ESG: Improving ratings through engagement

Zürcher Kantonalbank Asset Management has worked intensively over the past year with the Pfand­brief­bank schweizerischer Hypothekar­institute and the Pfand­brief­zentrale der schweizerischen Kantonal­banken to improve their environmental, social and governance performance, and their resulting ESG ratings. The two organisations are currently the largest bond issuers in the CHF capital market (including money market bonds), accounting for one third of the Swiss Bond Index. They are therefore important for portfolio composition from both a financial and sustainability perspective.

The business model of the two Pfand­brief institutions is defined by the Swiss Pfand­brief Law: they issue Pfand­briefe in the capital market and use the proceeds to grant loans to their member banks against registered mortgage collateral in order to co-finance mortgages.

Responsibility for sustainable financing

As the financing of mortgages is directly linked to the real estate market, the question arises as to the role and responsibility of the two Pfandbrief institutions from a sustainability perspective. This concerns topics such as raising awareness among member banks of sustainable construction finance, the carbon footprint of the cover pool or compliance and governance. Due to their size and importance in the capital market, the two issuers have significant influence, at least indirectly, on the conditions for the mortgage business and thus on the domestic real estate market.

At the beginning of 2024, the asset management department of the Zürcher Kantonal­bank addressed the above-mentioned issues with both institutions and showed them ways in which, despite their legally defined business model, they could still reduce their CO₂ footprint across the value chain and positively influence their own operations and the member banks. To this end, we met with both issuers on several occasions, maintained a regular dialogue and kept in touch with ESG rating agencies. Finally, in 2024, the following positive developments took place in response to our engagement efforts:

Positive developments at the Pfandbriefbank in 2024:

• The member banks were made aware of the importance of the issue of CO₂ emissions: To illustrate this, a benchmarking exercise was carried out with the help of property specialists IAZI, and the issue was mentioned in the year-end letter and at the Annual General Meeting.
• Data cleansing and collection to calculate the CO₂ footprint of the cover pool, and integration of a CO₂ calculator into the Pfandbriefregister.
• Guidelines on bribery and corruption, whistleblowing, sexual harassment, mobbing, anti-discrimination, and the promotion of diversity and inclusion, freedom of association, human rights, and environmental and climate protection were made publicly available and implemented.
• In addition to a public data protection declaration, an internal data protection guideline and directive on data protection impact assessment were also developed.
• Qualitative analyses and descriptions of physical and transition risks and the financial impact of climate risks were added to the sustainability report.
• Employee training on ESG topics now takes place at regular intervals.
• An external, professional ombudsman service has been set up for employees for both professional and private concerns.
• The Presidential Committee has been commissioned by the Board of Directors to act as a sustainability committee.

As a result of the above mentioned measures, the MSCI rating of Pfandbriefbank improved from A to AA in November 2024.

Positive developments at the Pfandbriefzentrale in 2024:

• Conducting a double materiality analysis with a clear definition of the value chain.
• Preparation of a sustainability report in accordance with the standards of the Global Reporting Initiative (GRI). This is to be published in 2025 and will contain descriptions of the management approaches to the material topics.
• In the third quarter, the Pfandbriefzentrale published and implemented an anti-corruption and bribery policy.
• An audit and nomination committee was established.
• In 2024, references to the climate report and the report on the engagement for biodiversity of Zürcher Kantonalbank were added to the sustainability policy, as the Pfand­brief­zentrale is located on the premises of Zürcher Kantonal­bank and it is managed by employees of ZKB.

Consequence: In November 2024, the MSCI rating of Pfandbriefzentrale improved from A to AAA.

Zürcher Kantonalbank's Asset Management welcomes the fact that the two Pfandbrief institutions have reached the above-mentioned milestones in 2024. This demonstrates their commitment to sustainability and represents a positive development in the CHF capital market. 

What comes next? 

Zürcher Kantonalbank's asset management continues to focus on transparent reporting, including the precise measurement of the CO₂ footprint. Our medium-term goal is for the mortgage bond institutions to define a CO₂ reduction path and to raise awareness among member banks and mortgage holders about sustainable construction and living. Systematic ESG reporting and regular dialogue with both institutions will serve as an information basis for us.