Environmental and social responsibility in banking

Information unaudited Information ungeprüft Environmental and social responsibility in banking

From the year of our foundation in 1861, we have resolutely followed a path where the aim has been to prioritise the interests of our clients and make a long-term, sustainable contribution to society at our business locations. We also fulfil our corporate responsibilities by offering our clients products and services that are environmentally sound and socially responsible.

Products and services

We are very aware that we can have a huge impact on the environment and society through our banking products and services – for example, as a result of decisions on which companies and projects we invest in, or the companies and projects we finance. We will take a closer look at some of our products and services in the following section.

We can make a positive contribution to the environment and society by steering capital into companies that offer innovative technologies, products and services to combat ecological and social challenges and advance sustainable development. We seek to avoid risks by keeping as much distance as possible from companies and projects that are linked to negative impacts on the environment or that are not compatible with both our values and international values (for our international obligations, see chapter Industry initiatives and corporate citizenship). For this reason, we incorporate the diverse ESG (Environmental, Social and Governance) criteria into our investment and financing decisions.

We attach particular importance to the subject of climate change. As part of our ACT-26 corporate strategy, we have set ourselves the ambitious goal of achieving complete climate neutrality by 2040. This is ten years earlier than foreseen by the Paris Climate Agreement and is in line with the UN’s highly ambitious target of 1.5°C (see chapter Our understanding of sustainability). Our range of products and services as well as our own investments can all make an important contribution to achieving this goal. Our objective of reducing greenhouse gases (GHGs) is therefore tied to specific interim targets that explicitly relate to the banking business (as opposed to banking operations; see chapter Corporate environmental and climate protection).

• In our banking products and our own investments, we are aiming for a 30 per cent reduction in GHG emissions by 2026 when compared to the 2019 base year.
• By 2030, there will be a reduction of at least 55 per cent when compared to 2019.

We have set up a range of management tools to ensure we achieve our sustainability goals and avoid risks. Based on the type of product and business area, we use a variety of instruments, which we will describe below.

Investment products

LLB Asset Management AG is responsible for investment processes in the sustainable and traditional areas. We are seeking to develop a range of products and services that simultaneously respond to client demands and regulatory requirements. Implementation of sustainable investment regulations and traditional investment requirements is monitored by the Investment Compliance Department as well as by internal and external auditors. Due to the dynamic nature of this topic, we review all aspects of sustainability and the regulations at regular intervals and develop our methodology and processes where necessary.

The details on our approach to responsible investment are included in the Group directive on investment advice and asset management. They are also included in every investment proposal and asset management agreement. This agreement describes the specific ESG management tools involved in the respective mandate.

ESG integration in asset management

For us, sustainability in asset management means adopting a highly responsible approach that meets ethical, social and environmental standards when investing. Furthermore, paying attention to sustainability aspects brings an additional perspective to assessing companies, institutions and market participants in relation to risk and return and as such, supports long-term value creation for our clients. As a member of the United Nations’ Principles for Responsible Investment (UN PRI) finance initiative, we are committed to responsible investment management (see chapter Industry initiatives and corporate citizenship). In this way we can contribute to meeting the UN’s sustainability goals. We expect broadly diversified, sustainable investments to yield returns comparable to those from traditional investments.

We have opted to apply a methodologically comprehensive approach to the investment process and the following management tools have been used when selecting individual securities.

Management tools ¹ used in asset management

1The typology associated with ESG management tools is based on the ‘FMA Guide for Managing Sustainability Risks’ from the Austrian Financial Market Authority (FMA; document no. 01/2020, p. 42 et seq.) and Fact Sheet 2021/1 on Dealing with ESG Risks from the Liechtenstein FMA (p. 15 et seq.). Negative selection refers to a management tool whereby financial instruments are excluded on account of their assignment to a problematic sector or a problematic business activity. Divestment is also based on blanket exclusions of sectors or business activities, but is concerned with financial instruments in which investments have already been made (whereas negative selection applies to new business). Conversely, positive selection means making targeted investments in sectors or business activities that are classed as positive in terms of sustainability. ESG integration means taking direct account of ESG factors when making decisions. In terms of engagement, a good example would be investors attempting to influence a company by exercising their voting rights. The aim is to steer the company in a direction that is seen as sustainable.

We also continuously monitor the GHG emissions caused by our investments. We pay particular attention to EU Sustainable Finance Disclosure Regulation (SFDR) classifications when selecting funds for our investment products. Therefore, both the LLB fund range and our third-party fund recommendations include a (well) above-average proportion of investment funds that exceed the Article 6 SFDR classification. Funds that comply with Article 8 SFDR take social and environmental criteria into account but do not invest in an entirely sustainable manner. These are then often referred to as light green financial products. Funds that comply with Article 9 SFDR largely invest in sustainable companies and projects and ensure as far as possible that there are no negative impacts on the environment and society. For this reason, they are referred to as dark green financial products.

We base our analyses on the ESG expertise of renowned agencies such as MSCI ESG Research and Inrate. The precise combination of the ESG management tools described will vary from product to product. Further information about our approach to investment is available in our annual PAI report and the respective product descriptions.

Impact funds

In addition to our ESG and ESG+ responsible asset management mandates (see section Asset management and investment advice), we have launched two dark green LLB Impact Climate funds that comply with Article 9 SFDR. LLB Impact Climate Equities Global Passive offers clients the opportunity to massively reduce the carbon footprint of their capital. The reduction in greenhouse gas emissions amounts to more than 80 per cent when compared to the MSCI Global Equities Index.

With the LLB Impact Climate Obligations Global Fund, which largely invests in green bonds, investors can target their capital at activities that support climate action. About a third of the funds currently flow into renewable energy projects. Around a quarter of the fund volume comprises investments in environmentally-friendly mobility, followed by investments in green buildings and infrastructure as well as energy-efficient technology.

With regard to the LLB Impact Climate Equities Global Passive Fund, investments of more than CHF 620 million (as at 31 December 2023; 31.12.2022: CHF 580 million) now align with the Paris climate targets. The LLB Impact Climate Obligations Global Fund has an investment volume of over CHF 160 million (2022: CHF 135 million).

wiLLBe investment app

The launch of the sustainable investment app wiLLBe offers an asset management solution that has been specially developed for small investors. The app is available in Germany, Liechtenstein and Switzerland and is specifically geared towards the UN’s sustainable development goals (SDGs). Investors can choose from seven topics such as “Education and equal opportunity”, “Climate and environmental protection” and “Clean energy”, where they can lend emphasis to their own investment preferences in relation to sustainability issues.

The wiLLBe portfolios are based on the strict sustainability criteria applied by LLB Asset Management, but they are also optimised with regard to their particular impact in terms of SDG alignment. In other words, attention is paid to ensuring they are closely aligned to the SDGs.

In each case, investment experts at LLB identify companies that are especially suitable for responsible and sustainable investment and that have the greatest impact in the chosen area. For example, if clients decide to choose a reference portfolio that focuses on climate, energy and health, the companies in the wiLLBe portfolio will indicate a CO₂ intensity that is around 56 per cent below the MSCI World benchmark. The companies’ energy consumption is 93 per cent lower than in MSCI World.

Engagement

Engagement is becoming increasingly important to us as an ESG management tool. With regard to our fund products and our own investments, we also want to use our vote as a way of communicating important sustainability issues to companies and institutions. With the support of the International Shareholder Services (ISS), we have clearly positioned ourselves in equity funds. For our voting decisions and analysis, we use the socially responsible investment (SRI) assessment methodology from the ISS. This methodology and the sustainability-oriented approach to voting decisions have helped us in more than 1ʼ900 votes.

Asset management and investment advisory services

In line with our approach to responsible investment, we only offer our clients mandates for asset management and investment advice that comply with ESG and ESG+. Under the ESG investment strategy, a substantial part of the portfolio is invested in products that fall under the light green category according to Article 8 SFDR and at least 5 per cent is invested in products in the dark green category according to Article 9 or in special impact topics such as climate and environmental protection and microfinance. Under the ESG+ approach, dark green products make up at least 45 per cent of the portfolio.

The entire investment range of LLB Invest has been converted to ESG or ESG+. Clients who characterise themselves as neutral in terms of sustainability will also receive an ESG offer although the minimum share stipulated for sustainable financial products will not be binding in this case. Consequently, the fact that our clients are only offered responsible investment solutions where the LLB sustainability approach has been consistently applied during implementation is a standard feature.

Financing

In the area of financing, we focus on real estate and mortgages. In Liechtenstein, LLB has a leadership position in the mortgage lending business with a market share of around 50 per cent. Mortgages also play a decisive role in Switzerland. For the LLB Group, the quality of the mortgage portfolio is key. Growth must be sustainable and risk-conscious and in line with the type of property and the development of the market in the region. At the and of 2023, mortgages accounted for 90.3 per cent (31.12.2022: 89.2 %) of loans granted by the LLB Group, corresponding to CHF 13.8 billion (31.12.2022: CHF 12.9 billion) (see chapter Finance and risk management).

We use dedicated financing products to target our support at sustainable building and energy-efficient renovations. In the environmentally-friendly mortgages, which were specially created for this purpose, clients are given a discounted interest rate if they comply with Minergie standards or exceed the applicable energy efficiency standards in Liechtenstein and Switzerland. As of 1 January 2024, the requirements entailed in the environmentally-friendly mortgages will be readjusted so that corporate clients will now be able to benefit from this offer, too.

The Group Credit Risk Management regulation also stipulates that we must exclude business relationships that contravene laws, are in breach of moral or ethical principles, may harm the reputation of the LLB Group, or can be used to circumvent the law. Likewise, we refuse to enter into business relationships with clients whose creditworthiness or financial standing are in doubt.

Own investments

We believe that our own investments are also an important tool for making a positive contribution to the environment and to society. For this reason, we have also set up a range of ESG management tools for this area:

Management tools and our own investments

In addition, we have set ourselves the goal of fully withdrawing from companies in the fossil fuel sector by 2025. This sector is responsible for a significant portion of the entire carbon footprint of the treasury portfolio.

Engagement is also used as a management tool in our own investments. Analogous to the approach adopted for our investment products, we make use of the SRI assessment methodology of the International Shareholder Services (ISS) so that we can exercise our voting rights with regard to shares (see section Investment products). We therefore follow the guidelines on the UN Principles for Responsible Investment (UN PRI).

The sustainability criteria that apply to our own investments were decided on by the Group Asset & Liability Committee (GALCO) and comply with the Group Market Risk regulation.

Key figures for the banking business

As we work towards our sustainability goals, we will ensure maximum transparency. In November 2023, we therefore published our second TCFD report based on the internationally recognised standards of the Task Force on Climate-related Financial Disclosures (TCFD). This report includes an estimate of the GHG emissions we have financed. This is the key performance figure (KPI) for the progress we have made with regard to sustainability in the banking business.

It was not possible to collect separate data on financed emissions for this report. This is why we decided to extrapolate from the figures included in the 2022 TCFD report. With the same parameters in terms of data coverage and the same CO₂ emissions created by our counterparties and the projects we have financed, the total emissions of the mortgage and investment portfolio amounted to 2.29 million metric tons of CO₂ as at 31 December 2023. However, this is only an estimate. This figure is based on data coverage of 69 per cent of the assets that we had defined as in scope (especially investment products, our own investments, and mortgages).

Other data on the impact that our own and other managed assets have on sustainability are available in the EU Taxonomy chapter. Furthermore, we published our first PAI report according to SFDR in June 2023. This includes information on the principal adverse impacts (PAI) that our investment decisions have had on sustainability factors. Only the investment products of the LLB Group were included for this.

Customer orientation

The success of the LLB Group is closely related to client satisfaction. The challenge is being able to continually evolve our offering to satisfy new client needs in what is a fast-changing environment. If we identify these needs at an early stage, we can enhance the client experience to strengthen confidence in the services we offer and improve customer loyalty. In this way, we can make use of the opportunities gained through the change in client behaviour, thereby ensuring the long-term success of the LLB Group.

For instance, the data we have collected shows that over-the-counter transactions are steadily on the decrease, while the use of digital channels is sharply on the rise. Our aim is to achieve an ideal balance between physical and digital channels, whereby our clients are always central. Our omni-channel strategy therefore entails investing in digital channels on the one hand, and refurbishing our bank branches to accommodate the changed needs of our clients on the other. The classical transaction business is becoming less important and making way for personal services.

Besides its bank branches, LLB Group also maintains a wide network of ATMs. This makes us the only bank in Liechtenstein to offer this vital service, which is still actively used in spite of digitalisation. LLB Switzerland also has ATMs at numerous locations.

Client proximity through systematic surveys

Knowing the needs of clients is the basis for the further development of our channels and offerings. In 2023, we carried out a survey on satisfaction with the new concept for the bank branches. Overall satisfaction was very good, with the friendliness of our staff and the atmosphere scoring particularly highly. Additionally, our clients confirm that we offer competent advice and solutions that are tailored to their wishes and requirements. In Liechtenstein, we have also conducted brand tracking, which has provided us with information about the perception of our brand and services.

Excellent client advisory services

Through the ongoing training and professional education of our client advisers, we ensure that they offer suitable products and services during the consultations (see section Training as a main pillar of a company’s success). All employees with client contact in Liechtenstein and Switzerland are certified in accordance with the standards of the Swiss Association for Quality (SAQ); in Austria, certification is based on the European Investment Practitioner (EIP) label, which is recognised throughout the EU. In a personal consultation, a four-step process ensures that the relationships with the clients and their situation, needs and goals are analysed in detail and that they are presented with a solution that is tailored to their profile. For our asset management and investment advisory services, clients can decide for themselves how comprehensively they want to be advised by their client adviser. Equally, when it comes to the investment strategy, various options ensure that clients’ individual interests are central. In this way, we not only comply with the applicable EU Directive MiFID II, but also the Swiss Financial Services Act (FinSA) regulations (see section Regulatory requirements and developments).

Fair competition

As the bank for the country and the people, being able to offer attractive and innovative price models is important to us. Individual prices and flat-rate price models and, on request, performance-dependent conditions underpin our claim to guarantee a fair and transparent tariff structure. For LLB funds, we forego retrocessions (portfolio maintenance commissions), which makes our funds significantly cheaper in comparison to the market. We pass retrocessions received on third-party fund holdings on to our clients in full. Thanks to our simple and easy-to-understand tariff structure, the fees and conditions are evident at a glance. We also have a very fair approach when it comes to fees for our LLB funds and are one of the first banks to introduce a swap-based model for some fixed-income funds, with pricing being linked to the interest rate.

Financial planning for private individuals and entrepreneurs

The challenging geopolitical and economic environment is making it increasingly difficult for private individuals and entrepreneurs to make the right financial decisions. The need for comprehensive, professional advice is therefore continuing to grow. Our answer to this is the “LLB Compass – the 360° advice for your future”. Our holistic financial planning highlights all the important topics such as budgeting, asset structuring, pension planning, real estate and financing as well as tax expenses and estates. This provides our clients with a guide on how they can shape their financial future. In the case of entrepreneurs, our advice always takes account of the individual characteristics of the firm.

LLB Pension Fund Foundation for Liechtenstein

With the LLB Pension Fund Foundation, we are the only bank in Liechtenstein with a collective foundation for SMEs in Liechtenstein – and that since 2005. The Foundation is extremely popular thanks to its solid technical basis and its flexible design options based on the needs of the client. With a balance sheet totalling more than CHF 1.3 billion, it is one of the largest pension funds in the country as well as being an important pillar for Liechtensteinʼs domestic pension market. Its extremely attractive terms and conditions and good quality of service mean it is highly respected by its insured contributors and affiliated companies. The pathway it has adopted for digital channels means it is ideally equipped for the future. In order to be able to actively participate in shaping the legal framework, the LLB Pension Fund Foundation is represented on the Executive Board of the Liechtenstein Pension Scheme Association (LPKV). In this way, it is also instrumental in the expansion of the domestic market.