Overview – sustainability for the Swiss financial centre
As a member of the United Nations (UN), Switzerland has pledged to implement the UN 2030 Agenda for Sustainable Development and ratified the Paris Climate Agreement in 2017. Over the past few years, the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB) have joined the Network for Greening the Financial System and Switzerland has joined the International Platform on Sustainable Finance.
Last summer, the Swiss financial centre demonstrated its intention to defend and further expand its position as a leading location for sustainable financial services in spite of increased international competition through a wave of publications on the topics of sustainable finance and climate risks. Developments abroad, such as the ambitious EU action plan to finance sustainable growth, are also expected to have an impact on Switzerland.
Focus topic 1: Regulatory developments and reporting
Companies that position themselves as sustainable and produce reports on this, need reporting processes that ensure accurate data and publications. The requirements vary from one jurisdiction to another:
Switzerland:
In line with the country’s ambition for sustainable finance, Switzerland has undertaken the following steps:
- After the rejection of the Responsible Business Initiative, and under new regulations governing the disclosure of non-financial information (Swiss Code of Obligations [OR], article 964bis et seq.), large Swiss companies are legally obliged to ensure transparency with regard to the risks posed by their business activity in relation to environmental, social, employee, human rights and anti-corruption matters, and all measures taken to counter these.
- Switzerland officially pledged its support to the Task Force on Climate-related Financial Disclosures (TCFD).
- FINMA is amending its circular “Disclosure – banks”. The revised circular will enter into force on 1 July 2021. Initially, only the large banks (supervisory categories 1 and 2) will fall under the scope of the disclosure obligations for climate-related financial risks.
- The Federal Council has decided to hear proposed changes to Swiss financial market law on the subject of greenwashing until autumn 2021, if necessary.
European Union:
The EU is implementing measures defined in the EU Action Plan on Sustainable Finance. Some of the key regulations are summarised below:
- The EU Taxonomy regulation, which entered into force 12 July 2020, reflects a common European classification system for environmentally sustainable activities. It follows six environmental objectives and defines an economic activity as sustainable if this activity contributes at least to one of these objectives without, at the same time, doing significant harm to any of the other objectives.
- The Non-Financial Reporting Directive (NFRD) is the EU legal framework for regulating the disclosure of non-financial information by corporations (all industries). It was adopted in 2014 and states that corporations have to report on ESG information from 2018 onwards. The NFRD is rather flexible – it applies only to large corporations and contains so-called comply-or-explain clauses. The EU has recently published the new Corporate Sustainability Reporting Directive (CSRD) which revises the Non-Financial Reporting Directive (NFRD).
- The Sustainable Finance Disclosure Regulation (SFDR) is the new EU regulation that introduces rules for financial market participants and advisers to report on how they account for sustainability risks. SFDR applies at the entity level and product level and requires reporting on sustainability risks even if no ESG-related products are being offered. For ESG products, additional disclosures are required. While SFDR has been in force since 10 March 2021, only the first level of implementation has required action, further disclosures will be required at a later stage of development. As with many EU regulations, level 1 development sets out the basic framework principles for a regulation, however, without specifying technical details. The SFDR also requires asset managers to disclose their policies regarding the consideration of Principal Adverse Impacts (PAI) of investment decisions on sustainability factors on a comply-or-explain basis. SFDR level 2 will come into force once the regulation is complemented with Regulatory Technical Standards (RTS), expected in 2023. The RTS will also specify the linkages to the Taxonomy in more detail.
SFDR and the Taxonomy are both based on European regulation and are immediately enforceable in the EU states without further translation into local law. The linkages between the three frameworks will be further specified.
Global:
A new global development that is noteworthy in this context is:
- At the G7 Finance Minister meeting on 5 June 2021 a communique was issued that referenced ongoing work to consider the formation of a new sustainability board within the structure of the IFRS Foundation. The aim is to develop a global baseline of sustainability-related financial disclosures that bases on the TCFD and to make climate-reporting mandatory for corporates adhering to IFRS standards.
In view of the regulatory developments it is vital that financial institutions
- have clarity as to which standards they have undertaken to uphold, and which regulations have to be applied (by which entities);
- define the scope and key features of reporting;
- implement strong governance and effective checks in the reporting process.
Focus topic 2: Compliance and consistency in implementation
Focusing on sustainable investments requires adjustments to processes, checks, directives, contracts and systems and, above all, the communication with clients. These adjustments should all be geared to keeping sustainability promises made to clients.
- Client preferences (and instructions) must be clearly understood and documented.
- Investments and advice must be selected and provided in line with communications and expectations.
- Client reports must be prepared in such a way that clients gain a reasonable overview as to whether or not their expectations have been met.
Conclusion
Financial market participants that operate in the EU and want to provide sustainable products for their clients must find ways of adhering to increasingly strict reporting and compliance demands. Since many different areas of a company are affected and some aspects of implementation are still unclear, an external point of a view, review of key controls and benchmark comparison are invaluable.