It is now impossible to talk about sustainable finance without mentioning the risk of greenwashing. Both the legislator and the financial market supervisory authorities, in Switzerland and in the EU, consider greenwashing a major challenge to the effective transition to a low-carbon economy. Part I of this paper looked at some of the regulations adopted in the EU. Part II will discuss the initiatives and measures in Switzerland to address the concerns about greenwashing.
I. About the risk of greenwashing
As investments in sustainable products increase, the topic of greenwashing has gradually become a topical issue when assessing the progress made on sustainable finance. In other words, greenwashing raises the question of whether this steady growth in sustainable investments is real or manufactured.
In its annual report 2020, the Swiss Financial Market Supervisory Authority (FINMA) listed greenwashing for the first time as one of the risks that the regulator must pay attention to when working towards investor protection.
In Switzerland, as in the EU, there is no legal definition of greenwashing. It generally refers to business practices whereby investors are deceived about the sustainable properties of the financial products or services offered to them. In addition to this risk of deception (towards investors), greenwashing also entails a reputational risk vis-à-vis providers of financial services and products.
While there is a relatively broad consensus that not all green or sustainable financial products deliver on their promises, the line between deceptive practices (constituting greenwashing) and the normal risk associated with any financial investment is still blurry.
In its Guidance of November 3, 2021 on preventing and combating greenwashing, FINMA states that the following practices in connection to investment funds amount to greenwashing :
- absence of a sustainable investment policy/strategy, although the investment fund is marketed as a sustainable product;
- failure to implement the sustainable investment policy/strategy referred to in the investment fund documentation;
- contradiction or discrepancies between the term “sustainable” (or similar) used by the investment fund and the investments actually authorized by the investment policy;
- misuse of the term “sustainable” (or similar) insofar as the investment policy/strategy uses only exclusion criteria, without specific sustainability criteria being provided for.
Given the lack of a legal definition or a standard that makes it possible to measure, based on objective and common criteria, the sustainability of investments, there is legal uncertainty about what constitutes greenwashing. In this context, different approaches and initiatives have emerged in the last months aiming at setting a frame of referencefor the market and the investors.
II. The Swiss regulatory approach on greenwashing
Switzerland’s approach to the fight against greenwashing is similar in many ways to the approach followed in the EU. In particular, the duty of increased transparency is, in Switzerland as in the EU, the cornerstone of anti-greenwashing initiatives.
However, the Swiss strategy is characterized by the rather backward role of the legislator, the most detailed and concrete initiatives being led by the Swiss Financial Market Supervisory Authority (FINMA) and professional associations in the financial sector.
The following initiatives and measures deserve special attention :
a) Swiss Financial Market Supervisory Authority (FINMA) : In November 2021, FINMA published a guidance on preventing and combating greenwashing. Therefore, similarly to what is happening in the EU, the Swiss regulator has taken the lead in ensuring market integrity and protecting investors. FINMA’s role is all the more important as, so far, the Swiss legislator has not adopted specific rules about prevention of greenwashing or, more generally, on sustainability.
The FINMA Guidance describes the concrete measures applied by FINMA to ensure that no greenwashing practices take place. These prudential measures apply at two levels in the context of investment funds : at the product level (the investment fund) and at the level of the entity responsible for managing the fund (e.g., the fund manager/the asset management company).
For example, as part of the approval procedure for Swiss investment funds referring to sustainability, FINMA examines the nature of the investments authorized by the investment policy/strategy to ensure that designations such as “sustainable” or “ESG” are justified.
FINMA also supervises the management of (Swiss and foreign) sustainable investment funds to make sure that the investment policies/strategies marketed to investors are implemented. In particular, the entities in charge of managing the investments funds must have an adequate organization.
With regards to the management of sustainable investment funds, according to FINMA’s practice, having an adequate organization entails that the fund manager/asset management company complies with the following requirements :
- a decision-making process that integrates sustainability criteria;
- an appropriate risk management and control system that takes into account the risks inherent in sustainability;
- sufficient personal resources, knowledge and expertise in sustainability;
- a top down ESG approach defined by the board of directors;
- appropriate instruments for assessing and verifying the information and analysis provided by external providers of sustainability data.
FINMA may verify these elements at the time of the authorization procedure of the applicant or, later on, in the context of its supervisory activities by means of on-site inspections of fund managers and asset management companies.
FINMA identifies an additional area relevant to greenwashing : the investment advice. FINMA notes that greenwashing can occur at the time of providing investment advice, when financial products are offered and presented to potential investors. In this respect, the regulator calls for an amendment to the Swiss Financial Services Act (FinSA) in order to expressly provide that investment advisors must take into account the ESG preferences of their clients. In the meantime, due to the absence of a binding legal basis, FINMA refers to the Swiss Bankers Association’s “Guide to the integration of ESG factors in the advisory process for private clients” as a source of useful guidance.
b) Professional associations – Swiss Sustainable Finance (SSF), Asset Management Association (ASMA) and Swiss Bankers Association (SBA): In December 2021, ASMA and SSF published a set of recommendations aimed at clarifying the investment approaches (g., exclusion of products and/or business activities, best-in-class and positive screening, thematic investment, exercise of voting rights) and the financial instruments available for sustainable investing. These recommendations are also intended to provide a minimum information framework for investors so that they can more easily understand the different approaches and instruments available, and their respective potential impact on achieving sustainability objectives.
The SBA has recently issued new guidelines on the integration of ESG-preferences and ESG-risks into investment advice and portfolio management. The purpose of these guidelines is to establish a uniform minimum standard within the industry for the consideration of ESG-preferences and ESG-risks when providing investment advice. SBA members will be automatically subject to them as of January 1, 2023. Non-members can subscribe on a voluntary basis.
By aiming to introduce uniform practices in terms of information as well as assessment and implementation of client’s ESG-preferences, this set of rules and recommendations contribute to the fight against greenwashing.
The SBA Guidelines are intended to be complementary to the practice developed by FINMA. Article 7 of the SBA Guidelines states that the Guidelines focus on the risk of greenwashing from the point of view of financial services (i.e., investment advice and asset management) and refers to the FINMA Guidance 05/2021 with regards to greenwashing practices that may exist at product level (in particular, in connection to investment funds).
c) Swiss authorities and legislation: The strategy of the Swiss authorities is in line with the approach of the European Commission insofar as the fight against, and prevention of, greenwashing requires measures aimed at greater information transparency. The improvement of transparency must be both quantitative (extent of available data) and qualitative (quality of available data, in terms of relevance and methodology applied).
To facilitate the comparison of sustainable investment data, the Swiss Federal Council launched the Swiss Climate Scores on June 29, 2022. This is a rating system intended to provide Swiss investors with comparable and useful information on the extent to which their financial investments are compatible with international climate goals.
The effectiveness of such an instrument – which is supposed to increase the comparability between financial products – depends to a large extent on its adoption by the financial industry (in particular, banks and asset managers). As it stands, the use of the Swiss Climate Scores is on voluntary basis. The voluntary uptake of this instrument will be monitored by the Federal Department of Finance (FDF), in cooperation with the Federal Department of the Environment, Transport, Energy and Communications (DETEC) by the end of 2023.
Although there are no regulations specifically designed to prevent greenwashing, the following provisions of the Swiss Collective Investment Schemes Act (CISA) make it possible, to a certain extent, to address the risk of greenwashing in the field of investment funds :
- Pursuant to Article 12 (1) CISA, the name of the investment fund must not be confusing or misleading, in particular as regards the type of investments made. Intentional violation of this provision is punishable by a fine of up to CHF 500,000 (Article 149 (1) (a) CISA).
- The persons who manage investment funds as well as their agents must comply with the following duties towards investors: duty of loyalty, duty of diligence and duty of information (Article 20 (1) CISA). Non-compliance with these duties may lead to civil and administrative sanctions.
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 Swiss Sustainable Investment Market Study 2022, Swiss Sustainable Finance, June 2022, p. 6.
 Exclusion criteria: “Approach excluding companies, countries or other issuers based on activities considered not investable. Exclusion criteria (based on norms and values) can refer to product categories (e.g., weapons, tobacco), activities (e.g. animal testing), or business practices (e.g. severe violation of human rights, corruption).” (see Swiss Sustainable Finance Glossary: https://www.sustainablefinance.ch/en/glossary-_content—1–3077.html#anchor_WOCQOU).
 See footnote Nr. 6.
 Article 9 of the Financial Institutions Act and Articles 14 (1) (c) and 20 (1) of the Collective Investment Schemes Act.
 This guide of the SBA will be superseded by the “Guidelines for the financial service providers on the integration of ESG-preferences and ESG-risks into investment advice and portfolio management” described under letter b below.
 “How to Avoid the Greenwashing Trap: Recommendations on transparency and minimum requirements for sustainable investment approaches and products”, Asset Management Association and Swiss Sustainable Finance, December 2021 (https://www.sustainablefinance.ch/upload/cms/user/RecommendationsforSustainableInvestmentProducts_AMAS_SSF.pdf).
 “Guidelines for the financial service providers on the integration of ESG-preferences and ESG-risks into investment advice and portfolio management”, Swiss Bankers Association, June 2022 (https://www.swissbanking.ch/_Resources/Persistent/a/5/e/0/a5e0845f065a60699df88910ae675b7082e69411/SBA_Guidelines_investment_advice_and_portfolio_management_EN.pdf).
 Article 1 (1) of the Guidelines.
 Subject to the applicable transitional periods (Article 18 of the Guidelines).
 See letter a above.
 “Swiss Climate Scores. Best practice transparency on the Paris alignment of investments”, June 2022 (https://www.newsd.admin.ch/newsd/message/attachments/72243.pdf).