The three Swiss blue-chip private banks delivered figures pointing to some challenges in their operations. How do UBS, Credit Suisse, and Julius Baer stack up when it comes to ESG?

The recent second-quarter results delivered by the three major Swiss wealth management banks are sobering. UBS's operating income stagnated compared to the previous year, Julius Baer reported a 6 percent drop in operating income, while at Credit Suisse, net income was down by nearly a third.

In times of central banks ending easy money policies, the low-hanging fruit is now a thing of the past for financial institutions.

Uncharted Waters

Alternative measures that can be used to describe the health of blue-chip private banks also give pause for thought. For example, between 2020 and last year, the turnover among CS employees nearly doubled to 12.6 percent. At UBS, provisions for legal cases increased by more than $660 million during that period. And at Julius Baer, the proportion of women in senior management increased only slightly from 27.9 to 28.5 percent.

To be sure, these figures are not available in current quarterly reports but are extracted from the respective annual reports of the three institutions. This was done by the same team of analysts from Barclays who recommended shares of Credit Suisse and UBS as a sell shortly before the quarterly reports were released. For the first time, they included an «ESG snapshot», culminating in a score for each firm in the areas of environment, society, and good governance (ESG).

While this is uncharted territory, in the transformation toward a more climate-friendly economy it is possible that this could become the norm for bank research in the future.

UBS Scores

That raises the question as to whether the most operationally successful bank is also the most sustainable. Barclays assigns a maximum value of five points for each ESG reporting «letter», where multiple and consistent third-party assessment baselines were used. Julius Baer scored three points in each of the three areas of environment, society, and governance. Credit Suisse scored four points for the environment, three points for society issues, and only two points for governance in light of its recent debacles. Finally, UBS scores best with four points each on the environment and social issues and three points on governance.

While all three banks have made various sustainability pledges, the pace of attaining those goals varies. UBS and Credit Suisse, for example, want to achieve «net zero» for their own CO2 emissions in 2025, while Julius Baer sets a goal of 2030.

Client Money Question Marks

While the Barclays analysts believe that such targets are also achievable for Julius Baer, they consider the private bank's ability to evaluate the origin of its client funds according to ESG aspects to be a challenge. This is also a question for UBS and Credit Suisse. Furthermore, the report also criticizes Julius Baer over the need to make strides in staff diversity and minimize the legal risks in private banking.

At Credit Suisse, ESG expectations focus on risk management and corporate culture, while for UBS, the analysts are concerned about the risk of a new tax dispute.

Tested by the ECB

To view the ESG merely as a nice-to-have add-on to the «hard facts» would be misguided. All signs indicate that in the future, the sustainability rating of banks will become just as important as their creditworthiness, capital strength, and market value. A climate stress test conducted by the European Central Bank (ECB) last July at 41 eurozone banks hinted that this is the wave of the future.

Although the test did not yet have any consequences for the banks, in Switzerland the industry does not want to face a new wave of regulation. In seeking to get ahead of the issue, in June they created their own rules against fraudulent labeling of ESG financial products and with targets for the mortgage business.

Casting a Wary Eye

Outside Switzerland, banks have also realized the need to be proactive when it comes to sustainability issues, and promises are made quickly. But that is easier said than done and implementing policies is complicated and expensive, made even more so under the watchful eye of environmental activists and major shareholders.

A recent industry navel-gazing exercise, also supported by Swiss institutions, concluded that banks must significantly accelerate their climate efforts if global temperature rise is to be kept within the Paris Agreement targets.