FRR) and the gov- other, future pensioners are being allowed
ernmental additional insurance for civil servants greater choice in how their funds are being
“Etablissement de Retraite Additionelle de la invested. There is some scope for them to apply
Fonction Publique” (ERAFP) are pioneering SRI sustainability criteria in choosing a portfolio.
with the objective of considering sustainability
criteria for all their investments.
17Path to the Sustainable Financial Centre Switzerland
Encourage standards on SRI. It recently created a label for SRI funds
that systematically take ESG criteria into con-
Following the 1989 Exxon Valdez oil sideration. Novethic is widely recognized as a
spill in Alaska, investors founded Ceres, a US- key driver of the development of SRI in France.
based non-governmental organisation (NGO)
dedicated to “building a sustainable global
economy.” The organisation focuses on policy 2.5 Make the market
advocacy and investor-company-stakeholder
dialogues on sustainability issues, most notably
climate change, water and energy. While many It is important to develop adequate
NGOs work on sustainability, Ceres is unique guidelines for the registration of
as a neutral platform for bringing investors into investment funds dedicated to sustain
policy advocacy, an area where few investors ability. Present leaders in investment
have made their voices heard (as they frequently funds are taking the challenge. But
do in the corporate sector). In 1997, along with
Swiss sustainable asset managers con-
the United Nations Environmental Program and
tinue to register their funds in Lux
the Tellus Institute, Ceres launched the Global
embourg, mainly due to the simple,
Reporting Initiative (GRI)32, the de-facto stand-
ard for corporate reporting on environment,
efficient registration process intro-
social and governance issues. More recently, duced by the Association of the Lux-
Ceres was instrumental in encouraging the US embourg Fund Industry.
Securities and Exchange Commission to issue
guidance on how existing rules could obligate
companies to report on climate change risks US, UK, Europe are on track …
and opportunities.
Both London and New York are home to
responsible investment funds, as well as to foun-
Develop labels dations and charities that practice or promote
sustainable finance and advocate sustainability.
Founded in 2006, The Luxembourg Fund
Labelling Agency (LuxFLAG)33 awards a label In Europe, France and Luxembourg domi-
to microfinance investment vehicles. By driv- nate the market of ESG (cross-sector) funds.
ing competition it raises the standards and Nearly half of all such funds are domiciled in one
contributes to the effectiveness and impact of or the other, reports a recent European Respon-
microfinance. Another lesson to be learnt from sible Investing Fund Survey34, and the countries
LuxFLAG is its governance. Under the honorary are home to 56 % of such assets under man-
president, HRH Grand Duchess Maria Teresa of agement. The figure jumps to 66 % of the total
Luxembourg, important players joined forces – assets under management in microfinance.
from the Stock Exchange to the European
Investment Bank (EIB), from Luxembourg Bank-
ers’ Association (ABBL) to selected ministries. Australia develops a mandatory approach
Novethic, financed by the state controlled The fund industry body in Australia, the
Caisse des Dépôts, is an information agency Financial Services Council (FSC), has begun a
18Path to the Sustainable Financial Centre Switzerland
process to set new guidelines for ESG integra-
tion at Australian super fund firms. Fund pro-
viders will be required to implement and dis-
close ESG risk management policies under new
standards that will come into force in July 2013
and be mandatory one year later. The new guid-
ance follows an ESG Reporting Guide for Aus-
tralian companies published with the Australian
Council of Superannuation Investors in 2011.
The FSC has 130 members with combined
assets of more than Euro 1.5 trillion35.
Don’t forget stock exchanges
Another vehicle here is the Sustainable
Stock Exchanges project. This UN-organised
programme aims to require listed companies to
make disclosures about their sustainability per-
formance. So far it has been promoted mainly
by bourses in South Africa, Brazil and Malaysia.
19Path to the Sustainable Financial Centre Switzerland
3 Five key challenges
of sustainable finance
What does sustainable finance look like in practice? Research and
interviews for this report suggest that it can be defined by five main
issues. This chapter analyses the challenges for the path to develop the
Sustainable Financial Centre Switzerland, outlines the issues in
broad terms and looks at today’s picture. Suggested approaches for
dealing with the identified challenges will be aggregated into five
pillars for sustainability success which will be detailed in chapter 4.
Clients are key drivers
3.1 Clients and trust
The UN Global Compact CEO survey from
2010 for example highlighted that end consum-
A customer-oriented approach is a ers, including business and government cus-
fundamental requirement of a success- tomers, are the key driver of both how compa-
ful Swiss financial centre in the future. nies will manage societal expectations as well
as a company’s strategy for developing sustain-
able products and services.36
Trust is central to sustainable finance,
notably in the area of wealth management. If Another study among leading business
clients lack confidence in their financial advi- CEOs clearly indicates that customers are the
sor or broker, (or if they trust another one more), perceived most influential stakeholders in shap-
they will take their business elsewhere – thus ing the future business agenda.37
undermining the essence of sustainability. This
challenge is about financiers earning that trust, Furthermore, Switzerland has long been
namely addressing the principles that foster cli- active in promoting and adopting sustainable
ent satisfaction. It’s about appropriately reward- consumption. Scenarios for housing, transport,
ing advisors for providing valuable and pertinent food, consumer goods and public utilities have
products and services that satisfy clients. It’s been developed based on key factors, actors
also about competence – as with all professional and decisions to help develop effective policy
services, practitioners must have a solid under- approaches.
standing and skill set to optimally manage and
communicate both the financial and non-financial Within the OECD countries, Switzerland’s
impact of the products and services they offer. leadership is acknowledged notably in the area
20Path to the Sustainable Financial Centre Switzerland
of sustainable procurement. Switzerland leads the financial centre institution serving them. On
the Marrakech Task Force on Sustainable Pub- closer analysis this dissatisfaction can be broken
lic Procurement, an initiative to shift public pur- down into expectations not being met in all of
chasing towards goods and services that meet the individual elements of reliability, assurance,
high environmental, social and economic stand- responsiveness, empathy and tangibles.
ards throughout their life-cycle.
For finance to be sustainable,
Finance needs trust it must be trusted.
Trust is clearly one of the most important A Weatherill / IBM study explored the
requirements of long-term viability of the finan- notion of trust in a survey capturing the views
cial sector and it is coherent with the principles of high net worth clients and wealth managers,
of financial privacy. albeit on an international basis. The study con-
cludes that trusted financial advisors are almost
5 times more profitable than their untrusted
“Client centricity must be based on Swiss counterparts over the course of their client rela-
core values – we need to emphasise tionships thanks to a 26 % higher share of wal-
the value of the ability to listen and the let than untrusted advisors, double the amount
delivery of a reliable and quality of referrals and virtually no client attrition / turn-
service respected by privacy, discretion, over. The study also clearly illustrates similarly
to the University of Zurich study that key per-
modesty and independence”
formance indicators of wealth managers and
Interviewee of the Paper
clients are currently not aligned, pointing to a
fundamental flaw in the performance manage-
Looking closer at the relationship of trust ment systems.39
between the client and the financial advisor in
Switzerland, a study by the University of Zurich
corroborates the outcome of the interviews Swiss privacy
we held and concludes that the regaining and
strengthening of trust with clients represents the Privacy is an inherent part of Swiss cul-
most important challenge facing the future of ture, and financial privacy has long been a cen-
the financial sector with respect to the advisory tral element of Swiss finance where the under-
role they play.38 The results of the study indicate standing is rooted in a trusting relationship
the level of dissatisfaction with the services of between government and citizen. Switzerland
21Path to the Sustainable Financial Centre Switzerland
and the financial sector is at the forefront of partly covered by the proposed changes in the
preventing privacy abuse, by setting and prac- MiFID II43 regulation that are aimed at protect-
ticing stringent anti-money laundering stand- ing customers. We believe that ideally financial
ards.40 The Swiss government is now formu- advisors should act without being forced; they
lating a clear strategy on the issue of financial should know that protecting clients is in their
privacy and the protection of personal data in own interest.
light of current discussions on an international
level within the G20 and the OECD which must
then be consistently adopted by the financial Improved transparency
sector. Furthermore, the Swiss Federal Coun-
cil has acknowledged the importance of client Many interviewees pointed to the com-
security and has given the task to the Federal plexity of the financial sector’s products and
Department of Finance to detail the required services as an issue to address. Improved
legal basis in order to improve client protec- transparency – in terms of an open culture and
tion with regard to the distribution of financial reporting allowing customers and regulators
products.41 to verify interest-alignment and competence
is perceived by many as a must-have going
forward.44 FINMA has addressed this topic to
Expanding know-how some extent in its report on the distribution
of financial products in 2010, with the aim of
Many of those interviewed agreed that fostering the sector to disclose diligent, neu-
Swiss financial sector professionals hold many tral and transparent information on financial
of the ingredients required to be recognised and products.45
perceived as a trusted partner, this is notably
the case with regard to strong financial sector Finally, the notion of digital technology
know-how. However, our interviewees often needs to be considered in the transparency
emphasised that know-how will in the future argument. Current technology allows clients to
not be assessed on traditional financial skills both compare value and expand choices in a
alone, a broader understanding of social and simple and quick manner, thus emphasising the
environmental issues, the risks and opportuni- requirement for greater transparency. Continu-
ties that these create, will help financial advi- ing digital transformation is changing the way
sors to successfully create value for their clients people interact, share ideas and access prod-
in the future. Also, as we have mentioned ear- ucts and services.
lier, competence alone is insufficient to address
the satisfaction gap. Soft skills clearly differenti-
ate financial sector advisors in the eyes of the Our vision …
client.42
Future action in Switzerland to fit the
‘build trust through client centricity’ pillar
Align interest must recognise this social and behavioural
change that is only set to further continue –
The topic of aligned interests, whereby the change, which if managed well, will create
incentives to finance professionals are aligned significant competitive advantage.
with the best interests of their customers is
22Path to the Sustainable Financial Centre Switzerland
3.2 Innovation and regulation on an international level also impacts
the financial services industry in Switzerland,
legislation
for example the EU Markets in Financial Instru-
ments Directive (MiFID), a directive centred on
Competition, innovation and regu- increasing financial market transparency and
lation are essential to sustainable improving investor protection. Another example
finance is the Dodd Frank Act enacted by the United
States Congress which created new financial
regulatory processes that enforce transparency
There usually exists a tension between and accountability while implementing rules for
industry and regulators. On one hand, competi- consumer protection.
tion drives innovation and growth. On the other
hand, regulation is needed to prevent excesses
and to enable the desired conduct to those who “There is an extremely formal culture in
it applies. This tension will never disappear, nor Switzerland currently with regard to
should it; the key is to keep it balanced and dialogue between the different industry
healthy. Both competition and regulation are players and the regulators.There is also
essential to sustainable finance. This challenge insufficient constructive communication
addresses the appropriate regulatory or legal
between the different financial services
framework to support the development of the
companies.This is not supportive of efforts
Sustainable Financial Centre Switzerland.
to create a competitive advantage in
Switzerland as a sustainable financial
Ruling a new global financial system centre”
Interviewee of the Paper
There was a broad consensus among the
interviewees we dialogued with that regula-
tory change in the industry sector will become Addressing sustainability challenges
commonplace in the future. This change is needs new rules
perceived both in terms of the development of
hard rules but also notably the development Our interviewees recognised also that
of guiding principles and industry driven self- the sustainability megatrends – for instance the
regulation based on the strong belief in better war for natural resources, the impact of climate
risk management in the global financial system change and inequality of income and wealth are
in response to the public outrage following the phenomena that will have a fundamental impact
financial crisis and the political agenda this has on the way people live and companies do busi-
engendered. ness. It was often mentioned that this is likely
to become one of the main, if not the key driver
The difficulties experienced in the last of, government policies in the area of sustain-
five years in the financial services sector have able finance. At the same time, and equally as
exposed significant public policy flaws that the important, customers and investors are also
Swiss Financial Market Supervisory Authority expected to push for more long-term orienta-
is currently addressing, for example through tion and behaviour by financial sector players
the Too Big to Fail (TBTF) legislation. Further and their management.
23Path to the Sustainable Financial Centre Switzerland
The sustainability megatrends will open Ending the compensation debate
up new markets and business models for by adopting adequate standards
organisations that both understand the chang-
ing dynamics of supply and demand, and know Executive compensation was another
how to mitigate the risks and grasp the oppor- material topic that was highlighted in our inter-
tunities. The insurance industry with its familiar- views and research. In terms of compensa-
ity with risk management, modelling and limi- tion, the Financial Stability Forum’s Principles
tations can provide valuable guidance to other for Sound Compensation Practices47 and their
financial services segments. A prospective reg- Implementation Standards48 which were devel-
ulatory framework, that is fair and balanced, that oped on the back of the financial crisis to align
is driven and supported by the industry sector, compensation with prudent risk-taking, par-
that increases transparency and does not sti- ticularly at significant financial institutions, have
fle competition (and subsequently innovation) been endorsed by G20 leaders and represent a
will facilitate these opportunities and the sub- concrete and credible solution providing practi-
sequent creation of prosperity that will address cal recommendations to both national authorities
the sustainability megatrends. and firms to address the sensitive issue of exec-
utive compensation in a sustainable manner.
Past weaknesses partly still valid
Our vision …
The TSF has looked at the regulation
question in the past. The TSF Symposium in A balanced regulation is essential to sus-
2009 concluded that the domestic character tainable finance, and so is supervision.
and focus of regulation was inadequate given The supervisors must be treated with the
the global integration of companies and econ- priority, diligence and respect they deserve,
omies. Further, the risk posed by individual though the supervisors themselves must
organisations to the financial system as a whole adopt a stakeholder-oriented approach.
was not sufficiently accounted for. The Sympo- As stipulated in article 5 of the Financial
sium further highlighted insufficient disclosure Market Supervision Act49, the supervisory
requirements, too little public intervention in authority’s objective is to contribute to
corporate governance and the perceived insuf- sustaining the reputation and competitive-
ficiency of funding for the national regulatory ness of Switzerland’s financial centre. For
bodies to attract high calibre professionals with competitive advantage, we believe appro-
the requisite training and experience to appreci- priate, stable and recognised supervision
ate and analyse the complexity and implications needs to be maintained.
of the issues facing the sector as a whole, as
crucial factors impacting the sector difficulties
during 2008 – 9.46 Many of these conclusions
remain largely valid today, though it should be 3.3 Investment and
recognised that FINMA has since made pro-
long-term
gress to enhance the quality of its most senior
professionals.
The financial services industry has to ad-
dress client’s and society’s needs in the long term.
24Path to the Sustainable Financial Centre Switzerland
Sustainability is, by definition, about the plan and (3) optional tax-privileged provision.
long term. Only over generations can a com- This is a strong basis to build on.
pany, an industry or an investment be judged
as long-lasting. This challenge is about advo-
cating the business case for long-term invest- How much can the financial markets
ment – notably to asset managers, emphasising contribute?
the benefits to the financial services sector, to
customers and to society of doing so. It focuses Current figures on Swiss pension fund
mainly on the pension fund industry, a very tan- performance and returns show a below-expec-
gible example of where the long-term philoso- tations figure, depressed by short-termism and
phy is perceived as a fiduciary duty. financial instability. One large institution meas-
uring returns since 2000 communicated an aver-
age figure of 1.85 % yearly return against prom-
Investing for tomorrow ised returns of 3.3 to 3.7 %.51 When one looks
and compares how selected pension funds
The interviewees we spoke with were managed in other countries are performing,
in agreement that a healthy financial centre there is often a gulf in performance compared
needs to anticipate demographic and migra- to the Swiss-based funds. The above-cited arti-
tion developments and bring products and ser- cle details that some of the Canadian funds for
vices into line with the changing customer base example still bring yearly returns of over 10 %.
in the different markets served. As people live Swiss pension fund owners simply accept these
longer and state support declines, the com- figures as they do not have the power to influ-
petitive frontline will likely shift from lending ence the way their savings are invested in the
towards helping people to fund and manage current legislation. The pressure on pension
their retirements. Furthermore, urbanisation fund reform in Switzerland is increasing though.
increases the stress on physical and service The same article clearly identified required
infrastructure, creating demand for invest- improvements in the regulatory environment,
ment to support the migration of people into the incentive system of pension fund managers
cities.50 and the level of professionalism and expertise
of the whole industry.
The overriding purpose of long-term sav-
ings institutions, notably pension funds is to
deliver financial security in retirement or income “Research shows clearly that companies
at other stages in life, to millions of ordinary forego investment opportunities with posi-
people. To do this, these investors depend on tive long-term net present value in
markets that are stable, well regulated, trans- order to satisfy the market’s short-term
parent and fair, thus closely linking this chal- performance expectations. Companies
lenge with the previously detailed one in this
have little incentive to invest in serious
Paper. The Swiss pension fund system is well
emission reductions (beyond the lowest
financed, money is available, there’s a strong
of the low-hanging fruit) if their share-
track record in asset management and Switzer-
land enjoys a well established pension scheme
holders would prefer short-term earnings
based on three pillars (1) old age and survivors’ or share buy-backs over capital expendi-
insurance, (2) mandatory occupational benefit ture or R&D with a longer-term payback
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