Will the Swiss climate referendum spark institutional demand for transition assets?

In June, a majority of Swiss voters supported a referendum on implementing the Climate and Innovation Act, which targets climate neutrality by 2050. The proposals include incentives to facilitate investment in energy efficiency, renewable energies and climate protection. 

As a small country, Switzerland currently imports around two thirds of its energy supply. With the target to banish fossil fuels, the country now hopes to produce more green energy domestically, a process that will require large-scale investment. 

Switzerland could play a more prominent role in efforts to stabilise global temperatures, believes Swiss glaciologist Matthias Huss, one of the backers of the referendum. 

Transitioning the nation to a carbon neutral economy could have a tangible local impact, argues Huss: “Among other benefits, some glaciers can also be preserved in the Alps - a beautiful and dynamic element of our landscape.”

The Swiss pension markets is one of the largest in Western Europe, as of 2022, it covered $1.4trn in assets under management. 

But when it comes to responding to climate change, it lags behind European peers. Only 6% of Swiss pension funds have net zero targets in place, according to a Swisscanto survey, compared to around three quarters in the UK. 

“Pension funds are only starting to get a handle on climate" argues Patrick Schmucki, corporate responsibility officer at KPMG Switzerland. "Except for the few large ones they don’t even have firm concepts for the management of climate risks, let alone a transition plan for their portfolios."

Asset Allocation Impact

When approached by Net Zero Investor, several major Swiss investors declined to comment on the referendum, indicating that it was too early to disclose any asset allocation impact. 

But a breakdown of their current asset allocation and funding status  already sheds some light on the potential future direction of travel.

Just over a third of the average Swiss pension fund portfolio is currently invested in equities, compared to 27% in bonds, according to Swisscanto's latest Pension Study. 

Swiss pension funds also tend to have a relatively high allocation to real estate, which accounts for a quarter of all holdings, while exposure to alternatives remains marginal at around 6%. 

If Swiss investors were to bet on the transition to renewables, their allocation to alternative assets could increase, given that many renewable energy projects tend to fund themselves through private markets. 

A counteracting trend is the fact that Swiss pension funds are on average 122 percent funded due to the rise in bond yields. This in turn might restrict their willingness to seek exposure to riskier assets such as private debt or equity.

Moreover, last year, Swiss pension funds booked a negative net return of -8.8% on their holdings, which is likely to further reduce their appetite for investment risk.

Meanwhile, the rise in bond yields might spark a resurgence in demand for fixed income. Yields on 10Y Swiss government bonds have increased by 7.5 basis points year to date, making them a relatively more attractive asset compared to private markets.

Green bond appetite

There may not need to be complete cynicism when it comes to how Swiss asset owners' may react to the new net zero targets.

Zurich as a green financial space still performs highly relative to the world markets, and it may be that asset owners are in fact making the early moves towards net zero already.

Swiss pension funds are attaching increasing long-term relevance to the broader topic of sustainability, more than one third of the pension funds have now anchored ESG criteria in their investment regulations, Swisscanto reveals. Over the past three years, this figure has risen from 25% to 37%.

In October last year, the Swiss government launched its first ever green bond, raising CHF 766 million ($766 million), with use of proceeds going towards supporting environmental goals in areas such as clean transportation and biodiversity.