In the Federal Parliament: the Committee for Science, Education and Culture of the National Council discusses how legislation should be adapted. | Illustration: Christoph Fischer

How politicians deal with global warming is closely dependent on information gained from scientific research. One just has to think, for example, of the thousands of pages that scientists have written on behalf of the Intergovernmental Panel on Climate Change (IPCC). Or how researchers have been trying for years to help determine Swiss CO₂ legislation – from individuals like the climate researcher Reto Knutti to institutions like the ProClim Forum. However, these examples merely demonstrate just how difficult it is for scientific findings to make their way into the political process. The most recent revision of the CO₂ Law failed in a referendum in the summer of 2021, despite lengthy negotiations in the Federal Parliament in Bern. And we are quite obviously not on course to meet the goal of limiting global warming to 1.5 degrees Celsius as was set out in the Paris Agreement.

Scientific findings sometimes find their way into the political arena through less weighty regulatory efforts – such as through so-called ‘soft law’. These are agreements made within specific sectors, or recommendations passed down by the Federal Council. They are not binding, but in practice they often manage to have the intended effect. We here follow the different steps on the way to creating just such an example of soft law.

1 – So-called ‘green funds’: the Federal Council wants transparency

In November 2021, the Swiss Federal Council published a report on how Switzerland could become a climate-friendly financial centre. This was an initial step towards moving the financial market towards green investments. Sustainability with regard to the environment and the climate has been a major concern for the Federal Council for several years, according to Christoph Baumann of the State Secretariat for International Financial Matters (SIF).

If investors want to use their money to do something for the climate, they have to know whether a fund is truly compatible with climate goals. The danger here is ‘greenwashing’ – in other words, just because an entity calls itself green doesn’t mean it is green. “Clients expect to be able to make better-informed decisions on the basis of the climate impact stated”, says Baumann. One of the Federal Council’s 2021 recommendations to the financial sector, he says, was that “disclosure requirements should allow for statements that are as comparable and as climate-relevant as possible if they are to be effective. The measure in question should also be aligned with a specific goal”.

2 – Greenwashing: Private research and NGOs assess what’s true

“The Swiss federal government works closely with the scientific community when it comes to sustainable finance”, says Baumann. The Federal Council’s recommendations are in part grounded in a joint study by the rating agency Inrate and the research office Infras that was commissioned by the environmental NGO Greenpeace. This study was the first to prove empirically that investment funds sold as ‘green’ have virtually no meaningful impact. “The starting situation at the time was extraordinary”, says Anik Kohli, a political scientist, a project manager at Infras, and one of the three authors of the study. This was because the research question came from Infras itself, not from clients. This is very rare.

Included in the evaluation criteria that the agency Inrate uses to assess companies are so-called ‘environmental, social and governance’ (ESG) impact ratings. “Together with Infras, Inrate is constantly working to generate meaningful analyses and data on whether the activities of companies are having a positive or negative impact in these three areas – and if so, how”, says Kohli. “They are also trying to determine the extent to which investors have an impact; in other words, whether they can influence the actual behaviour of companies with their investments”.

Anyone wanting to invest their assets well, and who also hopes to improve the world while doing so, will find themselves dealing with sustainable funds that are evaluated using ESG criteria. When Kohli and her colleagues set out to find partners for their research question, they found them at Greenpeace Switzerland and Greenpeace Luxembourg. These NGOs wanted to pursue their suspicion that greenwashing is actually widespread among so-called sustainable investments. So Infras, Inrate and Greenpeace together refined their research question. But their roles were always clearly separate, says Kohli: “We wrote an analysis according to strictly scientific criteria, and Greenpeace used its results for a political campaign”.

Kohli and her co-authors identified the investment strategies of 51 funds that were labelled ‘sustainable’. They then used statistical analysis to examine whether they really did channel capital into sustainable investments. They concluded that the usual strategies for sustainable investment do not actually place money into companies or business practices that contribute to slowing down global warming.

3 – Who determines what ‘green’ actually means?

“It was no surprise to experts in the industry”, says Peter Haberstich, a financial market expert at Greenpeace Switzerland. “But the evidence had been lacking until then”. After the study by Infras and Inrate had shown that funds labelled ‘green’ did not actually invest their capital sustainably, the question naturally arose as to why not. The answer was that the same companies are represented in both so-called ‘green’ funds and conventional funds. “The vast majority of funds that are sold as being sustainable are classified solely on the basis of risk-return”, says Haberstich. To put it simply: a company already gets climate bonus points if it has given up a factory near the sea and thereby minimised the risk that it will be damaged by rising sea levels. But the company has actually done absolutely nothing for the climate. This is not clear to investors, however.

This example shows that the fight against global warming is also a fight for the prerogative of interpretation. What is a green fund anyway? One that is merely oriented towards sustainability criteria? Or one that actively contributes to them? Research results are fundamental here, says Peter Haberstich: “Data are enormously important for campaign work”. Greenpeace has always done investigative work. Twenty years ago, what mattered was getting photo evidence of whaling; today it’s scientific research that is more in demand. Haberstich is convinced that, “without the findings from the Inrate study, we would not have been able to exert such a strong influence on politics regarding the topic of greenwashing”.

4 – University researchers create a guide for investors

Another academic paper that was included in the Federal Council’s report of November 2021 was from the Department of Banking and Finance at the University of Zurich, where Julian Kölbel and his colleagues had already published a paper on the impact of investors back in June 2020, roughly a year before the study made by Greenpeace and Inrate. Today, Kölbel is an assistant professor at the School of Finance at HSG. He recalls that this particular paper had originated in a lecture he had given in 2017 on ESG criteria. His students had asked him about the real, concrete impact of ESG investments. “I thought: I’ll have to do a good slide about that”, he says. It turned out that the question went much deeper. What began as a PowerPoint slide turned into a comprehensive study of the literature. Four co-authors worked on it for two years, detailing the state of research on whether investors can truly make a difference for the climate with their investments.

The main finding of their study concerned the cause-and-effect chain. An investor affects the company, and the company affects the world. “It’s actually very simple”, says Kölbel. Nor is the distinction between investor impact and company impact entirely new – but it’s central to making progress with how financial markets can be organised so as to help protect the climate. “We were clearly able to reconfirm this fundamental insight” says Kölbel. “And we then invested more time and money into making public the results of our study”. To this end, the authors distilled their work into its most important findings and published a guide providing an overview of the various levers through which investors can do good with their money. As an example, Kölbel and his colleagues cite the USD 25 million that Bill Gates invested in a start-up in 2013 that was tinkering with synthetically produced meat. Today, that product is being sold at Burger King throughout the USA. The Federal Council in turn took a graphic from this investor’s guide for its own report.

5 – From a soft law to binding standards

Another concrete finding from Kölbel’s study was that investing in line with ESG criteria will not be enough to bring about the big shift to CO₂ neutrality. “For this, we need binding regulations in the real economy, such as a CO₂ tax”. But so far, however, the Federal Council has not issued any such regulations for the financial market. The transparency recommendations that it made in its report of November 2021 are only voluntary in nature. So what kind of regulation does Kölbel see as being most obviously in line with his own research findings? He points to the approach taken by the financial market supervisory authority Finma. Funds sold as ‘sustainable’ in Switzerland have to provide Finma with reliable information on their sustainability goals, and how they intend to achieve them. “That’s a very elegant solution, because it recognises that there are different mechanisms to achieve an impact on the climate. And yet it is a very clear specification”.

But even that would offer no guarantees that money invested would actually counteract global warming. The Federal Council itself writes in its report that “there are few legal grounds available today by which to prosecute greenwashing under supervisory law”. And on its website, Finma emphasises that it can only rely on the statutory prohibition of deception in its fight against greenwashing.

Meanwhile, Julian Kölbel is working on a new research project about sustainable investing. “We already know some things”, he says, “but more is needed”. And Christoph Baumann from SIF is certain that “research will continue to be closely involved”. Perhaps Kölbel’s future findings will one day not just feature in soft law, but will be incorporated into binding laws and regulations. Either way, the Federal Council wants to decide by the end of 2022 whether adjustments are needed to financial market legislation in an effort to avoid greenwashing.