In December 2022, the Federal Council published its position paper regarding greenwashing. It instructed a working group, led by the Federal Department of Finance (FDF), to examine the best way to implement its position. The result of this examination has now been published.
What does the statement of the FDF say?
The FDF will implement the Federal Council's position by proposing principles-based state regulation at ordinance level. The FDF will submit a consultation draft to the Federal Council by end-August 2024 at the latest. If, however, the financial industry presents a self-regulation solution that implements the Federal Council's position effectively, the FDF would dispense with further regulatory efforts.
What does this mean for financial institutions?
For the first time, the understanding of “sustainable investment product/service” will be standardized on the Swiss financial market. We expect that this definition will largely reflect the concept presented in the December position paper:
- Double materiality: products and services can only qualify as sustainable if they address one or several sustainability targets. Pure (ESG) risk management is regarded as part of the fiduciary duty and therefore mandatory for any discretionary money manager or advisor
- Sustainability targets: we don’t expect specific frameworks or targets to be mandated but transparency will need to be provided on those targets and how they are being measured
- Alignment and contribution: sustainable investment products need to be either aligned with or need to contribute to the defined sustainability target(s)
It remains to be seen how much additional guidance will be provided in the revised ordinances and the respective implementing regulations and/ or self-regulations.
Similar concepts have already been taken up by the SSF Market Study 2023, impact standards such as GIIN or in the Sustainability Disclosure Regime (SDR), the UK’s transparency regime for sustainable investment products and servcies. Simply speaking, “alignment” is about the alignment of impacts of companies with certain sustainabiltiy targets, while “contribution” is about the real-world impact of investors, for example via engagement. Taking these definitions, up to 80% of assets currently management as “sustainable” in Switzerland could lose that status, based on data available in the mentioned SSF Market Study.
In any case, interoperating the the new Swiss regime, SDR and SFDR (with it’s many national “variants”) will only add to the already significant challenge to establish consistent practices across the business while meeting the expectations of individual regulators.
For banks and asset managers, the new regulation is likely to have four main effects:
- Higher standards for sustainable products and services: while ESG risk management becomes a must for all institutions, those looking to market sustainable investment solutions will need to apply more sophisticated responsible investment approaches to clearly demonstrate the consideration of double materiality (with respective implications on costs for data providers, systems and processes). It seems likely that the Swiss Climate Scores will become the basis for any responsible investment approach involving climate topics going forward.
- “Impact” for retail investors is becoming more challenging: while such products are already usually not accessible to retail clients (despite their popularity), more stringent standards on what exactly constitutes “investor impact” could make the manufacturing of such products more complex and costly, thus making it even harder for retail to invest. In its sustainable finance strategy 2022-2025, the Federal Council expressed that a “mainstreaming” of impact investing would be desirable to allow private capital to be channeled on a large scale. It will be interesting to see how this square of the circle will be accomplished in future regulations.
- Robust data and reporting solutions: the more “quantitative” understanding of sustainable investment solutions reflected in the definition above is likely to result in the need for a more data-intensive reporting to clients and therefore more powerful investment reporting solutions.
- Greenwashing risk management: training of staff will be paramount but robust end-to-end investment processes and a comprehensive greenwashing risk framework will form part of an effective response.
For insurers, unlike banks and asset managers, the FDF’s statement means that the wave of sustainable finance regulation has now reached them as well, likely in the area of insurance-based investment products. While banks and asset managers will begin to gain experience with integrating ESG into product manufacturing and distribution in accordance with the applicable standards of the SBA and AMAS, this will be a new area for most Swiss insurers.
What to do next?
With the new sustainable finance regulation, a binding baseline standard for sustainable investing is now also introduced in Switzerland. Some of the most complex areas related to that are the following and should therefore be implemented as soon as possible:
- ESG risk management: approaches for the systematic identification, quantification and management of ESG risks are continuously evolving and need to be “mainstramed” across all product categories and embedded in the firm’s risk framework.
- Quality of “sustainable” products and services: institutions should start early on if their existing product are likely to meet the concepts of impact “alignment” or impact “contribution”, and adust their product strategy accordingly.
- Reporting solutions: many traditional applications have only limited capabilities to report on non-financial metrics. Accordingly, firms should assess the capabilities of their current systems and look for alternatives, if necessary.