Sustainable investment on Swiss financial markets will have to abide by new rules introduced by the Swiss Federal Council.
Financial products and funds labelled as ‘sustainable’ or ‘ESG’ on Swiss financial markets will have to align or contribute to specific sustainability goals and pursue at least one investment objective under new rules introduced in December 2022.
Sustainable investment products or services that aim to reduce ESG risk will not qualify for a sustainable label without pursuing a specific sustainability goal.
Firms should consider adopting third-party verification standards that provide independent verification that a firm is meeting certain environmental standards. The additional proposals include such verification, alongside disclosures concerning a product’s sustainability approach, regular reporting on sustainability goals, verification of KPIs and recourse to legal action following non-compliance.
The position paper released with the Federal Council report outlines a series of measures planned through 2025. The new sustainable investment initiatives include mandating TCFD recommendation for large firms, requiring transparency on stewardship strategies to promote sustainable education, issuing Confederation green bonds, and supporting global carbon pricing initiatives.
The Swiss Federal Council is taking its cue from the United Nations’ 2030 Agenda for Sustainable Development.
Financial products or services that are labelled as sustainable or as having sustainable characteristics must also pursue at least one of the following investment objectives in addition to their financial goals: Alignment with one or more specific sustainability goals, or Contribution to achieving one or more specific sustainability goals.
Financial products and services that are aimed at reducing ESG risks or optimising performance follow purely financial investment objectives and should therefore not be described as sustainable, unless they also pursue one of the investment objectives outlined above.
ESG risks should rather be taken into account as part of fiduciary duties. The product documentation or the financial service provider should specify whether the investment objective being pursued is an alignment goal, a contribution to the achievement of one or more specific sustainability goals, or a combination of both.
A sustainable investment product aimed at contributing to the achievement of a sustainability goal will typically apply an impact investment approach (incl. real estate investments), a credible active ownership approach or a combination of the two.
Impact investments must aim for a credible, causal and measurable impact. This could be direct investment in new solutions for renewable energy, for example.
Active ownership could be achieved by actively selecting target companies which have a significantly negative impact on the climate or on biodiversity.
A financial service provider which offers a sustainable investment product or service should describe its sustainability approach. This information should be public, easily accessible, transparent and comparable. Thus, a service provider that pursues an alignment objective should describe how this alignment is concretely achieved and measured in the investment process. Under the impact investment approach, the provider should describe the management process used to achieve the desired impact, define the key performance indicators for measuring the effective impact and monitor these indicators so that the investment strategy can be optimised as necessary.
The new Swiss investment rules follow global momentum from regulators including the UK’s FCA, US SEC and EU ESMA that address issues associated with the increase in investment products and services advertised as ‘green’ without clear rules that communicate the real ESG-related attributes, methodologies and criteria to investors.