UBS' and Credit Suisse's have ambitious climate targets. Their balance sheet risks are one reason for that. An upcoming Swiss vote on a CO2 law is key for Swiss banks.
«Everything we do starts with our purpose. Our story.»
If this sounds like a line from some mission statement of an environmental NGO or similar, it isn't. It was part of UBS CEO Ralph Hamers' presentation during the first quarter earnings conference in April where he sketched out the basics of his new strategy for the first time.
Just Marketing?
The UN's Sustainable Development Goals, or SDGs, require zero emissions by 2025, including a full stop to any financing of climate damaging sources of energy, such as coal. Both UBS and Credit Suisse adhere to this and both have their own sustainability committees. At Credit Suisse, Lydie Hudson was tasked as CEO of sustainability, research, and investment solutions last year.
Environmentalists, however, remain skeptical that banks do this out of pure altruism for the environment, society and sustainability. Both UBS and CS have faced protests in the past. NGOs also repeatedly complain that banking is not changing fast enough.
Other critics see their efforts as pure marketing.
Still Voluntary...
Few are paying attention to the inner tensions driving the banks towards more sustainability. UBS and Credit Suisse have a clear interest in getting climate risks off their balance sheet. They are still doing it voluntarily by following the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), part of the Financial Stability Board (FSB).
But the number of requirements has increased in number in the past few months and smaller financial institutes will have to pay attention to them in the medium term.
Official Support
«UBS and Credit Suisse has included climate risk as part of its balance sheet valuation process since 2o19», Hans-Ruedi Mosberger says, head of asset management and sustainability at the Swiss Bankers Association. «As part of that, climate risks are already relevant to their capitalization.»
Mosberger connects the dots in the industry's sustainability efforts and it now takes up almost all his time. Not least given that COVID-19 has accelerated sustainability trends in Switzerland.
In January, the federal government lent its official support to TCFD. «Disclosure of environmental, social and corporate governance is coming, and it will have an impact on the banks just as much as the real economy», Mosberger says, looking at the future.
Declining ESG Risks
In the future, Switzerland's two largest banks will have to know exactly what climate risks in the balance sheets of its business partners. Both already publish detailed sustainability reports for every financial year.
A spokesperson for UBS said that it does not have any significant climate related risks last year. The proportion of CO2-relevant assets on the balance sheets was relatively small at $5.4 billion and down nearly two percent from the end of last year, after declines of 2.3 percent at the end of 2019 and 2.8 a year earlier.
«In order to protect ourselves from climate risks we limit our risk uptake related to CO2-relevant assets and evaluate the impact of UBS activities against the risks posed by climate change», the UBS spokesperson added.
Slashing Energy Lending
Credit Suisse stated in its 2020 sustainability report that its potential exposure to climate-sensitive industries under the TCFD standard was 4.5 percent, when measured against total lending volume. Oil and gas financing has declined since 2015, totaling 7.1 billion US dollars at end-2020, against 9.1 billion back then.
«Financing limits for coal plants and mining as well as the use of the Client Energy Transition Frameworks in such industries will help to reduce our engagement in in CO2-intensive and climate sensitive companies further,» Credit Suisse said.
Fear of the Unsaleable
When you have to use more capital to finance coal, even if it indirect, it helps build an understanding that such branches are riskier from the point of view of climate change, Mosberger said. «A corresponding valuation of the positions in the balance sheet helps prevent the banks from sitting on stranded assets.»
Ironically, in all this, Credit Suisse is currently having trouble getting money lent to Greensill's steel and coal funds back.
Regulators are increasingly interested in these kinds of positions. Swiss financial regulator Finma has set out climate targets to 2024 as part of its supervisory activities. Switzerland's central bank also joined the Network for Greening the Financial System (NGF), a coalition of willing central banks.
Banks in Support of CO2 Law
The next turn of the regulatory screw for Swiss banking looms in June when Swiss voters will decide on a revision of the so-called CO2 law in a referendum. It foresees a further cuts in greenhouse gases and emissions in Switzerland. If approved, Finma and the Swiss National Bank will formalize Article 66 related the supervision of climate related financial risks.
The bank lobby, usually skeptical about new regulation, supports it this time. «The CO2 law creates an initial and important framework to help a full and complete transition away from fossil energy fuels,» argues the SBA (in German). The lobbyists, this time, seem to be following the wishes of the broader Swiss economy.
Green Mortgages
The banking lobby isn't only thinking of the international competition so that the banks can position themselves as a hub for sustainable investments. As Mosberg emphasizes, it also offers opportunities for retail banking domestically.
«Local cantonal banks are in a good position to drive ESG criteria in banking» He believes, for example, that there is a great deal of room to maneuver when providing mortgages to climate-friendly construction. In short: «ESG needs to be understood as an opportunity for the financial industry.»
