Swiss Federal Council Reports on Sustainable Finance
On December 16, 2022, the Swiss Federal Council published two documents intended to give an update on the progress made in the past few years in sustainable finance and to highlight some forthcoming developments: a position paper on the required next steps to fight greenwashing and a report stating fifteen measures for the years 2022 to 2025 to further consolidate Switzerland’s position to play a leading role in sustainable finance. We will briefly present both documents as they take stock on the climate strategy implemented so far and call for further actions.
1. Further steps to prevent greenwashing
Until now, the fight against greenwashing was governed by punctual initiatives led by industry associations. The Swiss Financial Market Supervisory Authority (FINMA) has also taken a position on this issue in a policy paper in 2021.2 The Swiss Federal Council, on the other hand, remained rather reluctant to intervene. Things are changing.
In its position paper published on December 16, 2022 3 , the Swiss Federal Council states that the measures taken so far are insufficient to effectively prevent the risk of greenwashing. Accordingly, there is a need to establish a common framework that defines the circumstances in which financial products and services can be labeled as sustainable.
The Swiss Federal Council’s objective is twofold. On the one hand, it aims at putting in place a system that protects clients, investors, and policyholders and, on the other hand, Swiss Federal Councilseeks to ensure Switzerland’s credibility so that it can play a leading role in sustainable finance.
The position paper sets out the principles that should be included in a regulation to prevent greenwashing:
- In accordance with the United Nations 2030 Agenda for Sustainable Development, for financial products or services to be labeled as sustainable or with sustainable characteristics, they must pursue at least one of the following investment objectives: (a) alignment with one or more specific sustainability objectives, or (b) contribution to the achievement of one or more specific sustainability objectives. These features must be specified in the product documentation.
- When a financial service provider offers a sustainable product or service, it must describe the sustainability approach used. This information must be public, easily accessible, transparent, and comparable.
- Regular reports must indicate whether and how the defined sustainability objectives are achieved. Where appropriate, the Swiss Climate Scores 4 should be used.
- To enhance credibility, the implementation of the transparency principles to prevent greenwashing should be verified by an independent third party . This is a notable (and welcome) difference compared to the Swiss non-financial reporting requirements5 , which do not provide for such an external review by an independent third party.
- Obligations to prevent greenwashing should be legally binding and enforceable. Non-compliance with transparency obligations should thus be sanctioned and legal remedies should be available to clients, investors, and policyholders.
- The above-mentioned principles should apply across the financial market, to financial products as well as to financial services.
As the principles are not prescriptive but are mainly formulated as recommendations, the position paper leaves some leeway with regards to their implementation.
The Federal Department of Finance (FDF) is responsible for setting up a working group, in which FINMA and representatives of the relevant industries will participate, to identify the best way to effectively implement the position of the Swiss Federal Council. The working group must submit a plan and concrete proposals by September 30, 2023.
2. Fifteen measures to advance sustainable finance
On December 16, 2022, the Swiss Federal Council also published a report on sustainability for the years 2022-2025 6 . The report, which focuses mainly on climate and biodiversity issues, takes stock of the measures already underway and discusses new ones. The sustainability strategy laid out in this report is based on fifteen measures divided into four areas of action:
- Sustainability data from all sectors of the economy : Switzerland (like the EU) has made transparency one of the pillars of its strategy towards climate transition so that investors be able to compare financial products and make informed investment decisions. 7 The collection of and access to quality information is a prerequisite to enable transparency. The rules about non-financial reporting duties for large companies which entered into force in January 2022 8 along with the Ordinance on Climate Disclosures9 are measures already taken to increase the amount and quality of sustainability data available to the industry and investors. As a further step, greater transparency is expected as regards the risks associated with the decline of biodiversity and the climate compatibility of Swiss real estate.
- Transparency of the financial sector: Besides building a framework for better sustainability data, financial institutions are encouraged to publish the methodology and strategies used to take climate risks into account, as well as to engage in investment stewardship. This information should be made available to the public on the website of the financial institution. Increasing transparency in this way would also provide for greater accountability of the financial sector.
- Impact investments and green bonds: The report focuses on climate and biodiversity protection. However, this third area of action has a broader scope as it aims to promote social impact investing in developing countries, for instance through the SDG Impact Finance Initiative launched in 2021 by the Federal Department of Economic Affairs, Education and Research (EAER). 10 As regards green bonds, the Swiss Federal Council adopted a framework for issuing green Confederation bonds in 2022 and issued the first green Confederation bond in October 2022. The Confederation plans to issue additional green bonds or to reopen existing green bonds offerings in the future.
- Pricing pollution: The last area of action aims at supporting, at the global level, carbon pricing to reduce carbon emissions. It also looks at supporting carbon offsetting in the financial sector. The Federal Department of the Environment, Transport, Energy and Communications (DETEC) is examining the measures that could be taken in this regard.
This new sustainability report is in line with the measures and recommendations formulated by the Swiss Federal Council in previous reports and other publications, such as its report on sustainability of June 24, 2020. 11 Moreover, the general (and rather pragmatic) approach underlying Switzerland’s strategy for sustainable finance is reaffirmed: public action should remain subsidiary to solutions from market players and Swiss climate policy needs to be aligned with developments taking place at the international level.
As a result, with a few exceptions (notably the Ordinance on Climate Disclosures and the implementation of the principles against greenwashing described above), the action plan for 2022-2025 is largely based on recommendations and calls for action rather than prescriptive measures.
That being said, the climate policy announced in the report contains some new developments worth to be mentioned:
- Pursuant to developments happening at the international level 12 , biodiversity loss is now part of the Swiss strategy for climate transition. In particular, the Swiss Federal Council plans to develop, in the medium term, transparency recommendations to promote biodiversity.
- As mentioned, the Swiss Federal Council’s position on combating greenwashing has become more assertive as it acknowledges that the measures put in place so far by the market are insufficient. Accordingly, its position paper on greenwashing lays out a series of principles to remedy this situation.
- As a significant departure from the EU approach, the introduction of a taxonomy has been discarded. The taxonomy is not seen as a very compelling tool to properly assess the economic activities that make a substantial contribution to the achievement of environmental objectives.
- The FDF has been instructed to examine whether the creation of a new category of collective investments could facilitate social impact investing. FINMA and the relevant industry players will also participate in assessing such a measure, which would entail an adaptation of the Swiss financial market legislation.
- By encouraging investment stewardship, the Swiss Federal Council has taken a step further to enhance transparency in the financial sector.
- The Swiss Federal Council reiterates its support for the conclusion of voluntary industry agreements by the financial institutionsto enhance transparency within the financial sector. So far, the adoption of this measure has been rejected by the Swiss financial industry.
3. Looking into the 2023 Swiss sustainable finance landscape
The latest sustainability report as well as the position paper on greenwashing set out an ambitious agenda to reinforce Switzerland’s position in the area of sustainable finance.
According to the agenda stated in the report, the following developments should be expected in 2023 as regards some of the measures and recommendations discussed:
- conclusions from the FDF on how to implement the principles developed by the Swiss Federal Council to fight against greenwashing (deadline by September 30, 2023);
- assessment by the FDF of the progress made on the conclusion of voluntary industry agreements by financial institutions (deadline by the end 2023);
- review of the comparability value and incentive effect of the Swiss Climate Scores, and further adjustments as necessary (deadline by the end 2023).
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