Dr. Matthias Breier, Head of ESG Product, FE fundinfo, outlines the key components for successful reporting by fund managers under the scope of the Swiss Climate Scores.
In order to reduce greenhouse gas emissions to net zero by 2050, Switzerland has decided on self-regulation with the Swiss Climate Scores. Developed by the Confederation in cooperation with the financial industry, the Swiss Climate Scores aim to help position the country as a leader in ‘credible climate transparency’.
It is a big step for Switzerland which – with more than CHF8.9 trillion (US$7.9 trillion) of AuM – is a significant wealth management hub. It would mean that any changes made to fund level disclosure standards would have significant global effects and get market-wide attention.
Acting as key data points, the Swiss Climate Scores are primarily based on the Taskforce on Climate related Financial Disclosures (TCFD) framework which is broken into a variety of different factors. These being greenhouse gas (GHG) emissions (Scope 1, 2 and 3), exposure to fossil fuel activities, verified commitments to net zero, management to net zero, credible climate stewardship and the optional global warming alignment.
However, the Swiss Climate Scores take a different approach from the EU’s disclosures under the Sustainable Finance Disclosure Regulation (SFDR), as they are designed to do more than show the current degree of alignment with the taxonomy or the percentage of the portfolio in sustainable assets. They aim to be forward-looking indicators, showing the extent to which, the portfolio is on track to meet the target of net zero emissions by 2050 and meet the Paris Agreement goals.
Creating a best-in-class solution
The Swiss Climate Scores were always going to be a logistical challenge for fund managers to deal with, so finding the right solution to ease the reporting requirements was always going to be a vital step into their success.
Having sort insight from key stakeholders including the Swiss government, the Asset Management Association Switzerland, wealth managers and industry standard-setters, we identified three main areas for consideration that would be vital components to any successful Swiss Climate Scores reporting solution.
Consideration one: Content
The first consideration is what content to include. With the Swiss Climate Scores there are different data types to think about and weigh-up. On the one hand there is the qualitative and fund strategic data. On the other hand, there is the quantitative data which will include five main data points that need to be calculated. These are weighted average carbon intensity, the carbon footprint; the exposure to fossil fuel activities such as coal, global warming alignment and verified commitments to net-zero.
Considering the ongoing discussion about Scope 3 emissions it is important to mention that the Swiss Climate Scores explicitly require Scope 3 reporting. On the qualitative disclosure side of things, the recommended publication also pays tribute to the topic of stewardship and engagement. This is specifically important as an increasing number of regulators acknowledge that only stewardship and engagement can lead to positive impact for funds based on a secondary market. So, the Swiss found a lean way to define some standards to cover and investigate the impact a fund can make which will outline the huge differences between active and passive funds.
Consideration two: Design
The second point for consideration is the template design. Providing a reporting template that is in line with the recommended Swiss Climate Scores framework is vital, while also ensuring the capabilities that allow for the flexibility of users to create their own conditions and glossaries.
On a recent FE fundinfo webinar, a government representative explained that the suggested design is only one idea and that their expectation is the data is published as a group. The market, however, is strongly pushing for the use of a template that makes it quite clear that these are the Swiss Climate Scores. Nevertheless, this provides the flexibility to align the template with one’s own design and corporate branding to make it a template that can be used with clients.
Consideration three: Operations
The third important point to create a successful reporting solution is for report production to be scalable. This means that the system is still able to cope with the requirements in a way that can produce millions of documents each month. The Swiss Climate Scores are expected to be used for every space where they make sense (corporate investments right now). This means they are also expected to be handled on client (institutional and retail) portfolio level in Switzerland.
This goes hand-in-hand with translations. As the Swiss Climate Scores are expected to be a client facing report, it is important to consider the translation of the report into the different languages in Switzerland. The production and publication of reports in Italian, German, French and potentially also English very often creates further issues and new requirements for production as well as design.
What’s next for the Swiss Climate Scores?
At the time of writing, Swiss Climate Scores remain a voluntary disclosure. You must assume, therefore, that the early adopters will be those that expect them to show their portfolios in a good light.
Time will tell if funds in Switzerland choose this route and especially if non-Swiss asset managers will also follow the recommendations of the market or if a considerable number look to only adopt the disclosure requirements under the SFDR.
For the Swiss asset and wealth managers the question is almost no question at all. Our experience shows that the Swiss Climate Scores receive a lot of attention in the market and are very much welcomed by the market participants.
Failure of adoption, however, could also lead to voluntary reporting becoming mandatory. Representation from the State Secretariat for International Finance (SIF) indicated that they want to go with the Swiss Climate Scores as a recommendation but if the market does not respond to it, potentially a regulatory requirement will be necessary.