Duties and rights

The fiduciary duties that apply to pension funds when investing assets include security of the investment, risk diversification, sufficient return (normal market return) and sufficient liquidity.⁽²⁾ In addition, there’s the obligation to exercise shareholders’ rights when investing in Swiss shares. Current legislation doesn’t explicitly mention sustainability as an element of fiduciary duties in connection with pension fund investments. Accordingly, there’s also no legal obligation to take climate impacts into account when investing.

However, according to a legal opinion, there’s an implicit obligation for pension funds to take climate risks into account when evaluating the risk-return profile of investments.⁽³⁾ The Federal Social Insurance Office (FSIO) states that pension funds must include climate risks in the risk assessment of investments.⁽⁴⁾ ASIP states that pension funds should address ESG risks and sustainability aspects when defining the investment strategy⁽⁵⁾.

Climate reporting enshrined in law

In November 2021, the Swiss Federal Council adopted various recommendations and measures relating to sustainability in the Swiss financial centre. They affect all financial market players and pension funds. The following measures are included:

• Publication of comparable and meaningful climate impact indicators and corresponding transparency for all financial products
• Uniform definition of sustainability impacts
• Joining climate alliances and industry initiatives
• Extension of the mandate of the Occupational Pension Supervisory Commission (OPSC) in relation to sustainability

The Federal Department of Finance (FDF) and the Federal Department of the Environment, Transport, Energy and Communications (DETEC) are to examine whether the financial industry has implemented the recommendations. What’s more, in June 2022, the Federal Council launched the ‘Swiss Climate Scores’ as transparency indicators for the climate compatibility of financial investments.

Combating greenwashing

In November 2021, the Swiss Financial Market Supervisory Authority (FINMA) published Supervisory Notice 05/2021 Preventing and Combating Greenwashing. In it, FINMA calls for more transparency in the disclosure of sustainability aspects of Swiss collective investment vehicles that pursue an ESG investment strategy. Pension funds should also benefit from this transparency as they invest through these kinds of vehicles.

Active self-regulation 

The Asset Management Association Switzerland (AMAS) together with Swiss Sustainable Finance (SSF) took a first step towards creating standardised definitions of ESG investment approaches in December 2021.⁽⁶⁾ In addition, AMAS defined new ESG metrics for the first time in spring 2022 as part of the transparency of self-regulation that real estate funds must publish in their annual reports as of 31 December 2023.⁽⁷⁾ In September 2022, AMAS published the new self-regulation on transparency and disclosure for sustainability-related collective assets. This is intended to ensure quality in the asset management and positioning of sustainability-related investment funds as well as transparency within the Swiss asset management industry. In September 2022, the Conference of Managing Directors of Investment Foundations (KGAST) recommended that investment foundations collect and report ESG indicators for directly investing real estate investment groups in line with the AMAS guideline⁽⁸⁾.

In 2021, ASIP established a working group together with other industry associations (AMAS, KGAST, SSF, CFA Switzerland and others). By the end of 2022, this body is to draw up a guideline on how pension funds can create transparency regarding sustainable investments. The guideline is intended to define which key figures pension funds should disclose with regard to ESG investments and it should contain the following key points:

• Focus on ‘E’ key figures, as ‘S’ and ‘G’ key figures are not widely established or available; these are mainly key figures for CO₂ emissions (e.g. CO₂ intensity)
• Differentiation between key figures at basic and advanced level
• Presentation of the key figures for the investment portfolio and the benchmark
• Aggregation of key figures at mandate or investment product level vs. total assets
• Evidence of a so-called ‘transparency ratio’ if not all asset classes or investments are covered by the key figures
• Disclosure of qualitative information (e.g. ESG investment strategy and active engagement)

In parallel to this initiative, ASIP published a practice-oriented implementation guide⁽⁹⁾ in July 2022 on how pension funds can take ESG criteria into account when making investment decisions. This guide covers the following aspects, among others:

• Embedding ESG criteria in the investment strategy and investment process
• Description of ESG investment approaches and their implementation in different asset classes and with different investment instruments
• Guidance on the step-by-step implementation of ESG aspects in investing pension fund assets

Integrating ESG risks into the investment process

Most Swiss pension funds consider the integration of ESG factors into the investment process as an element of risk management as part of their fiduciary duties.⁽¹⁰⁾In particular, this means that they consider the possible impacts of environmental risks and social and governance aspects on the investment value to the same extent as financial aspects in the investment decision-making process. This is most closely in line with the ‘ESG integration’ approach established in the asset management industry. The AMAS self-regulation defines ESG integration as ‘the consideration of sustainability risks and opportunities in traditional financial analysis and investment decision-making processes based on systematic processes and appropriate research sources’. In practice, pension funds now have a wide range of investment products that follow the ESG integration approach.

The question of how to classify targeted exclusions of certain companies and industries comes up time and again. This approach – also called ‘negative screening’ – primarily involves exclusions based on norms and values; for example, the exclusion of manufacturers of controversial weapons. Some Swiss pension funds have applied this norm-based exclusion policy in the past. Because the moral values and preferences of board members and the beneficiaries of pension funds vary and depend on their professional focus, values-based exclusions are multifaceted and controversial.

With the exception of standards-based exclusions, which are mandated by law, pension funds must generally evaluate ‘voluntary’ values-based exclusions in the context of their fiduciary duties. The inclusion of specific ESG investment approaches based solely on moral values or image considerations should not conflict with fiduciary duties. For example, withdrawing from the alcohol industry because the risks of legal action make it a poor long-term investment would be consistent with fiduciary duties. By contrast, withdrawing from the alcohol industry because of the idea that it’s wrong to be associated with a product that is harmful to health would be consistent with moral values, but not with fiduciary duties.

Interestingly, the new AMAS self-regulation on transparency and disclosure for sustainability-related collective assets doesn’t consider investment products that exclusively apply exclusion or ESG integration as a sustainability approach to be sustainable. They may not be designated or positioned as ‘sustainable’. For the time being, it appears that asset managers and institutional investors need to agree on how to interpret the term ‘sustainability’.

Of course, pension funds are free to pursue other advanced investment approaches beyond the ESG integration approach – such as the best-in-class approach – or thematic investments like climate alignment. However, these investment approaches must always be defined and implemented in the context of fiduciary duties.

Most sustainable investment approaches are fundamentally active. In concentrated investment strategies, such as best-in-class and positive screening, they may increase the investment risk relative to the broader market due to comparably lower diversification. Investors should be aware that even so-called passive sustainability strategies that track a specialised ESG index are actually active strategies. This is because in this case the active investment decision is simply delegated to the index provider.

What’s more, certain ESG investment approaches, for example with a focus on reducing greenhouse gas emissions, can increase concentration risk. This is because ‘low-emission’ industries and issuers – such as financial services or information technology companies – are overweighted in the portfolio.

Monitoring impact on return and risk

At the heart of the implementation of ESG investment approaches is the monitoring of investment outcomes such as investment return, investment risk and ESG-specific metrics. We know from experience that many challenges remain in this regard^(11):

• Insufficient quality of ESG data, analyses and reporting
• Insufficient opportunity to monitor the evolution of ESG metrics over time and measure the impact of ESG factors on investment returns and risk

Only a small minority of asset managers in Switzerland can currently provide a meaningful analysis of the impact of ESG investment decisions on investment returns and risk. According to a co-study⁽¹²⁾ by PwC and bmpi among Swiss asset managers, custodian banks and institutional investors, 75% of study participants cannot edit any such risk impact. Accordingly, investors cannot adequately measure whether ESG investment decisions actually contribute towards reducing investment risk.

_{[1] See Swiss Sustainable Investment Market Study 2021, Swiss Sustainable Finance (SSF) and University of Zurich, 2021.
[2] See Art. 71 Federal War Victims Relief Act (BVG), Art. 49a, 50-51 Ordinance on Occupational Retirement, Survivors’ and Disability Pension (BVV2).
[3] See Consideration of Climate Risks and Impacts on the Financial Market, prepared on behalf of the Federal Office for the Environment (FOEN), 2019.
[4] See Communications on Occupational Pension Plans No. 152, BVS, 6 May 2020.
[5] See ASIP technical bulletins FM116, FM112.
[6] See Recommendations on Minimum Requirements and Transparency for Sustainable Investment Approaches and Products, AMAS and SSF, December 2021.
[7] See AMAS Circular 04/22 Environmental Indicators for Real Estate Funds, AMAS, April 2022.
[8] See Environmental Indicators for Real Estate Investment Groups}, _{KGAST, September 2022.Publikation von vergleichbaren und aussagekräftigen Klimaverträglichkeitsindikatoren und entsprechende Transparenz bei allen Finanzprodukten
[9] See ESG Guide for Swiss Pension Funds, ASIP, July 2022.
[10] See Swiss Pension Funds Through the Lens of Sustainability, R. Anhorn, ZHAW, 2021.
[11] See ESG Strategies for Pension Funds: Implications for Investment Controlling, R. Garcia, College of Employee Benefits, 2021.
[12] See ESG Investment Reporting Survey, PwC and bmpi, 2022.}