Sustainable Finance in Switzerland: the end of an era or the start of a promising future?
By Benita Dreesen and Xinxiu Liu
On 24 June 2020, the Swiss Government adopted a report and guidelines on sustainability in the financial sector. The aim is to make Switzerland a leading location for sustainable financial services.
Sustainability creates incredible opportunities for Switzerland’s financial center. Combined with digital technology, sustainability drives innovation forward and makes finance more competitive. Switzerland’s stability, open economy, strong rule of law, excellent infrastructure and efficient public services are all factors that create optimal conditions for sustainable businesses. With its long tradition, expertise and high-quality standards, the Swiss financial sector is in a perfect situation to further strengthen its position in this field.
We spoke to Raimondo Costa, Partner of Q_PERIOR Switzerland on what he sees as the newest trends and evolutions in Sustainable Finance (SI); especially in a new post-Covid-19 era.
Switzerland claims to take lead in Sustainable Finance; could this be greenwashing?
In my opinion it is not about greenwashing. When the international convention on the automatic sharing of banking information (bank secrecy) entered into force on January 1, 2017 or due to various Tax initiatives before, many declared that the Swiss banking sector would not bounce back from it. This proved to be wrong but it pushed us to improve our wealth management services, asset management capabilities and it increases the need to (re-)think the banks service model for future growth and income in Switzerland. This means that today, Switzerland is prepared for the future and even outperforms the neighboring countries as far as I can see. In one word, Swiss banking industry is in my opinion well established and stronger or better said more sustainable than before but the future service model of banks will lead to more sustainable banking products, sustainable thinking and also sustainable solutions and flexible IT platform architecture.
What does Sustainable Finance mean exactly?
Years ago, Sustainable Finance was mainly about portfolio management (not investing in bad/unethical companies); but this thinking has evolved in the meantime. Today we aim to do an in-depth due diligence of the ESG (environmental-social-governance) factors of an organization which is still very difficult. Besides looking at the investment/product area, we also need to have a look at the credit part because customers often ask: who do we or a company give credit to?
The investment and credit part alone are not enough. Sustainability in banking involves the whole value chain, covering e.g. the employees’ commuting chain, the banks advice process and products, the banks suppliers and value chain within and outside of the bank. For every little piece of the value chain, we should analyze if it runs and is sustainable. Sustainable financing is really beyond the investment aspect , but has a much deeper and broader meaning if banks take it seriously.
Personally, I think sustainability is not only the E, the S and the G. It is also sustainability in terms of economic decisions when it comes to solutions and the IT for new business models.
Q: Is the Market ready for such an in-depth change?
Some established players in the wealth management area don’t see that their business models are changing; they are convinced that the clients need personal contact which a digital platform cannot fulfill. Their primary problems is to find the new future income booster. And sustainable banking might be of help for them but is maybe not the real driver.
However, there are small Fintech players entering and testing our markets and they are taking already small parts of the banking business. This is rapidly growing as the COVID-19 pandemic pushed many of us to go more digital. These Fintech companies create new products, they provide processes, tools, and data services, totally finetuned on each particular client segment needs. Meaning they have the advantage to build their solutions around a business need without any legacy. Their IT is much faster and more efficient in delivering solutions.
For us the big question is: what is the future of banking? How does it look like? Is it possible to build a universal bank just with an assembled set of Fintech solutions paired with banking services? Do existing smaller banks go more into specialists and the bigger ones into platforms? How many platforms in one bank service are can co-exist? One big Swiss bank is now going to launch its mortgage platform; for sure it will change and test the market in this segment. We will see what happens next.
Sustainable financing: what are the main challenges?
The main challenge is to decide if a bank intends to become fully sustainable and sees Sustainability as part of its service model or if the bank just wants to fulfill the minimum requirements. If the bank decides for the first, it must ensure that every single part of a company’s value chain is sustainable. For instance, to understand the financing part (with whom does the bank do business), to see through the suppliers chain (e.g. from cleaning team of the office to the core banking provider and the external lawyers or service companies), to track the origin of energy, to really know the employees and all the suppliers.
What is the current situation of Sustainable Finance legislation in EU and Switzerland?
EU Legislation is coming up in the middle of 2021 with the EU Taxonomy directive and the definition of the ESG Factors as the first part. As an EFTA (The European Free Trade Association (EFTA) member, Switzerland is linking into the EU legislation and usually adopts EU Directives with slight changes, in many cases going one step further.
How many Swiss banks have embedded Sustainable Finance in their organizations?
Today, there are I guess about 20 banks listed in the Sustainable Finance Group in Switzerland besides some insurance companies and banking suppliers, so in total max 10% of the Swiss banks volume I assume. Lots of smaller banks (retail, cantonal banks) are observing the current situation and will follow the trend going forward. Some banks already see business opportunities and are pushing to be the frontrunner in Sustainable Finance. The challenge for all of them is between their involvement in the trends discussion and to actively define the own banks future stake in that game.
Is Covid-19 helping and pushing the sustainable finance topic forward?
Yes, we feel that consumers and businesses are rethinking about the ‘what, where, how and why’ they do things – the pandemic seems indeed to be a big trigger to re-think the future service model. We see firsthand that projects can be developed without people being physically at the office, which is a proven case. Less workspace reduces the ecological footprint. Covid-19 has been a catalysator. But this is more for digitalization than real sustainability.
The behavior of people and what they expect from their bank is changing as well; this pushes the bank to offer more sustainable products. Swiss banking customers demand sustainability – for them it’s a kind of lifestyle like it’s with the Bio trend when you buy your groceries. For Bio you pay more but it gives you a better feeling.
The past few years, banks have seen their margins shrinking – they need to find new products/services they can scale. We expect that pricing will be done differently in the future and that every individual wants its own price. Technological innovation and future price models, where sustainability will generate more income, will make this possible. Sustainability might lead to higher margins due to sustainable products pricing.
About Q_PERIOR (https://www.q-perior.com/en/about-us/)
Q_PERIOR is an international management consultancy with a focus on management and IT consulting. It was founded in 2011 and the name “Q_PERIOR” stands for “Quality and Superior”. It has 15 offices worldwide across Europe and North America. Q_PERIOR ‘s core sectors include insurance, banking, travel, transport and logistics, automotive and industry, energy and the public sector.
Contact: Hohlstrasse 614, 8048 Zurich- telephone: (41) 44 437 20 20; email: Raimondo.costa@q-perior.com