30 August 2023

ESG Switzerland: Regulation of sustainability in the fund area

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The demand for sustainable finance is growing. In Switzerland, there are no specific measures, but only various individual laws and recommendations. In the following we will give an overview.

The demand for sustainable financial products is increasing with the growing climate crisis. The topic is also under discussion at the regulatory level. The fact is that so far in Switzerland - in contrast to the EU - no sustainability-specific measures have been enacted either at the statutory or regulatory level. The regulation of sustainability in the fund area is made up of individual general provisions of various laws and recommendations. These are presented in overview in the following article.

According to the Federal Council's report "Sustainable Finance Switzerland - Fields of action 2022 -2025 for a leading sustainable financial centre", sustainability is one of the pillars of Switzerland's financial market strategy. In this context, the State Secretariat for International Finance (SIF) was tasked with examining developments in this area at international and EU level and their impact on the Swiss financial centre. Based on this, concrete proposals for measures were to be developed. This has not yet been done. For example, there is no consensus in Switzerland on what "sustainability" actually is or which parameters have to be fulfilled for a financial product to be described as "green" or "ecological". This increases the risk of abuse through so-called "greenwashing". Greenwashing occurs when a company pretends to act in a particularly environmentally friendly and responsible manner without there being a sufficient factual basis for doing so.

There are general rules that can be applied to the topic of greenwashing in the financial sector. For example, general legal principles for preventing and combating greenwashing can be derived from the Collective Investment Schemes Act and the Ordinance on Collective Investment Schemes. For example, on the prohibition of deception (Art. 12 CISA), the minimum requirements for the content of fund documents (Art. 35a CISO), the duties of conduct (Art. 20 CISA) or the organisational requirements for the institutions entrusted with the management (Art. 14 CISA; Art. 9 FinIA). The prohibition of misleading advertising in Art. 3 lit. b UCA applies to advertising with terms such as "sustainable". FINMA also has the topic of greenwashing on its radar. FINMA has issued a supervisory communication on preventing and combating greenwashing as well as a circular on the disclosure obligations of banks and insurance companies. In the former communication, FINMA explains its supervisory practice with regard to sustainable financial products. FINMA focuses its supervision on the financial risks for financial institutions and the financial system as a whole, as well as on the protection of investors and clients. It also uses case studies to explain what it understands by "greenwashing". Greenwashing, or at least a greenwashing risk, can be assumed if terms such as "zero carbon" or "impact" are used without being measurable or verifiable. In the circular on disclosure requirements, FINMA specified the disclosure requirements of banks and insurance companies with regard to climate risks. According to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), a description of the short-, medium- and long-term climate-related financial risks and their impact on the business and risk strategy as well as the effects on the existing risk categories must be disclosed. Finally, the counter-proposal to the corporate responsibility initiative came into force on 1 January 2023. This extends the accounting obligations in the CO for large FINMA-subordinated companies to the effect that they must also report on non-financial matters for the first time for the 2023 reporting period. Specifically, this concerns the reporting obligation on CO2 targets in the area of environmental sustainability. The corresponding ordinance, which will come into force on 1 January 2024, is intended to concretise the provisions of the CO and implement the recommendations of the TCFD.

These laws and communications are supplemented by various voluntary measures, whether in the form of self-regulation or the Swiss Climate Scores (SCS). In the area of self-regulation, the Swiss Bankers Association (SBA) and the Asset Management Association Switzerland (AMAS), for example, have issued binding guidelines for their members. These aim to promote the integration of ESG criteria at product and company level as well as the inclusion of ESG criteria in the advisory process. The SBA has also issued a "Guideline for Mortgage Providers to Promote Energy Efficiency", which came into force on 1 January 2023 and is binding on member banks (with a transitional period for adapting the bank's internal processes until 1 January 2024). Finally, the Federal Council launched the SCS on 29 June 2022. The aim is to become an international leader in the field of sustainable investments through credible climate transparency. The SCS is intended to provide investors in Switzerland with information that gives them an overview of the compatibility of their financial investments with international climate goals.

The legal situation regarding sustainability in the fund sector is blurred and there are considerable risks for financial market players in connection with "green" financial products. We are happy to support you in gaining an overview of the confusing regulatory landscape in Switzerland and in the EU in the area regarding sustainability in the fund sector and in implementing the necessary measures in the area of compliance and risk.