To meet net zero targets, over 1 million Swiss homes need urgent renovation work. Banks face a herculean task.

Key4 seems to be UBS's latest answer to the Swiss neo-bank threat. But last week's launch overlooked a few sentences that deserved more attention. Part of the new product line is a savings account that comes with a promise. The major Swiss bank will only invest in «green» mortgages that finance sustainable construction.

Almost in passing, UBS mentioned something that could help the country become climate-neutral. Approving loans in the domestic mortgage business that are linked to sustainable criteria. The leverage would be immense. According to data from the Swiss National Bank (SNB), the total credit volume of domestic debtors in 2021 was 1.1 trillion francs (roughly equivalent to the US dollar figure at current exchange rates).

Cutting Energy Consumption by a Quarter

Swiss property is a climate killer. Buildings are responsible for about a quarter of CO2 emissions and 40 percent of all energy consumption. Those are the findings of a study published on Tuesday by the Zurich University of Applied Sciences (ZHAW) under the auspices of Swiss Sustainable Finance (SSF) and the Association of Swiss Cantonal Banks.

The authors postulate that renovating and renewing Swiss property, and quickly, is a central imperative. Environmentally-friendly buildings consume up to 25 percent less energy and owners would have fewer operating costs to contend with while benefiting from higher selling prices and rent.

Government Targets

The word to watch out for here is potential. Numerous banks have climate-friendly mortgages on their shelves and support sustainable building with perks and rebates. But the authors of the study say that those incentives are only used with new buildings. But these already have to fulfill high standards and any impact on climate change from them will be limited.

The situation looks different with buildings that are already standing. Estimates show that there are about 1 million homes that need to be fully renovated - but current figures show that only 1 percent of them are undergoing any kind of work. According to analysis from other sources, that is not enough to reach the government's stated climate targets even though in 2019 it decided to cut greenhouse gas emissions to net zero by 2050.

That means, in short, that the sum total of property stock in the country would have to stop emitting harmful emissions by then.

More than Incentives Needed

It will not be lucrative for Swiss banks if the real estate sector fails to meet future targets. They are publicly committed to climate change and they have a deep interest in a CO2-light client portfolio. But they mostly use incentives to get the needed investment going. That is usually preferential interest rates, certification support services, and energy consulting for sustainable properties or deep renovation work.

SSF head Sabine Döbeli told finews.com that additional steps would pay off. «Banks will also have to finance the necessary transition and transformation to a sustainable and climate-neutral world», she maintains.

A Few Headaches

Loans are the most important sources of finance in the mortgage and commercial banking business and they are lucrative. New, profitable business sectors would open up. «Sustainable finance products», says Döbeli, «are a large opportunity for banks to find new sources of revenue and maintain or expand current client relationships.»

But there are still a few headaches ahead, particularly related to owners who refrain from urgently renovating buildings because of the expense and complexity. The tactic of shaming the worst climate offenders, which has become routine in sustainable investment quarters, simply does not work in the Swiss real estate market, the study warns.

Not Realistic

The study's authors say that changing the approach without regulatory support is not realistic for banks as it would impact their current business far too negatively.  And when it comes to climate, it is fixing the problems with the worst offenders that will be critical in whether the objectives are reached or not. The study also generally points out that the sustainable lending business is far less developed than investing.

Does this make a case for a state-owned, green bank as a number of members of parliament are asking for? Döbeli is skeptical. There is no lack of capital out there for sustainable solutions. Her argument is that the default rate on green mortgages is less than that for normal mortgages and banks should be able to refinance them more cheaply. 

«It is clear to me that a cheaper green mortgage should help drive house owners to start long-overdue renovation work.»