Experts see loopholes in Swiss plans for banks’ nature risk management

March 5, 2024|Written by |Swiss Financial Market Supervisory Authority

Switzerland’s financial regulator has set out plans for how banks and insurers should manage nature-related risks – but experts warn that the changes could give them too easy a ride.

The Swiss Financial Market Supervisory Authority (Finma) is running a consultation on the new rules until 31 March, ahead of their expected implementation at the start of next year.

Swiss banks and insurers – which together make up one of the world’s most influential financial sectors – are exposed to a variety of nature-related risks, from biodiversity loss to the transition risks associated with the shift to a low-carbon economy.

The Swiss branch of WWF welcomed Finma’s push for more stringent management of nature-related risks in the financial sector.

“We particularly commend the integrated approach, rooted in NGFS (Network for Greening the Financial System) recommendations, to address nature-related risks holistically in financial supervision,” WWF said in a statement.

Pierre Monnin, a senior fellow at the Council on Economic Policies in Zurich, similarly praised the decision to treat climate change as part of a wider array of environmental risks.

“There are a lot of feedback loops between nature and climate,” he said, citing the example of deforestation accelerating climate change, which in turn leads to biodiversity loss.

However, both he and WWF said there was plenty of room for improvement.

Monnin said there was no detail on the sanctions that Swiss banks could face should they fail to meet the requirements within a given timeframe. In contrast, the European Central Bank is expected to issue fines and capital add-ons this year against banks that have failed to meet the required standards for climate risk management.

In addition, there is hardly any mention of transition plans in the text. “This is something that should be more prominent in the law, because transition plans are a key forward-looking risk indicator,” Monnin told Green Central Banking; in other words, if a bank doesn’t have one, it is a clear sign they are exposed.

Monnin also suggested the threshold for what is considered material to Swiss banks should be significantly lower. The financing of a single fracking project, for example, would be material to the overall financial system, even if it might not be considered material to the reporting bank.

WWF similarly pointed to “too much wiggle room for financial institutions in the implementation”.

“The circular alone in certain areas falls short in providing concrete and prioritised guidance where it is required, for example, on how to conduct scenario analysis and stress testing,” it said.

Despite this significant room for manoeuvre, Monnin said he expected pushback from Swiss banks and insurers to the proposal given the strong preference in the financial sector for self-regulation.

Adoption of the new regulations will meanwhile be voluntary for smaller banks, and Monnin suggested Finma could be “more forceful” in encouraging their application.

This page was last updated March 5, 2024

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