1 Disclosure of the methodological basis

The following general requirements are relevant for SZKB’s 2023 sustainability reporting:

• In accordance with the Swiss Code of Obligations (CO), SZKB is obliged to report on non-financial matters starting from financial year 2023.
  
• SZKB decided to calculate the financed emissions in accordance with the PCAF standard.
  
• SZKB decided to prepare its sustainability reporting for 2023 and 2022 in accordance with GRI.

Notes 3 and 4 feature an index for the requirements «Reporting on non-financial matters in accordance with the Swiss Code of Obligations» and «Reporting in accordance with GRI (GRI Index)», which shows where the information pertaining to the points to be reported can be found in the sustainability report.

SZKB employs specific concepts for reporting on individual, specific matters. This is especially true for the carbon footprint and the surveys on client and employee satisfaction.

On 29 November 2020, the «Responsible Business Initiative» was defeated by a majority of the cantons. The indirect counter-proposal of Parliament was thus approved. This includes new non-financial reporting obligations and new due diligence obligations in the areas of conflict minerals and metals and child labour.

In accordance with Art. 964a CO, SZKB is obliged to prepare a report on non-financial issues starting from financial year 2023. This obligation is met by this Sustainability Report.

The report is to include information that is necessary for understanding the business trend, the business results, the company’s situation and the impact of its activities on these topics (Art. 964b CO with further details). This includes accountability in regard to environmental issues, in particular CO₂ targets, social issues, employees, human rights and combating corruption both domestically and internationally. Furthermore, specific due diligence and reporting obligations apply in the areas of conflict minerals and metals, as well as child labour.

Companies involved in conflict minerals and metals or child labour are obliged to develop a supply chain policy as part of their management system and establish a traceability system for their supply chain. Companies must identify and assess the risks of adverse impacts in their supply chains, draw up a risk management plan and take measures to minimise the identified risks.

SZKB’s risk management process is comprised of five phases.

1. Continuous identification of pertinent risks and risk drivers.
   
2. Assessment of identified risks.
   
3. Ongoing management of risks in everyday business operations.
   
4. During monitoring, applicable standards and control mechanisms are subject to review or quality assurance.
   
5. Reporting provides all hierarchical levels with a transparent and current overview of the underlying risk profile and the respective risk position.

In 2023, SZKB updated and expanded its risk inventory for ESG risk drivers in 2023. The risk inventory covers all three environmental (E), social (S) and governance (G) dimensions. Climate risks form an integral component of the environmental dimension.

In the risk inventory, the key events associated with environmental, social and governance standards were defined and described. The main mechanisms for transfer to the relevant risk category and the affected sub-portfolios were recorded for each event. Environmental events are broken down into physical and transitory risks of an acute or chronic nature. The identified transmission channels are described in detail and illustrate how ESG impacts each of these channels. The ESG events and their corresponding transmission channels were quantified according to the associated exposure (E=Exposure), the probability of their occurrence (L=Likelihood) and the impact (I=Impact) of their occurrence (S=Score). This results in a score that assists in identifying the most critical transmission channels.

An overall qualitative assessment with regard to materiality is conducted and described qualitatively for each event. The entire assessment process is carried out for both the gross total risk and the net total risk. The regionally specific conditions of the SZKB are taken into account, such as by utilising the publicly available maps provided by the Federal Office for the Environment (FOEN). The assessment of the net view took into consideration the measures and initiatives implemented by SZKB to mitigate the presented risks.

Due to the changing market environment, a qualitative assessment of the long-term trend was also conducted based on the existing net risk.

CO₂ is a key driver of climate change. In addition to the greenhouse gas carbon dioxide (CO₂), there are other greenhouse gases such as methane and nitrous oxide. The different gases do not contribute to the greenhouse effect to the same extent and remain in the atmosphere for different lengths of time. In order to make the effect comparable, the unit of measurement CO₂ equivalents (CO₂e) was created to standardise the climate impact of the various greenhouse gases.

In this Sustainability Report, the terms CO₂ and CO₂e are used interchangeably.

The terms «Scope 1», «Scope 2« and «Scope 3» play a role in CO2e reporting. The following applies:

1. Scope 1 comprises direct greenhouse gas emissions that originate from sources that are under the company’s control or within its sphere of influence. This typically includes emissions from the combustion of fossil fuels such as gas or oil in our own facilities or vehicles.
   
2. Scope 2 comprises indirect greenhouse gas emissions resulting from the purchase of external sources of electricity or thermal energy.
   
3. Scope 3 encompasses all other indirect emissions of greenhouse gases that are not included in Scope 1 or Scope 2. These are emissions that occur along the entire value chain of a company, including suppliers, clients, transport, disposal and product use.

In its CO₂e emissions, SZKB differentiates between operational and financed emissions.

Direct and indirect CO₂ emissions are documented in SZKB’s carbon footprint. Due to business-related delays in reporting by data suppliers that are primarily external, the carbon gas footprint does not refer to the same reporting year as the Sustainability Report, but instead to the previous year in each case.

In addition to Scope 1 and 2 emissions, SZKB also reports some of its Scope 3 emissions from operations in accordance with ISO 14064-1 and the Greenhouse Gas Protocol (GHG) (see Chapter 2.4.1 «Relevance, goals, concepts and measures», Section Management approach). The following table provides an overview of the emission sources that fall under Scope 3 in SZKB’s operational carbon footprint:

In the reporting year, SZKB did not purchase any CO₂ certificates or engage in emissions trading, and there were no reductions in production capacity or significant outsourcing of processes.

SZKB decided to calculate the financed emissions in accordance with the PCAF standard.

The acronym PCAF stands for «Partnership for Carbon Accounting Financials». PCAF is a global initiative that was launched in 2019 with the primary objective of developing uniform standards and methods for accounting for greenhouse gas emissions. This will allow banks in particular to quantify their emissions, develop targets for reducing emissions and communicate their progress in a transparent manner.

PCAF defined seven primary categories for accounting for greenhouse gas emissions in the financial sector. The categories are:

• Listed shares and corporate bonds
  
• Corporate loans and unlisted equity
  
• Project financing
  
• Commercial property
  
• Mortgages
  
• Motor vehicles
  
• Public debt

The PCAF categories of projects and financing of motor vehicles are not material for SZKB because SZKB does not engage in this type of business. In the area of leasing, however, SZKB refers clients to a specialised partner company.

In the reporting year, SZKB for the first time calculated the greenhouse gas emissions on its leasing portfolio (Scope 3, Category 15). Emissions were calculated based on the global standards of the Greenhouse Gas Protocol (GHG) and the Partnership for Carbon Accounting Financials (PCAF). SZKB allocated its financing portfolio to the following PCAF classes:

• Mortgages (owner-occupied residential property and individual flats)
  
• Commercial properties (outstanding mortgage financing with mortgage liens, excluding agriculture)
  
• Corporate financing (other loans, including agriculture)

These allocations differ from the definitions typically used at SZKB.

Although SZKB also provides individual financing in the energy sector, SZKB has simplified its presentation by grouping this activity in commercial real estate and corporate financing due to the low volume of this business.

In cases where values were missing, external public data sources were used for the calculation. Whenever the data for the calculation was still incomplete, average values based on the known values were derived and applied. The PCAF Data Quality Score reflects the average quality of the data used.

The emissions intensity shown pertains to the Scope 1 and 2 emissions from financing. At present, SZKB does not include Scope 3 emissions from financing in its calculations. The financed emissions for the mortgages and commercial properties have been calculated using the emission factors in kgCO₂/m² (score 4) for 2020 provided by PCAF (in accordance with PCAF’s recommendation, as more recent factors still have a provisional status). The emissions associated with corporate financing were determined using emission factors measured in kgCO₂e per thousand francs of turnover (PCAF score 4), which were calculated and provided by the consulting firm zeb. zeb calculated these emission factors on the basis of Swiss emissions statistics, the national input-output table and the national accounts, which only take into account Scope 1 and 2 emissions. If no turnover or accounting data was available for the companies, the emissions were computed using the PCAF score 5 calculation methodology. When calculating the financed emissions, missing data was supplemented with average values and estimates.

SZKB reports the CO₂ emissions financed by its SZKB Ethical Fund.

SZKB uses data from the sustainability specialist ISS ESG to assess sustainability indicators, with a focus on climate metrics. ISS ESG is a subsidiary of the Institutional Shareholder Services (ISS) Group, which was founded in 1985 and specialises in ESG solutions. The division has a staff of 610 individuals and not only provides sustainability ratings for companies and funds but also gathers climate data from more than 37,000 companies.

The ISS ESG methodology for measuring and assessing the climate footprint of investment portfolios includes around 800 sector and sub-sector-specific models. This allows a special focus to be placed on factors that are especially pertinent to the specific business sector.

The ISS ESG methodology consists of the following steps:

1. Compilation of the emissions reported by the company itself: Various public sources are used for this purpose, such as sustainability reports, Bloomberg surveys, CDP and investor relations.
   
2. Evaluation and validation of this information, with the possibility of discarding it necessary. The data points received are checked for their trustworthiness using criteria such as: Discrepancies with historical data, discrepancies between sources, external validation and company experience in climate data collection.
   
3. Estimate of emissions from companies that do not provide information about their own greenhouse gas emissions: Sector- and sub-sector-specific models are used for this purpose.
   
4. Assessment of Scope 3 emissions: Depending on the company-specific sector profile, the Scope 3 emissions of each company are modelled with a) a bottom-up approach focused on the value chain, b) a top-down approach focused on the product or c) a peer group-oriented process.
   
5. Allocation of corporate emissions to portfolios: Greenhouse gas emissions of companies are allocated to their owners, that is, the shareholders, on a pro rata basis in accordance with the «ownership principle», similar to how company assets are allocated. The TCFD recommendations are used to determine the weighted greenhouse gas intensity. For this purpose, the emissions per sales dollar are multiplied by the specific company’s portfolio share.

SZKB chose to prepare its sustainability reporting in accordance with the Global Reporting Initiative (GRI) in 2023 and in subsequent financial years, as it did in 2022.

GRI is a globally recognised framework for sustainability reporting. It was developed to help companies and organisations transparently and comprehensively communicate their economic, ecological and social impacts. The most important features of the GRI guidelines are:

1. The GRI guidelines are a comprehensive approach that addresses a broad range of sustainability issues, including environmental performance, social impact, labour practices, human rights, governance and more.
2. A key principle of the GRI guidelines is the concept of materiality. Companies are to identify the sustainability concerns that are most pertinent to their business activities and stakeholders and report on these aspects. This enables targeted and focussed reporting.
   
3. The GRI guidelines provide a framework for the preparation of sustainability reports. They define a set of indicators and key figures that companies can use to measure and report their performance.

In 2023, SZKB worked together with a specialized consulting firm to conduct a client satisfaction survey. The key figures were:

• Survey period: 4–24 May 2023
  
• Invited clients: 10,986
  
• Response rate: private clients 11%, private banking clients 18%, commercial/corporate clients 12%.
  
• Survey methodology: online after receipt of a letter.

In 2023, SZKB conducted an employee satisfaction survey. The survey period was from 12 June to 7 July 2023. A total of 520 active employees were invited to participate, and 496 of them, representing an 87% response rate, completed the survey. The employee satisfaction survey was carried out electronically and anonymously and involved a benchmark comparison with 15 other financial service providers, including eight cantonal banks. Approximately 90 questions were posed in different categories referred to as the «influencing factors». The influencing factors included the employee’s own team, cooperation, the employee’s manager, SZKB’s strategy, processes and procedures, remuneration and work equipment provided. The responses of the survey participants were used to determine «target variables», including satisfaction, employer attractiveness, absence of a feeling of resignation, willingness to recommend SZKB to others and commitment. Overall, the target variables reflect the level of satisfaction, commitment and motivation of SZKB employees, as well as their perception of SZKB as an attractive employer.