How does climate change affect the SNB?
The SNB ensures stable prices and contributes to the stability of the financial system. In so doing, it also takes into account the potential consequences of climate change.
Climate change can have direct and indirect consequences for the economy and financial markets. The SNB considers climate-related risks in order to understand how climate change affects the fulfilment of its mandate. There are two types of risks: physical risks and transition risks.
For example, physical risks include damage to production facilities and infrastructure, as well as crop failures, caused by extreme weather or natural events. The more frequent and severe such events are, the greater the disruption to production and supply chains. Furthermore, in the longer term, a rise in temperature can lead to structural changes in various sectors of the economy, such as tourism, and affect productivity and economic growth.
Transition risks, on the other hand, concern the uncertainty facing economic agents as they seek to move to a low-carbon world. Examples include evolving consumer needs due to climate change, new charges and taxes (e.g. carbon tax) weighing on companies and households, new laws affecting companies’ business models, and the risk that companies may be unable to keep pace with technological advances.
The aforementioned developments and linkages are particularly relevant for the SNB in three respects: with regard to its mandate to ensure price stability, its statutory task of contributing to the stability of the financial system, and its management of currency reserves.
Climate-related risks and price stability
If supply is restricted because a natural event is disrupting important supply chains or production capacity, this can influence the prices of the goods concerned. Political measures designed to promote the transition to a low-carbon economy – notably, taxes – may also have an effect on the prices of goods and services. Such measures are particularly likely in the energy sector or for goods and services whose production and use are energy-intensive. Within the scope of its statutory mandate, the SNB analyses the implications of these measures for inflation and assesses their possible consequences for monetary policy.
Climate-related risks and financial stability
Climate change could affect banks’ traditional core business and thus present risks for financial stability. On the one hand, the effects of climate change could lead to write-downs on loans to companies and households. On the other hand, valuation adjustments in stock and bond markets can lead to trading losses and to an erosion of the earnings base. As outlined above, such adjustments may be triggered by acute weather events, such as storms or floods, that damage buildings or infrastructure. However, the transition to a low-carbon economy may also render the business model of companies or entire industries unviable.
The SNB monitors climate-related risks to financial stability and is in dialogue with the Swiss Financial Market Supervisory Authority (FINMA), the State Secretariat for International Finance (SIF), and other expert bodies. Specifically, this dialogue concerns, for example, the effects of climate change on real estate and the associated risk to mortgages – the largest asset on domestically focused banks’ balance sheets. Transition risks in the banks’ portfolios (loans, shares and bonds) may also be relevant for financial stability.
Climate-related risks in the SNB’s investments
Climate-related risks and adjustments to climate policy can trigger or amplify market fluctuations and influence the attractiveness of investments. From an investment perspective, such risks are essentially no different from other financial risks, and the SNB manages them by means of broad diversification, among other things. With this investment approach, the SNB ensures that the exposure of its corporate bond and equity portfolios to the various risks is roughly equivalent to that of the global universe of companies. Accordingly, structural changes in the global economy are also reflected in the SNB’s portfolio.
To be able to assess the climate-related risks of its investments, the SNB runs regular sensitivity calculations and stress tests. This work is based on the climate scenarios of the Network for Greening the Financial System (NGFS).
Good to know
The SNB monitors the latest climate change developments and findings and, to this end, engages in regular discussions with other central banks and institutions as well as with the academic and scientific communities. The SNB has been a member of the Network for Greening the Financial System (NGFS) since 2019. The SNB actively participates in the various workstreams of this network of central banks and supervisors. It is particularly involved in the workstream on monetary policy, with an eye to better evaluating the effects of climate-related risks on key economic variables such as prices, interest rates and GDP. The SNB is also involved in the workstreams on the development of climate scenarios for the financial sector as well as on sustainable investment practices and climate-related reporting.
Climate strategy and transition plan for SNB operations
The SNB has developed a transition plan for reducing its own greenhouse gas (GHG) emissions, such as those resulting from heat generation in its buildings. The plan details how GHG emissions can be at least halved by 2030 and reduced to net zero by 2050 at the latest. The goals are aligned with Switzerland’s climate targets and with internationally established standards. In order to meet the goals in the transition plan, emission sources are to be reduced using technical measures or replaced with low-emission energy sources.
