The global sustainable finance regulatory landscape has been dominated by the European Union, but Switzerland is now striving to distinguish itself as a leader in sustainable finance.
The European Union has been a leader in developing sustainable finance regulation. From its cornerstone initiative, the EU Taxonomy and SFDR (The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation introduced to improve transparency in the sustainable investment market) to the CSRD (The Corporate Sustainability Reporting Directive (CSRD) is an EU ESG (Environmental, Social, and Governance) standard adopted by the Council of the European Union on 28 November 2022, designed to make corporate sustainability reporting as coherent, consistent, and standardised as financial accounting and reporting) and the new sustainability requirements under MiFID II, the bloc has been actively developing its regulatory framework. Consequently, a large portion of the commentary and conversation surrounding sustainable finance regulation has been dedicated to the European Union. In our latest article, we move away from this trend and turn our attention to a jurisdiction that has become a challenge to the European Union: Switzerland.
The Swiss regulatory landscape
The Swiss Federal Council has set a goal to strengthen Switzerland’s position as a leading country in sustainable finance for 2022 to 2025. Sustainable finance is viewed as an opportunity for the Swiss financial centre to develop competitive advantages and take a central role in the transformation of the global economy.
However, the Swiss regulatory situation is inherently complex. Many Swiss financial market participants sell products in other countries, particularly in the European Union. Therefore, the industry must not only be aware of what is happening in Switzerland but also remain attentive to developments beyond its borders.
Furthermore, the situation within Switzerland itself is far from straightforward. As is often the case, the Swiss industry has been granted the freedom of self-regulation, which means that market participants have to navigate a mix of regulatory initiatives. This blog will highlight some key Swiss regulatory developments. They cover a range of industry and regulatory activities, as well as current and forthcoming regulation. The aim is to provide some clarity on the main trends affecting market participants in Switzerland and what this means for consumers, as well as to outline some technology-driven solutions that can ensure you stay one step ahead.
Regulatory trends in Switzerland
In December 2022, the Swiss Federal Council (SFC) published a report on sustainable finance. In this report, it outlined several distinct and interconnected initiatives that will promote the further development of sustainable finance in the Swiss financial centre. It also prepared a position paper.
The Swiss Financial Market Supervisory Authority (FINMA) has made it clear that one of its key tasks is to prevent 'greenwashing'. Since 2021, FINMA has expanded its supervisory activities and is actively covering the prevention and combating of greenwashing.
It also stated clearly that ESG (Environmental, Social, and Governance) risks must be integrated into the broader risk management strategy of financial institutions (i.e., asset managers, banks, and insurance companies). In a recent publication from January 2023, FINMA reaffirmed this point, noting that climate risks (including physical, transition, legal, and reputational risks) should be viewed in the same way as existing non-ESG risk categories. Therefore, financial institutions are expected to incorporate ESG risks into financial risk considerations when managing client assets and to publish the relevant information. There are also specific regulatory considerations depending on the type of financial institution, which we outline below.
Asset managers
In December, the SFC published a position paper on 'greenwashing' in the financial sector. In this document, the SFC indicated that financial services lack regulatory requirements with sustainability criteria. The document mentions existing rules that apply to investment funds, such as the FINMA rule requiring greater transparency in fund documentation that uses terms such as 'sustainable', 'green', and 'ESG' (see Guidance 05/2021). This rule sets out FINMA’s expectations that funds marketing themselves as sustainable must have disclosures, information, and reports that substantiate sustainability-related claims. However, it does not set out detailed reporting metrics.
The SFC not only refers to some of the industry standards led by the Asset Management Association Switzerland (AMAS), Swiss Sustainable Finance (SSF), and the Swiss Bankers Association (SBA), but also points out that more must be done to combat 'greenwashing' and proposes some high-level rules. These rules will focus on ensuring that products labelled as sustainable are indeed sustainable and that the necessary information is provided to ensure transparency. It proposes two potential investment targets – alignment with a sustainability objective or investment in achieving a sustainability objective – which could mirror Articles 8 and 9 of the EU Sustainable Finance Disclosure Regulation. To create a common framework for understanding sustainability, the document recommends using the UN Sustainable Development Goals (SDGs) to describe the sustainability-related objectives of a financial product. As part of the follow-up measures, a working group will submit a concrete regulation proposal by the end of September 2023.
Meanwhile, financial market participants can choose to voluntarily disclose their Swiss Climate Scores. This is a set of indicators that reflect best practice for reporting on progress towards net-zero targets. Good scores on these indicators can help attract investors. Alongside reporting on net-zero targets, governance, and other qualitative indicators, fund managers are required to report on the greenhouse gas emissions (intensity and impact) of their portfolio, as well as the proportion linked to activities that use fossil fuels.
Elsewhere, a large part of the industry already adheres to the AMAS voluntary standards on sustainability disclosures in funds, which will officially come into force in September 2023 and require its members to publish a sustainability report annually.
Investment managers
In January 2023, the SBA guidelines on the integration of ESG preferences at the point of sale came into effect. The rules, sometimes referred to as 'Swiss MiFID', stipulate that investment managers must take the ESG preferences of direct clients (private, professional, or institutional investors) into account and recommend products based on these priorities. These guidelines very closely mirror recent EU changes to MiFID II to ensure that sustainability priorities are taken into account as part of the suitability assessment at the point of sale. While European rules are stricter regarding how these preferences must be expressed (referencing Principal Adverse Impacts (PAI), the EU Taxonomy, or Article 2(17) of the SFDR), the substance of both sets of rules largely aligns.
Banks and insurers
Reporting in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) is also increasingly being incorporated into Swiss regulation, and many regulatory requirements are underpinned by TCFD. Large banks (category 1 and 2) and insurers (category 2 only) with assets exceeding CHF 1 billion are already required to disclose information in line with TCFD as part of their annual financial risk reports. From January 2024, this requirement will be extended to all public companies, banks, and insurers with more than 500 employees, a balance sheet total exceeding CHF 20 million, or revenue exceeding CHF 40 million.
Large companies
Large companies are also subject to the Swiss Code of Obligations, which has been in force since January 2023. Under this code, companies that meet the size threshold mentioned above are required to disclose information on a variety of topics, including CO2 targets, human rights, and how the company manages related risks.