Switzerland moots state-funded Green Investment Bank

Some investors are hesitant about putting their money into risky sustainable projects. © Keystone/ Valentin Flauraud

Switzerland needs nearly CHF13 billion ($13.6 billion) a year to fund its goal of carbon neutrality by 2050 and aims to invest CHF600 million annually in sustainable projects in developing countries. Would a state-funded Green Investment Bank help the Alpine state reach these targets?

The idea looks simple enough on paper: create a new bank, controlled by the state, that would invest CHF10 billion over the next decade in ecological projects.

State-backed investments could blaze a trail towards sustainability and encourage commercial investors to follow suit by soothing any doubts about risk. This could speed up funding of innovations in solar energy and CO2 capture and removal, for example.

In addition, a Green Investment Bank (GIB) would be a source of expertise and data that it would make available to other financial sector participants. 

The idea was proposed by Swiss think tank Foraus earlier this year and has attracted support from dozens of Swiss parliamentarians. The plan also has its critics who doubt that such an entity could achieve its purpose or fear it could distort competition in the commercial banking sector.

In May, five Swiss parliamentarians from a variety of parties put forward a motion to create a GIB in Switzerland. “Private capital is currently struggling to find its way, at large scale and at the required speed, to projects that have high investment requirements and increased risk,” states the motion, which found backing from more than 80 parliamentarians.

For example, Switzerland is one of the powerful economies that have  agreed to collectively invest $100 billion a year on combating climate warming in developing countries. Switzerland calculates that its fair share is CHF600 million a year but is scratching around to find the last CHF150 million of this total from the private sector.

The idea of creating banks or funds to channel taxpayer funds into sustainable projects has already seen the light of day in other parts of the world (see box below). They exist in such countries as Britain, Germany, Australia, Malaysia, Japan, the United Arab Emirates and several states in the United States.

Switzerland has two sustainable investment funds backed by the state, but at present no regulated bank focused purely on this task.

Competition fears

Foraus, a think tank focused on Swiss foreign policy, believes a GIB would be an ideal solution to a current shortfall in sustainable funding. The goal is to “draw inspiration from these successful global business cases and to apply them to Switzerland’s challenges,” Sébastien Chahidi, a co-author of the Foraus proposal, told SWI swissinfo. And the backing of the state is also crucial. “When a GIB invests in a project it sends a signal that it is safe enough for private investors to risk their funds.”

Greening Switzerland will come at a cost. The Swiss Bankers Association (SBA) estimates that CHF387 billion in sustainable investments are needed over the next three decades to meet Swiss climate goals by 2050 – that’s CHF12.9 billion per year.

The SBA believes Switzerland already has enough firepower in its domestic financial centre to meet this burden and baulks at the idea of a new state-controlled bank stepping on the toes of the private banking sector.

Swiss Sustainable Finance (SSF), a body comprising 190 financial entities, academics and public sector participants focused on transforming Switzerland into a leading sustainable finance hub, is also sceptical of the GIB idea.

The main issue is that the current regulatory framework opposes sustainable investment plans, says Sabine Döbeli, CEO of SSF. She argues that better frameworks are needed to allow more sustainable projects to be realised rather than establishing a new bank that competes with private investors.

Switzerland’s system of direct democracy can slow down planning procedures, bogging down solar wind and hydro projects in time-consuming legal and court battles.

“The barrier to accelerating the rate of sustainability progress in Switzerland is not of lack of finance,” she told SWI swissinfo. “The limiting factor is the overly-complex and lengthy procedures for obtaining planning permission.”

“Many energy projects are financed by state-owned utility companies that are constantly looking for new projects to invest in. The problem is obtaining permits to get for these projects off the ground.”

Switzerland already has two state-backed funds that promote sustainable investments from the public purse: the domestic-focused CHF500 million Technology Fund, which has so far underwritten CHF220 million bank loans for Swiss climate projects, and the Swiss Investment Fund for Emerging Markets (SIFEM), which has invested more than CHF1 billion in developing countries.

Foreign investments

Foraus and the GIB project’s parliamentary supporters believe a new investment bank could have a more significant impact on financing sustainable projects abroad.

Creating a fully regulated investment bank would raise the bar on such activities by giving start-ups full access to the debt markets when they want to raise fresh funds or by eventually advising on acquisitions and helping a company list on the public markets.

“A bank can leverage investments through a wider variety of financial instruments than a fund has at its disposal,” said Sébastien Chahidi from Foraus.

But not everyone agrees that this is necessary, including Martin Stadelmann, Head of Climate Investments at the sustainable finance consultancy group South Pole, which co-manages the Swiss Technology Fund.

“Building a totally new GIB would take five to ten years – and that would be lost time for climate action,” Stadelmann told SWI . “Reforming existing institutions would be much quicker and would have a far greater impact.”

“The wisest option would be to expand the mandate of SIFEM to give it a clear climate mandate and allow it to take more risks using a wider range of financial instruments, such as early-stage equity, flexible debt instruments and providing technical assistance. Expanding the mandate of the Technology Fund to cover emerging markets with loan guarantees would also be highly beneficial.”

There is no guarantee that a Swiss Green Investment Bank will ever appear. A parliamentary motion in June that advocated such an entity requires a detailed technical assessment study followed by a debate in both chambers of parliament before it can be approved. Such a process is likely to require several months before even a decision is possible.

Global GIBs

There are several state-funded banks aroundExternal link the world that invest taxpayer funds into sustainable projects.

Germany’s Kreditanstalt für Wiederaufbau (KfW) was formed in 1948 to channel Marshall Plan funds into rebuilding the war-ravaged country. It was later used to bail-out commercial banks during the 2008 financial crisis.

KfW also has a sustainable finance mandate and is active in the carbon trading market and, together with subsidiary units, invests in green projects.

Britain’s Green Investment Bank was formed in 2012 to help meet climate targets but was later sold to the private sector. However, British politicians have hinted at the possibility of creating a new state-backed green investment bank in future.

The Scottish National Investment Bank invests in a number of key infrastructure projects, particularly in the area of renewable energy.

Several US states invest public finances into sustainable projects via green banks. These include the New York Green Bank, the New Jersey Green Resilience Bank and the Connecticut Green Bank.

Australia’s Clean Energy Finance Corporation, the Malaysian Green Technology and Climate Change Corporation and Japan’s Green Fund are other examples of government agencies that invest sustainably.