3 Responsible financing

Relevance of the topic to SZKB and goals

The lending business has a positive or negative impact on many sustainability issues, including those related to the environment, society and the economy. However, the actual impact does not manifest immediately but rather has downstream effects on borrowers. Some positive effects include job creation, while negative effects may include the generation of unwanted CO₂ emissions.

For SZKB, «financing a sustainable property», «access to sustainable financial services» and «climate change» are key topics in the area of responsible financing, as SZKB finances a significant amount of CO₂ emissions through its financing business. Switzerland’s climate strategy emphasises the importance of reducing CO₂ emissions in the building sector. To meet the goals outlined in the Swiss climate strategy, it is crucial to elevate the renovation rate for existing properties in particular. SZKB aims to reduce CO₂ emissions in the real estate sector by developing financing products (in addition to raising awareness among property owners) that foster and support sustainable behaviour on the part of mortgage borrowers.

As part of its responsible financing strategy, SZKB has defined the following sustainability targets for 2023:

• The emissions intensity of mortgages1 financed will be reduced by a minimum of 42% by 2030 compared to the 2022 base year.
  
• The emissions intensity of commercial real estate2 financed will be reduced by a minimum of 40% by 2030 compared to the 2022 base year.
  
• Development of financing products that foster and support sustainable behaviour.
  
• Raising awareness among clients.
  
• Raising awareness among employees.
  
• Creation of incentives, such as favourable interest rates, to facilitate a decrease in emissions intensity.
  
• Support with the generational transfer of a property.

SZKB has aligned its objectives with the Swiss climate strategy. Furthermore, for SZKB to achieve its goals, it is essential that the financial industry and SZKB are willing to provide information, advice and financing and that policymakers establish suitable economic framework conditions while Switzerland systematically pursues its own net zero target.

Due to its balance sheet volume and its contribution to business income, the lending business will play an important role in SZKB’s business model. The Bank focuses on business with private, commercial and corporate clients primarily in the Canton of Schwyz and neighbouring regions.

One of the ways in which SZKB demonstrates its commitment to sustainability in the area of financing is by practising responsible lending. Being the largest lender in the canton, the Bank wields influence over the flow of funds through loans and investments. It therefore plays a key role in the sustainable development of the Schwyz economic region and assists private, commercial and corporate clients over generations. With its lending policy, SZKB has an impact on the environment, society and the economy.

Management approach

SZKB manages the impact of sustainable financing through the credit products it offers and the established credit processes. The Credit Regulations established by the Bank Council provide the framework for SZKB’s lending business.

Clients with higher risks of default are closely monitored by a specialised team. SZKB is committed to working with its clients to identify sustainable solutions whenever possible.

The primary measures are outlined in Chapter 3.4 «Climate change» and 3.5 «Assessment of effectiveness and next steps».

Financing portfolio

As the leading bank in the Canton of Schwyz for private and business clients,1 SZKB is primarily active in the mortgage business (chart below) and focusses on its market area (chart below). This includes the Canton of Schwyz and neighbouring regions in which SZKB possesses extensive market expertise.

The regional allocation is based on the location of the property for mortgage insurance and the debtor’s domicile for all other types of insurance.

The law governing the Schwyzer Kantonalbank limits the possible foreign assets of SZKB to a maximum of 5% of the balance sheet total. As a result of internal regulations, the financing business can account for a maximum of 0.7% of this. Currently, only 0.02% of loans are financed with clients domiciled outside Switzerland. Mortgages are not granted to clients with covered properties outside Switzerland.

 

The business client base of SZKB reflects SZKB’s business activities and is primarily composed of sectors related to the real estate business.

SZKB currently has no exclusion criteria for the financing of individual sectors.

Special sectors:

• Because of limitations on foreign participation and the composition of the sectors (see figure below), there is no direct financing available for the extraction of tar sands oil, production of Arctic oil or ultra-deep-sea oil, or lignite and hard coal mining outside Switzerland.
• Agriculture in Switzerland, and in the Canton of Schwyz in particular, is dominated by small-scale farms. The average usable area per farm in the Canton of Schwyz is 16 hectares. SZKB does not have any exclusions in place for financing specific business sectors. The regulations of the canton determine the maximum amount of financing available for the specific agricultural enterprise. Legislation sets out extensive requirements for land management (environmental protection, biodiversity, water protection, sustainable land use) and animal welfare. Control mechanisms have been put in place by the state.
  
• SZKB also provides financing for companies that produce renewable energy, specifically in the areas of district heating and hydropower. Furthermore, loans are provided to support smaller-scale solar power installations and energy-efficient renovations for private, commercial and corporate clients, as well as non-profit housing developers. SZKB also provides financing for hospitals, retirement and nursing homes, and other social institutions and handles student loans granted by the Canton of Schwyz, with a volume of around CHF 1 million.
  

Guarantee Fund

SZKB works with the Guarantee Fund of the Canton of Schwyz and the SZKB Innovation Foundation to provide clients with access to additional sources of financing.

The Guarantee Fund is a cantonal institution with a legal personality, and its registered office is in Schwyz. The purpose of the fund is to provide guarantees for loans, credits and guarantees for natural and legal persons resident or domiciled in the Canton of Schwyz who prove to be creditworthy and trustworthy. The fund is used to guarantee loans, credits and guarantees for which no or no fully bankable cover can be provided and which are needed for the following purposes:

• For the acquisition, construction, maintenance and improvement of residential buildings, condominiums and commercial and agricultural real estate (real estate loans)
• For the construction, maintenance, improvement and expansion of service enterprises as well as commercial, industrial and agricultural businesses (operating loans)
• For start-up and venture financing of companies

SZKB is responsible for reviewing applications and processing such loans.

The SZKB Innovation Foundation exists in the Canton of Schwyz to promote innovative and young companies (see Chapter «2.3.3 ‘Fostering the local community and economy’ Section 'Fostering innovative and young companies'»).

Financed CO₂ emissions

In the reporting year, SZKB for the first time calculated the greenhouse gas emissions on its financing portfolio (Scope 3, Category 15) as of 31 December 2022 (table below).

The calculated values are used as the basis for measuring the emissions intensity goals.

PCAF investment class	Volume/share of portfolio (CHF million, %)	Absolute emissions Scope 1 and 21 (ktCO2e)	CO2 footprint Scope 1 and 22 (tCO2 per CHF million of financed balance sheet volume)	Emissions intensity Scope 1 and 23 (kgCO2 per m2 of financed area or tCO2e/million of revenue)	PCAF Data Quality Score4
Mortgages	7,658, 45.1%	24.8	3.2	24.3	3.9
Commercial property	7,435, 43.8%	31.3	4.2	24.2	4.0
Corporate financing5	1,432, 8.4%	111.0	77.5	33.6	4.8
Total	16,525, 96.3%6	167.1	10.1	25.0	4.0

 

¹ Absolute amount of Scope 1 and 2 greenhouse gas emissions from SZKB’s financing activities.
² Absolute amount of Scope 1 and 2 greenhouse gas emissions from SZKB’s financing activities relative to the financing volume.
³ The emissions intensity shown pertains to Scope 1 and 2 of the financing. SZKB does not currently calculate Scope 3 emissions from financing activities.
⁴ 1 high, 5 low.
⁵ Corporate financing also includes the agricultural sector, which accounts for around 80% of the emissions calculated in this asset class.
⁶ Individual loans are excluded on the basis of the PCAF method (primarily construction loans and building land loans). This accounts for the discrepancy of 3.7%.

 

As of the end of December 2023, SZKB had a financial investment portfolio totalling CHF 1,509 million, with the majority being highly liquid bonds that qualify as high-quality liquid assets (HQLA). The portfolio consists of corporate bonds, mortgage bonds, and public sector bonds.

The emissions calculations are conducted according to the PCAF standard, which only includes CO₂ data for corporate bonds and mortgage bonds in the portfolio. This is because there is currently no established methodology for measuring emissions from other asset classes. This means that the reported emissions only account for 25% of SZKB’s financial investment portfolio.

Investment class	Volume/share of portfolio (CHF million, %)	Absolute emissions Scope 1 and 21 (ktCO2e)	CO2 footprint Scope 1 and 2 (relative carbon footprint (tCO2e/millions of CHF investment))	Emissions intensity Scope 1 and 2 (weighted average carbon intensity (tCO2e/millions of CHF revenue))	PCAF Data Quality Score
Financial assets	371, 25%	8.0	21.7	17.7	1.7

Assessment of effectiveness

During the reporting year, the emphasis was on the implementation of the Swiss Bankers Association’s (SBA’s) «Guidelines for Mortgage Providers on the Promotion of Energy Efficiency» in the key area of «Financing a sustainable property». SZKB achieved the following milestones, particularly in the owner-occupied residential property sector:

• Collaboration with myky: Using the platform solution provided by myky AG, clients and property owners can now calculate their CO₂ emissions and explore energy-efficient renovation options. The property can be quickly analysed, and optimisation measures can be simulated. Quotes can be acquired from a network of partners, and work can be commissioned. The tool also supports SZKB advisors in their consultations.
• SZKB has developed a standardised financing product for energy-efficient renovations, which is set to be launched in January 2024. With this product, existing SZKB clients with owner-occupied properties in the Canton of Schwyz can benefit from subsidised loans up to CHF 75,000. Application and processing have been simplified for clients and pricing has been made attractive in order to create additional incentives for energy-efficient renovations. Clients who do not meet the requirements for the standardised product and those outside the Canton of Schwyz who are undertaking energy-related renovations are supported with a contribution towards obtaining the GEAK, GEAK Plus or Minergie certificate.
• All SZKB financial advisors have been trained in energy-efficient property renovation. The client advisors were empowered to consistently integrate the topic into their advice for all residential property financing and to engage in discussions about potential solutions with the client through the myky partner application or new factsheets. For more detailed advice, it is recommended to seek assistance from external experts.
  
• SZKB has established the necessary conditions to include in its systems additionally required property data, such as heating type or energy reference area, and to access external, publicly available data. To support client advisors, SZKB has created a central starting page that consolidates available data and facilitates the prompt identification and resolution of data gaps. This gives client advisors the opportunity to enter into more in-depth and informed conversations with our clients about the property.

Because the relevant calculation basis was established in 2023 and there is thus no previous year for comparison, it is not possible to assess the progress towards meeting the emissions intensity reduction goals.

Based on what we currently know, we believe that the measures being taken will be effective.

Further development and next steps

In 2024, SZKB will further advance sustainability efforts through responsible financing in the following areas:

• Further development of consulting and products as well as expansion to other building types and client segments, with a particular focus on commercial clients.
• Further development of risk analyses, particularly in the realm of natural disasters and long-term scenarios related to climate change.
  
• Investigate how environmental risks can be systematically integrated into credit assessment and approval process where appropriate.
  
• Development of tools for managing and measuring environmental risks and integration into existing risk reports.
  
• Enhancement of data quality and addition of missing data.
  
• SZKB is preparing for full compliance with the TCFD requirements outlined in the Ordinance on Reporting on Climate Matters.