What does transition finance mean to the Swiss (financial) economy and what are currently the main challenges faced in financing the transition to net zero by 2050? INFRAS examined this in a study conducted on behalf of the WWF. Based on this, the WWF has drawn up recommendations for Switzerland’s financial market, industry and politics.
To enable the economy as a whole to achieve net zero emissions, all companies and industries along with their products, services and processes will have to undergo significant changes – a complete transition. This requires not only the right financial instruments, but also a huge volume of investment. However, there is currently no uniform interpretation of the definition of transition finance. Furthermore, there is a total lack of any standards regarding the corresponding financial products, or any framework conditions on who qualifies for these products and how.
Shift away from brown activities
Notwithstanding the diversity of definitions used, there is general agreement that transition finance includes a shift from brown, i.e. high-emitting activities, to less brown or green activities. The core of this is what are known as ‘harder-to-abate’ sectors, which provide essential services to society while facing huge difficulties in reducing emissions. These therefore require an especially large level of investment.
Conflict between returns, investment risk and environmental concerns
According to estimates, the road to a climate-friendly Swiss economy requires investment of 2.5 to 5 billion francs per year. However, the study found that the Swiss financial sector is well positioned to be able to make the expected level of investment. Nevertheless, there are many challenges: besides technological obstacles, investment in the goal of achieving net zero is not usually profitable in the short or medium term, or will only become so if CO2 emissions become more costly in the future. The necessary long-term nature of this transition goes beyond the time frame of most financial instruments, resulting in an unattractive risk-return profile. This means that investment is often simply not a financially rewarding prospect for either companies, who need money for the transition, or banks.
Clear criteria are required for companies’ transition plans
The study shows that transition finance can be interpreted in various ways, meaning all of the key players view it differently. There is therefore a need for clear definitions, international standards and corresponding financial products. The real economy also needs to comply with clear criteria in its transition plans. These should include detailed, verifiable and, above all, action-based goals designed to orient the entire supply chain to a net zero outcome. Furthermore, regulations and incentives are required to increase the profitability of low-emission products and technologies, which are important for the transition in order to make investment an attractive prospect for investors.
Detailed criteria for clear transition plans and detailed recommendations from the WWF can be found in the transition finance study’s final report.