Climate change - Fiduciary duties for financial service providers

Impact of climate change on asset management

WWF Switzerland mandated MME to investigate the extent to which climate-related financial risks are part of the fiduciary duty of financial service providers in Switzerland under current law.

Within the scope of our analysis with a focus on financial service providers and asset management mandates, we have gained the following main insights:

  • Climate change creates financially relevant risks for investors. These climate-related risks relevant to investments can be divided into two main categories: Physical risks and transition risks. The second category includes regulatory risks, liability and litigation risks and reputational risks.
  • Under the existing supervisory rules of conduct, climate-related risks that may arise for clients' assets must be included by financial service providers in the investment process for asset management mandates (risk management). In particular, there is the risk that, in the event of an ESG trend in the market, companies with negative ratings or those affected by regulatory measures could suffer a massive loss in value (stranded assets).
  • Based on the duty of care and fiduciary duty according to art. 398 para. 2 CO - and based on supervisory law within the framework of the Financial Services Act (“FinSA”) - financial service providers must inform their clients in an asset management relationship about the material climate risks of an agreed investment or investment strategy (duty of information).
  • We are of the opinion that the duty of disclosure or exploration of the client’s ESG and sustainability preferences under supervisory and contractual law does not (yet) form part of the general duty of care and fiduciary or rules of conduct. Under current Swiss law, the financial services provider is not required by law to ascertain the ESG preferences of the client (no duty of investigation). The EU goes further: Under EU law, the survey and consideration of clients' ESG preferences will in future form a mandatory component of the suitability test under MiFID II.
  • If the financial services provider asks the client about his ESG and sustainability preferences or if the client expresses wishes (e.g. restrictions), then climate aspects become part of the suitability test, which must be carried out with due care.
  • If a client wishes a "green" portfolio, this wish becomes part of the mandate. A "green" portfolio must contain sustainable financial products. The financial service provider must ensure with due diligence that the financial products advertised as "green" and selected by him for the client are in fact "green". In this context, the financial services provider is also obliged to ensure the necessary transparency. There are numerous standards as well as different measurement and rating methods. The EU wants to create clarity here and intends to enact a taxonomy in 2020.
  • As a supervisory authority, FINMA does not check whether "sustainable" financial products are in fact "sustainable". De lege lata, there is no legal basis for such checks. 
MME-ESG-Klimastudie

February 2020 | Authors: Dr. Martin Eckert, Dr. Tamara Teves, Stefanie Fuchs

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