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    The role of the Swiss financial center in financing the climate transition

    Opportunities waiting for banks and asset managers that offer financing solutions for a more sustainable economy.

    Due to the regulatory waves during the last five years or so, we are currently witnessing a phase of “mainstreaming” in the field of Sustainable Finance.

    While constructive discussions about the right standards, frameworks and ratings are necessary and sensible, there is a risk that we lose sight of the most important question of this generation:

    • How do we tackle climate change?
    • And how, by extension, can the financial system provide the funding to the real economy that is necessary to reach net zero by 2050? 
    Corina Wipfler
    Corina Wipfler

    Partner, Financial Services & Sustainability Services

    KPMG Switzerland

    Hans-Ruedi Mosberger, Head of Sustainable Finance at the Swiss Banking Association, estimates the funding gap obstructing the achievement of our climate goals both in Switzerland and globally and highlights the immense opportunities for Swiss financial institutions that are looking to address it. He also points out the importance of blended finance instruments for climate finance, an innovative investment approach that combines capital from public, philanthropic, and private sector investors. 

    Can financial success go hand in hand with positive social and environmental impact? Not always – but looking ahead, it is not hard to see that where the highest impact can be generated, the greatest commercial opportunities will lie.

    Mosberger Hans-Ruedi Hans-Ruedi Mosberger

    Guest article by Hans-Ruedi Mosberger, Head of Sustainable Finance, SBA

    Climate change is a global challenge that can only be overcome through concerted efforts. Financial resources will be needed to meet the targets of the Paris Agreement. Compared with the need for climate finance, the cash flows currently available for climate protection are inadequate – and not growing at the rate needed.

    The Standing Committee on Finance of the United Nations Framework Convention on Climate Change (UNFCCC) estimates that the transition to an emissions-free and resilient economy by 2050 will require annual investment of USD 1.6 to 3.7 trillion. Similarly, according to an analysis by the Glasgow Financial Alliance for Net Zero (GFANZ), funding of USD 32 trillion will be needed by 2030 alone if we are to reach net zero by 2050 – that is USD 3.2 trillion annually (2021-2030).

    This article examines the role of the Swiss financial center from two different perspectives: First, against the backdrop of the Swiss economy’s transition to net zero by 2050 and, second, in the global context of mobilizing private funds to achieve climate targets.

    Switzerland’s climate transition can be financed

    Switzerland – responsible for 0.1% of global and 1% of European CO₂ emissions – is faced with the challenge of reaching net zero to meet growing global demands for sustainability and climate protection.

    Considerable effort will be needed to achieve this target, particularly in the ten highest-emission sectors, which together account for 87% of Switzerland’s total emissions. Transitioning to a low-emission economy will require investments of CHF 387.2 billion by 2050, most of which will have to be made over the next 30 years.

    This funding will be crucial for reducing greenhouse gases and accounts for around 0.2% of the global investment volume. A large portion of the funds will go into the areas of “light-duty road transport,” “buildings” and “heavy-duty road transport,” with the required annual investment equivalent to around 2% of Switzerland’s gross domestic product.

    The Swiss financial center can cover a large share of the investment needed to mobilize financial resources for the transition, with 83% potentially being financed by banks and 8% by the capital market. The required bank loans would account for 10.8% of annual lending by Swiss banks, while capital market financing would only represent a small percentage of annual bond issues. In addition, public goods are traditionally financed by the state and could be in this scenario, e.g. through the expansion of public transport. To make financing easier, banks need to be proactive. At the same time, the general conditions need to be favorable. 

    Switzerland has the potential to become a leading hub for sustainable finance. This would strengthen the competitiveness of the economy and enable the country to make an effective contribution to climate protection.

    With the right approaches and support of the financial sector, Switzerland’s climate transition can be financed, sending a powerful signal to other countries.

    91% of the required financing volume can come from the financial center

    Financing sources for net-zero investments, 2020-2050, CHF bn p.a.

    Graphic: SBA * Source: BCG and SBA's own calculations

    The global perspective – mobilizing private funds for the climate transition from a Swiss standpoint

    For Switzerland, financing the transition is an ambitious but not unattainable goal. However, if we begin to explore where the greatest challenges for climate finance lie, we note that almost two thirds of global greenhouse gases are emitted in emerging and developing countries according to the Center for Global Development (CGD). 

    Investments in climate-friendly infrastructure projects in emerging markets differ significantly from traditional liquid investments in developed economies. The former are subject to higher risks due to political, regulatory and currency-related volatility as well as the lack of bankability and the scale of the projects. They require complex financial structuring to minimize investment risks and reconcile the interests of the various stakeholders.

    Moreover, they are associated with challenges when it comes to impact measurement and legal enforcement. In contrast, traditional liquid investments in developed markets benefit from stable regulatory frameworks, mature financial markets, greater transparency, better legal protection and lower risks, resulting in more predictable – and often quicker – returns.

    These differences add up to an uneven playing field in project financing, although there are certainly opportunities for private investors.

    Regarding the question of how private capital can be mobilized to close existing investment gaps, investors are clearly focused on “investability.” In this context, four core areas are addressed below; while they can be considered independently of one another, only in combination do they address the investability and therefore the mobilization of private funds. Given the scale of the challenge, the objective must be to initiate an investment cycle that has a positive impact on investability over time and reduces competitive imbalances.

    Core elements for a climate finance investment cycle in non-standardized financial markets

    1. Blended finance approaches
      • Risk allocation via tranches with return targets for different investor groups
      • Alignment of tranches with impact and development goals
      • Credit allocation and financing hierarchy via tranches
      • Transparency
      • Management of moral hazards
    2. Multilateral development banks
      • Technical support and knowledge transfer
      • Standardization for scalability and repetition
      • Financial intermediation
      • Catalytic capital and risk mitigation
      • Project appraisal and selection
      • Political dialog
    1. Investors
      • Long time horizon
      • Embedding in strategic allocation
      • Diversification
    2. Rating agency
      • Inclusion of all blended finance characteristics in the scoring model
      • Standardization of valuation for blended finance products
    3. Diplomacy - public sector
      • Bilateral and multilateral agreements
      • Sanctions and trade restrictions
      • Influence on international financial institutions
      • Political stability and rule of law
      • Conflict resolution

    What is blended finance?

    Blended finance is an investment approach that combines capital from public, philanthropic, and private sector investors to support socially, environmentally, and economically beneficial companies. It often uses public and philanthropic funds to lower investment risks, thus attracting more private investors.

    This approach is common in projects that target Sustainable Development Goals (SDGs), aiming to fill funding shortages and prove the feasibility of riskier ventures to boost future private investment.

    Blended finance is key for achieving the SDGs by 2030, as it fills the funding gap by attracting private capital through risk reduction and improved returns. This not only advances the SDGs but also creates new investment opportunities that align financial success with positive social and environmental outcomes.

    What does this mean for the Swiss financial center specifically?

    GFANZ estimates that between 2021 and 2030, increased use and leverage of blended finance approaches could mobilize USD 110 billion in public financing each year to support the USD 300 billion of private investments, giving rise to USD 410 billion in total annually. 

    Applying these estimates to the Swiss financial center, the following picture emerges:

    The asset and wealth management sector in Switzerland has assets under management of around CHF 5,000 billion and aspires to be a leading financial center for sustainable finance. Accordingly, an ambition should also be pursued in terms of volume. For the purposes of this discussion, it is assumed that around 5% of the global volume of blended finance solutions would be necessary to occupy a leading position. This corresponds to around USD 20 billion based on GFANZ estimates, of which USD 15 billion would have to be mobilized from the private sector each year. 

    Assuming no net new money inflows, this USD 15 billion would correspond to an annual allocation of less than 0.4% or, with an average term of 10 years (not unusual for venture capital (VC), private equity (PE) and infrastructure), a target allocation of 4% of the Swiss volume.

    At this scale, a positive diversification effect is already achieved on the one hand and a contribution to the return on total assets on the other, meaning that the associated expense is worth it for the investor. On the demand side, i.e. within the existing investor base in the Swiss financial market, these figures would certainly appear to be realistic.

    However, if the financing gap is to be significantly reduced – particularly through blended finance – and the aim is to achieve self-financing, the general conditions will also have to be adapted to the needs of the financing cycle – and thus to the expectations of private investors.

    This applies not only to the national framework conditions in Switzerland and other developed economies, but also to the countries where investment is to take place. International financial institutions (World Bank, IMF, MDBs, etc.) with their pivotal role are also of great importance. In this context, targeted political measures to improve the general conditions and increased and more ambitious blended finance are crucial to achieving the necessary level of private investment.

    Mobilizing private capital for climate-friendly projects in emerging markets involves a number of challenges, including political and regulatory risks, currency risks, lack of bankable projects, early-stage development, information asymmetries, transparency issues, complex blended finance structures, different stakeholder interests, limited local expertise, lack of investor knowledge, mismatched return expectations, difficulty in measuring impact, weak legal systems, institutional barriers, underdeveloped financial markets and infrastructure gaps.

    To overcome these obstacles, coordinated efforts are needed to create a favorable environment, build capacity and develop innovative financial instruments.

    Conclusion: A historical opportunity for the financial center

    Switzerland is not exempt from the growing global importance of sustainability and climate protection. The Swiss economy will have to put considerable effort into reaching net zero. Given the importance of bankable financing solutions to support this development, there is a strategic urgency, particularly for banks, to develop and offer appropriate products. 

    At a global level, we need financing instruments that are tailored to the needs of investors with different risk profiles and investment horizons, as current instruments are not sufficiently scalable and are too focused on the sequential financing of individual projects. To meet the USD 125 trillion in global investment needed for decarbonization by 2050, direct investment expenditure must triple by 2025 and reach USD 4.5 trillion annually thereafter. 

    Private players could provide up to 70% of this financing, depending on the development of the financial markets and policy measures. Blended finance can play a key role in boosting the financing cycle. As a leading market for private impact investments, Switzerland can contribute its experience and act as an inspiring trailblazer for other countries.

    Meet our expert

    Corina Wipfler
    Corina Wipfler

    Partner, Financial Services & Sustainability Services

    KPMG Switzerland

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