Climate change and its effects are a factor in the central bank’s assessment of the economy. But the Swiss National Bank refuses to be drawn into an active stock-picking strategy that might impair its neutrality – and it knows the banking industry is fully supportive of its stance.

The Swiss National Bank (SNB) has accumulated a huge mountain of assets since the financial crisis as it bids to keep the Swiss franc from going through the roof versus the country's main trading currencies. The side effects of this accumulation of money are proposals to use parts of the money for purposes that don’t fall into the remit of the central bank. And it has furthermore exposed the bank to demands from pressure groups to allocate assets in accordance to certain standards.

Environment as a Key Economic Factor

The risks to the environment in any case have become an important factor in the array of influences on the economy that the central bank is considering when it decides about its monetary policy. Weather extremes, including droughts, storms and floods have the potential to significantly influence the strength of economic growth (for instance by impairing the supply of food and drink and damaging property and infrastructure).

Andréa Maechler, member of the governing board of the SNB, at a speech in Geneva made a statement that will raise a few eyebrows in Switzerland, especially after the green election successes in October that will rejig the national parliament: «The overall threat posed by climate risks that are capable of affecting Switzerland’s economic and financial stability appears to be moderate at present.»

Of course, the bank doesn’t negate the risks and it is keen to understand how climate change exactly threatens economic stability. But Maechler refused to give voice to an alarmist opinion and that may in itself be political.

Neutral Asset Allocation

More contentious however is the bank’s approach to its asset allocation. With an equity portfolio of 150 billion Swiss francs ($151 billion), the SNB has become a major shareholder in 6,700 companies in more than 40 countries. The bank's asset managers are pursuing a neutral approach in their investments, said Thomas Moser, alternate member of the governing board of the SNB.

It currently only excludes companies from its investment portfolio that earn money with activities running counter to fundamental values and norms held in Switzerland. Examples for this are banned weapon systems and activities that result in massive damage to the environment.

Vulnerable to Political Influence-Taking

The SNB however insists that any standards that go further wouldn’t be in accordance with its mandate. The bank isn’t allowed to pursue a structural policy. If it were to promote values that are popular with certain parts of the population, it would become vulnerable to political influence taking. Also, taking even bigger stakes in certain companies might undermine the bank’s treasured independence.

«More active management in the environmental field would severely limit our investment options,» said Moser. «Given the particular profile and size of our portfolio, a more targeted selection of our investments would increase concentration risk, which would compromise our neutrality in the markets and hinder the implementation of monetary policy.»

Support From the Business Community

With the new parliament decidedly more environmentally minded, a renewed attempt to get the SNB to include a more stringent set of standards in its asset allocation is almost certain. But the bank has a lot of support in the business world for its neutral approach, as became apparent during a recent discussion at a conference organized by «NZZ» recently.

UBS Chairman Axel Weber – himself a former head of the German Bundesbank – impressed on the public to keep the central banks out of the political debate.

«Deeply Controversial Tasks»

«If we continue to make central banks the repair shop for bad government decisions and policies, if we make them the repair shop for failed environmental policies, you end up with a hybrid that loses all forms and shapes,» Weber said. «I would be very cautious to put central banks at the core of such disputed policies. It would undermine the credibility and the viability of central banks massively if we overcharge their remit with deeply political and deeply controversial tasks.»

He also said that he had concerns about giving more room to act to essentially unelected bureaucrats in a deeply political sphere.