“It does exactly what it says on the tin”. This 1990s British advertising slogan that brought fame to a humble brand of wood varnish could well now apply to the European Union’s rules aimed at bringing greater transparency to the world of sustainable investing.
Part of the European Green Deal that aims to make the bloc carbon neutral by 2050, the sustainable finance disclosure regulations (SFDR), together with the EU taxonomy framework, will require fund groups to explain what’s “inside the tin” of their green investment products, including any environmental and social governance (ESG) risks.
They will also have to clearly label how environmentally friendly their activities are, in a move aimed at clamping down on “greenwashing” by businesses and steering much-needed cash towards more sustainable, low-carbon projects. Much like cigarette packets with their visually explicit warnings, all investment products will have to carry a disclaimer where they do not meet the environmental objectives set out in the taxonomy.
The landmark rules, which will start being introduced next month, not only affect financial market participants in Europe, but also force any companies selling products inside the EU to step up their game, including Swiss fund and asset managers.
“The EU acts as a global industry standard-setter whether or not these standards become mandatory in Switzerland,” accountancy firm EY said in an advisory note. But with the EU taking the lead, it raises questions about Switzerland’s own regulatory plans - or lack thereof.
The Swiss finance sector "now comes under pressure because there are no standards at this current stage", Antonios Koumbarakis, head strategic regulatory and sustainability at PWC, told Geneva Solutions.
Switzerland weighs its options. Though keen to become a global leader on ethical investing, Switzerland has yet to set any standardised rules for its financial sector. In December, the Swiss Confederation organised a consultation on how it could react to EU legislation. It also began evaluating whether it is necessary to adopt its own taxonomy to tackle greenwashing.
However, at present there is no real impetus to impose further regulation, preferring to adopt voluntary measures instead, says Jean Laville, deputy chief executive of Swiss Sustainable Finance. He told Geneva Solutions:
“The Federal Council has decided to ask the State Secretariat for International Finance (SIF) to evaluate if it is necessary for Switzerland to implement some legislation against greenwashing. At SSF, we have just received the consultation from SIF asking us a lot of questions on this dimension. We are discussing it internally to try to understand what they want.”
Swiss Sustainable Finance is also separately in the process of finalising consultations for a roadmap to help set short and long-term policy objectives for the sustainable finance industry and advise different actors, from asset owners and banks to the Swiss National Bank and the country’s financial regulator FINMA.
“We don’t always need legislation as a first stage. If the private sector [adopts measures on a voluntary basis], it's easier to come in with legislation when you already have a practice that is established in the market,” Laville said.
Regulations vs. voluntary initiatives. There have been some regulatory and voluntary steps taken to help reach its climate goals and in improving social corporate governance, even if the majority do not directly impact financial institutions. These include:
The CO2 law. Agreed by the Swiss parliament in September, the CO2 law should help the country reduce carbon emissions by 50 per cent by 2030 relative to 1990s levels, through measures such as taxes on airline tickets, carbon emission limits for new cars and national emission trade schemes.
Task Force on Climate-Related Financial Disclosures (TCFD) - Switzerland in January officially adopted the global voluntary framework directed at helping public companies and other organisations more effectively disclose climate-related risks. It is now preparing to launch a consultation process to consider turning the recommendations into law while finance watchdog FINMA wants to make them mandatory for insurers and banks
The responsible business initiative (RBI) counter-proposal. After the RBI failed to win over a majority of cantons at the polls last year, the counter-proposal will oblige large publicly traded companies to report on human rights and environmental standards abroad when it comes into force.
Markets in Financial Instruments Directive (MiFID). Changes to the EU’s MiFID II suitability rules to ensure that investors’ environmental, social and governance (ESG) preferences are taken into consideration during the investment advice and portfolio management processes are also being introduced by the Swiss Banking Association to its members, but on a voluntary basis.
A new roadmap towards sustainability. Despite these different initiatives and consultations underway, there is still a lack of certainty over the direction of the sustainable finance industry in Switzerland. “It's why we have this roadmap,” says Laville.
“We all agree that we want to have this objective to be a leader in sustainable finance. It's important for competitiveness. Part of the Confederation's strategy for the Swiss financial sector is to ensure competitiveness. Clearly, sustainability is fully part of the competitiveness of the Swiss marketplace that has been accepted now.”
He continues: “Clearly what is interesting is that we have now on board, since last year, the government, the Swiss Banking Association, the Asset Management Association. We now have this connection with Building Bridges [a conference for sustainable finance sector held in Geneva] and the United Nations. We have all of these parties on board. Now the question is, what can we do?”
ESG investing - the new normal. As the Swiss government, alongside its financial industry bodies debate the next steps, it’s difficult to underestimate the impact the tougher EU standards will have in shaking up ESG investing both, and in forcing fund groups to raise their game - both in Europe and in Switzerland. For retail as well as professional investors, this means greater transparency on the “greenness” of investment products on offer.
“In a couple of years, ESG will be the new normal and nobody will ask you if you have a sustainable product or not," Koumbarakis said. "The whole industry is seeing a transformational shift."
Many major financial institutions have already adapted, with clients expecting them to be signatories of the UN Principals for Responsible Investment, for example. However, on the retail-side, the new rules could pave the way for more sustainable products and services, such as green mortgages and loans, to come onto the market in the next few years, he added.
Rachel Whittaker, sustainable investing strategist at UBS Wealth Management’s chief investment office, said the company had similarly seen a surge in demand as investors increasingly engage on issues such as climate change: “Over the last ten years, we have seen a rapid acceleration of interest, product expansion, a broadening of the range across different asset classes as well as availability, particularly for retail investors. Introducing regulation to protect investors is important.”
She added: "We're certainly seeing more focus on and demand for impactful products and disclosure from our clients. Investors want to know what difference their investments are actually making.
However, on a cautionary note on the future of ESG regulation, Whittaker said it is important that investors look beyond just good disclosure: "It is key that regulations are part of the whole ecosystem, encouraging both investors and companies to operate more sustainably, channel capital to sustainable industries and to improve their transparency and accountability.”