A Challenger Is Rising Up to Become the New Regulatory Leader: Switzerland
The global regulatory landscape has been dominated by the EU but now Switzerland is aiming to set themselves apart as a leader in sustainable finance
The European Union has been a leader in terms of the development of sustainable finance regulation. From its flagship EU Taxonomy and SFDR to CSRD and the new sustainability requirements under MiFID II, the bloc has been busy developing its regulatory framework. Consequently, much of the attendant commentary and conversation around sustainable finance regulation has focused on the EU. In our latest blog, we diverge from that trend and focus on a jurisdiction that has emerged as a challenger to the EU: Switzerland.
The Swiss Regulatory Landscape
The Swiss Federal Council has set a goal to reinforce Switzerland as a leading location for sustainable finance for 2022 to 2025. Sustainable finance is seen as an opportunity for Switzerland’s financial center to develop a competitive advantage and play a central role in the transition of the global economy.
The regulatory picture in Switzerland is, however, inherently complex. Many Swiss financial market participants sell products into other geographies, most notably the EU. As well as having a grasp of what is happening in Switzerland, therefore, the industry must also be attentive to developments outside its borders.
Moreover, the picture in Switzerland itself is far from straightforward. As is often the case, Swiss industry has been afforded freedom to self-regulate, meaning market participants must navigate a mix of regulatory initiatives. In this blog, we will highlight some relevant Swiss regulatory developments. These cover a mix of industry and regulatory activities, and current and forthcoming regulation. In doing so, we hope to offer some clarity in terms of the major trends impacting market participants in Switzerland and what this means for you, as well as outlining some technology-based solutions that can ensure you can remain one step ahead.
Regulatory Trends in Switzerland
In December 2022, the Swiss Federal Council (SFC) published a report on sustainable finance. Within this report, it outlined a number of diverse and linked initiatives that will foster the further development of sustainable finance in the Swiss financial center. It also produced a Position Paper (see below).
The Swiss Financial Market Supervisory Authority (FINMA) has made it clear that preventing greenwashing is one of its major focuses. Since 2021, FINMA has extended its supervisory activities and actively covers preventing and combating greenwashing.
It also made clear that ESG risk should be incorporated into financial institutions’ (i.e. asset managers, banks, and insurance companies) broader risk management strategy. A recent January 2023 publication by FINMA reaffirmed this point, noting that climate risks (including physical, transition, legal and reputational risks) should be considered in the same way as existing risk categories not related to ESG. It is therefore expected that financial institutions include ESG risks within their consideration of financial risks and publish relevant information when managing clients’ assets. There are also specific regulatory considerations based on the type of financial institution, which we highlight below.
- In December, the SFC published its Position Paper on greenwashing in the financial sector. In this paper, the SFC referred to a lack of regulatory requirements with sustainability criteria for financial services. The Paper mentions existing rules in place for investment funds such as the FINMA rule that requires increased transparency in fund documentation where terms like “sustainable”, “green” and “ESG” are used (see Guidance 05/2021). This regulation outlines FINMA’s expectation that funds marketing themselves as sustainable should have disclosures, information and reports to support their sustainability related claims. It did not however prescribe granular metrics for reporting.
- Alongside referencing some industry standards led by Swiss Asset Management Association (AMAS), Swiss Sustainable Finance (SSF) and Swiss Bankers Association (SBA), the SFC suggests that more needs to be done to combat greenwashing and proposed some high level rules. These rules will focus on ensuring that products labeled as sustainable are indeed sustainable and make requisite disclosures to ensure transparency. It suggests two possible investment objectives – alignment with a sustainability goal or contribution to a sustainability goal – which could mirror Article 8 and 9 under the EU’s SFDR. To establish a common baseline for understanding sustainability, the paper recommends using the UN’s Sustainable Development Goals (SDGs) to describe sustainability related goals of the financial product. By way of next steps, a working group will bring forward a concrete proposal for the regulation by the end of September 2023.
- In the meantime, financial market players may choose to voluntarily disclose their Swiss Climate Scores. These are a collection of indicators that represent best practices for communicating progress to net zero. Scoring well across the indicators can help attract investors. As well as reporting on net zero targets, stewardship and other qualitative indicators, fund managers must report the greenhouse gas emissions of their portfolio (intensity and footprint), as well as how much is exposed to fossil fuel activities.
- Elsewhere, much of the industry is already following the AMAS voluntary standards for disclosure of sustainability in funds, which officially come into force in September 2023, requiring its members to publish a sustainability report each year.
- In January 2023, the SBA’s guidelines on integrating ESG preferences at point-of-sale came into effect. The rules, sometimes referred to as “Swiss MiFID”, stipulate that wealth managers must take into account the ESG preferences of end clients (retail, professional or institutional investors) and recommend products based on those preferences. These guidelines read very closely across to the recent EU changes to MiFID II to ensure that sustainability preferences are considered as part of the suitability assessment at point of sale. While the European rules are more prescriptive in terms of suggesting how those preferences must be expressed (by reference to Principal Adverse Indicators (PAIs), EU Taxonomy or Article 2(17) of SFDR), the spirit of the two rules is largely consistent.
Banks and Insurers
- Reporting in line with the Recommendations from the Taskforce on Climate Related Financial Disclosures (TCFD) is also a growing feature of Swiss regulation, with many regulatory requirements anchored in the TCFD. Large banks (Category 1 and 2) and insurers (Category 2 only) with more than CHF 1 billion in assets are already required to disclose in line with TCFD as part of their annual reporting of financial risks. From January 2024, the requirement will be extended to cover all public companies, banks and insurers with more than 500 employees, more than CHF 20 million on their balance sheet, or more than CHF 40 million in revenues.
- Large companies are also subject to the Swiss Code of Obligations, which has been in force since January 2023. Under the Code, companies meeting the aforementioned size threshold must make disclosures covering a range of topics including CO2 targets, human rights and how the company manages related risks.
How can Clarity AI help?
Clarity AI leverages technology to provide data-driven solutions to its clients. Our product suite covers a range of use cases, many of which relevant to the Swiss market:
- TCFD and Climate: we provide a one stop shop for our clients’ climate needs, including a TCFD offering covering physical and transition risks as well as other climate related metrics and net zero alignment. This could help financial market participants and non-financial corporates reporting under the TCFD requirements in Switzerland and support reporting for Swiss Climate Scores (including fossil fuel exposure and GHG emissions).
- ESG Risk: our ESG Risk product enables customers to understand their ESG risk and potential enterprise value creation linked to sustainability. This can support financial market participants in understanding and reporting on their ESG risk.
- SDGs: Clarity AI’s SDG module could help financial market participants to prepare for the upcoming regulations covering funds in Switzerland. Under the proposal from the SFC, SDGs are mentioned as one way to demonstrate alignment to a sustainability goal.
- EU regulatory modules: for those selling products into the EU, we have market leading regulatory products including for EU Taxonomy (understanding your portfolio’s eligibility and alignment), SFDR (covering both the Principal Adverse Indicator metrics and Article 2(17) definition of Sustainable Investment), and MiFID II (guiding distributors through the MiFID process, with data and a tool that could be leveraged for Swiss MiFID).
If you are interested in seeing how our solutions could benefit your organization request a demo here.