Paving the way to a centre for sustainable finance

Today, the most prominent enforced regulation in Swiss law related to companies’ ESG disclosures remains the counter-proposal to the Responsible Business Initiative (RBI), which was adopted after the more far-reaching RBI was rejected by the Swiss electorate in November 2020. This counter-proposal imposes non-financial reporting duties on certain environmental and social issues as well as due diligence requirements regarding child labour and conflict minerals on Swiss businesses.³ In addition to the counter-proposal, the Federal Council adopted the implementing ordinance on climate disclosure for large Swiss companies in November 2022.⁴ This will enter into force as of 1 January 2024 and, among others, require large Swiss companies to implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) as well as a transition plan that is aligned with the Swiss climate goals. The climate ordinance expands the disclosure and application scope compared to the climate disclosure requirements issued by the Swiss Financial Market Supervisory Authority FINMA for large banks and insurers in May 2021.^5 6

In November 2021 FINMA also published guidance on preventing and combating greenwashing specifically targeting the Swiss financial market.  The guidance focuses on protecting investors and clients from being deceived regarding the alleged sustainability of products and financial services by laying out the scenarios under which it considers a business as engaging in greenwashing or at least sees a potential greenwashing risk due to a lack of transparency for investors.⁷ FINMA’s guidance will be supplemented by the government’s recent update (December 2022) on its position on preventing greenwashing, which states that merely incorporating sustainability criteria to minimise risks or optimise financial performance cannot be deemed as “sustainable” but that financial products advised as sustainable will need to be either in alignment with at least one specific sustainability goal or contribute to achieving at least one specific sustainability goal.⁸ How the Federal Council’s position on prevention of greenwashing in the financial market will be implemented and enforced is currently investigated by a working group led by the Federal Department of Finance which is set to publish a proposal by the end of September 2023.

As regulations and guidance are still evolving in Switzerland, the financial industry developed market practice approaches and self-regulations beyond the government and financial market regulations. On the one hand, the Swiss Bankers Association (SBA), comprising 260 member institutions, published two binding guidelines for members in June 2022⁹ for integrating sustainability criteria into investment advice and portfolio management, as well as mortgage advice. The self-regulation guidelines enter into force on 1 January 2023, with transition periods granted for adapting internal bank processes. The guidelines require banks to ask clients about their ESG preferences in order to offer them appropriate products and services as well as to include ESG topics in the training and professional development of their client advisors. For mortgage providers, the SBA expects the consideration of long-term value retention as well as the promotion of energy efficiency when advising clients on financing a property.

On the other hand, the Asset Management Association Switzerland (AMAS) published organisational, reporting and disclosure obligations in September 2022 which will enter into force on 30 September 2023 and therefore offer a transitional period of one year to its 200 members¹⁰. In collaboration with Swiss Sustainable Finance (SSF), AMAS also developed a template ensuring standardised calculation of the Swiss Climate Scores (SCS) indicators¹¹. AMAS thereby facilitates the adherence to this voluntary disclosure standard.

The report from the Federal Council published 16 December 2022 indicates that the government is sticking to the Swiss tradition of subordinating government action to market supremacy.

In contrast to the Swiss approach, the European Union employs a much more stringent path with numerous official regulations governing the field of sustainable finance. Especially in the past two years, a plethora of new regulatory developments was proposed by the EU. The EU pursues the implementation of the Action Plan for Financing Sustainable Growth, proposed by the European Commission in March 2018, to ensure the reorientation of capital flows towards sustainable investments. In fact, the European Commission set out new directives such as the Sustainable Finance Disclosure Regulation (enacted in March 2021), the Corporate Sustainability Reporting Directive (CSRD) in April 2021 or the integration of more stringent rules on the disclosure and consideration of sustainability risks and preferences when providing financial advice or portfolio management in the context of Directive 2014/64/EU, more commonly known as MiFID 2.

The European Parliament reported on 18 December 2022 that law makers from the EU also agreed on a number of measures aimed at combatting climate change.¹⁶ Under the EU Emissions Trading System, free pollution vouchers will now be phased out sooner than anticipated which will increase the required emissions reduction by European industries from 43% to 62% (from a base level in 2005 to 2030). Furthermore, the Emissions Trading System will be applied to road transport and building heating starting in 2027, significantly widening its reach. Foreign companies not complying with the EU’s strict sustainability standards will need to pay additional tariffs to enter the European market under the Carbon Border Adjustment Mechanism. Finally, in order to cushion the likely increase in fuel and energy prices, a social climate fund for particularly vulnerable households and businesses will be set up which will be funded with the revenues from the Emissions Trading System and include tens of billions of euros.

An often-debated aspect of the Swiss legislative process is its lengthy and cumbersome development and implementation period. Proponents of the Swiss approach may therefore argue that self-regulation is much more efficient than government-imposed regulation as it can be more easily rolled out and amended.

In comparison, the EU established a very comprehensive framework to govern sustainability regulations in the financial sector since first declaring its intention to become an international leader in that respect four and a half years ago. The EU has often opted for quick implementation of a rudimentary framework with the intention of specifying details in a later phase, as is for example the case with Delegated Acts, which are a core component of both the SFDR, where they are used to impose more precise disclosure standards, and the EU Taxonomy, where they define the technical screening criteria for each environmental objective. Consequently, the comprehensive EU regulations are currently far ahead of the principle-based regulation in Switzerland and the individual self-regulation guidelines proposed by Swiss industrial bodies such as the SBA and AMAS. The detailed comparison of the SBA guidelines and EU standards provided in EY’s Greenwashing series clearly illustrates this divergence.¹⁷

Another example is the Swiss government’s new position on greenwashing. While expected to expand further than the FINMA guidance, a concrete proposal on next steps will only be presented in September 2023. The current position of the Federal Council is still much less specific when compared to the EU Taxonomy. Whereas the EU Taxonomy defines 6 environmental objectives and requires an economic activity to both contribute to at least one objective and to do no harm to the others, the new definition of sustainable products of the Federal Council is much wider than the EU’s and allows for a lot of room for interpretation for individual financial institutions to define their own sustainability criteria. Additionally, there is no mention of adverse effects on other sustainability targets in the new Swiss position.

As the EU also imposes some of its regulations on companies from non-EU countries, as will for example be the case with the CSRD, the disparity with Swiss regulation will force Swiss companies commercially involved with the European Union to look to the EU’s more stringent sustainability standards for guidance or facing consequences in case of non-adherence. Another example is the upcoming Carbon Border Adjustment Mechanism, which will force Swiss companies to pay disproportionate fees when importing carbon-intensive products. The examples above clearly show that the EU was much faster and stricter in regulating its sustainable finance landscape.

As the Swiss Federal Council publicly announced its ambition to become a leading sustainable financial centre, outlining 15 measures within four areas of action, in December 2022, the adoption and implementation of these actions over the next three years will determine the position of Switzerland in Sustainable Finance. The ambition level to become a leading centre for sustainable finance is high while regulatory intervention has been low compared to a much more proactive, decisive regulatory environment observed in the European Union.