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Sustainable Finance | ESG: self-regulation sets the direction

Unlike Europe, Switzerland still does not have comprehensive ESG regulations suitable for the financial market. In-depth discussions are progressing, but to date there has been no concrete proposal. Some sectoral associations have, however, taken the lead by issuing directives on the subject.

 

By Boris Hofer
Director, Regulatory & Compliance Financial Services,
Grant Thornton AG                                                                         
And Valentine Resta
Senior Consultant, Regulatory & Compliance Financial Services,
Grant Thornton AG

 

Regulatory environment

Unlike in Europe, for example, there is no ESG legislation in Switzerland that is tailored to the financial market. Adjustments to financial market law are being discussed intensively, but no concrete proposals have been communicated yet. The closest thing to a legal regulation and in principle relevant for all financial institutions is FINMA supervisory notice 05/2021, which contains principles for combating greenwashing.

The situation is different for industry associations.  For example, both the Swiss Bankers Association (SBA) and the Asset Management Association Switzerland ("AMAS") have issued regulations on Sustainable Finance /ESG that will oblige their members to comply with specific regulations in the future. In summary, the "Guidelines for Financial Service Providers on the Inclusion of ESG Preferences and ESG Risks in Investment Advice and Asset Management" of the SBA and the "Self-Regulation on Transparency and Disclosure for Sustainability-Related Collective Assets" of AMAS contain the essential principles that allow an institution to be "Sustainable Finance/ESG-ready".

 

What does this mean for asset managers in concrete terms?  

If one then takes a closer look at the two sets of rules, they can serve as a template for a sustainable finance/ESG framework of a financial institution and thus offer corresponding opportunities.  

In order to better understand the suitability of the regulations as a template, an understanding of the concrete implementation of Sustainable Finance/ESG in a company is necessary.  

Institutions that take sustainable finance/ESG into account in their business activities can be required to do so at three levels: at the company level, at the product level or at the point of sale.  At the company level, strategic decisions have to be made, governance has to be reviewed and reporting has to be set up. At the product level, for example, investment approaches need to be examined in order to determine the desired level of ESG per product. Finally, at the "point of sale", the ESG preferences of customers must be recorded and taken into account in the provision of services. Where an institution covers several or all levels, the interplay, and interdependencies of the three levels is particularly challenging, the levels must not be considered in isolation under any circumstances.

The AMAS self-regulation covers the company level and the product level. In terms of content, it is similar to FINMA supervisory notice 05/2021, which also deals with these two levels. The self-regulation of the SBA covers the "point of sale" and obliges affiliated institutions, as well as those that have voluntarily adhered to the directives, to extend the provisions of the FIDLEG to include the area of ESG.  

Accordingly, the regulations can then serve as a "blueprint" for a sustainable finance/ESG framework if their principles are combined.  

 

A comfortable location? 

Asset managers are, at least superficially, in the comfortable position of (still) being able to determine for themselves how much Sustainable Finance/ESG they want to expose themselves and their clients to.  

Insofar as European regulations do not apply and clients do not want any "ESG offers", asset managers do not have to deal with the topic in detail, at least for the time being. Only if clients' ESG preferences are voluntarily recorded do they have to be taken into account in the context of asset management or investment advice. If, on the other hand, implementation is desired, the principles of the existing self-regulations can serve as a basis for this. 

However, the situation, which at first glance seems comfortable, should not obscure the fact that the developments have not been completed and that doing nothing always carries the risk of missing the boat.  

Although not all clients of asset managers request sustainable finance/ESG services, a heightened sensitivity towards the topic is definitely noticeable and it cannot be assumed that there will be less demand for sustainable/ESG in the future. In this context, it should be pointed out that the development of knowledge, the design of the corresponding processes, the reporting, etc. is not possible overnight and that an institution that is well versed in this topic can definitely stand out from the competition in a positive sense. 

Furthermore, it is foreseeable that the supervisory regulations will be adapted. The corresponding mandates have been issued by the Federal Council for some time.  

Finally, in asset management, the regulations under civil law must always be observed in addition to those under supervisory law, and these are also in flux. Already now, asset managers must be aware of the risks of the products recommended to the clients and there is usually an obligation to inform the former.  If, for example, within the framework of an asset management mandate, investments are made in shares of providers of non-renewable energy, the risk of a future restriction of this technology must be considered accordingly and communicated to the client. Should the consideration of ESG criteria in asset management become accepted in the future as the normally expected measure of diligence, then their non-observance could then lead to civil law risks.  

 

Conclusion 

The current situation allows asset managers, at least for the moment, to be somewhat more passive compared to other, strictly regulated financial institutions. However, any wait-and-see attitude can prevent them from taking advantage of opportunities and carries the risk of missing the boat. 

We are convinced that the financial market law will be amended Active engagement with the topic is therefore recommended.  

 

 

Biographies

Boris Hofer is a Director in the Regulatory & Compliance Financial Services division in Zurich. He has been working in the compliance field for over 15 years, both in consulting and "in-house" in technical and management functions at various financial institutions and at an energy company. He also has several years of professional experience as a claims specialist with a Swiss insurer. Boris Hofer specialises in advising on financial markets law and the governance of financial institutions. He also conducts regulatory audits in these areas, and in outsourcing assumes responsibility for internal control activities (compliance, risk management) for asset managers. Finally, Boris Hofer has mandate experience in the area of data protection and specialises in the topics of "Sustainable Finance / ESG".

Valentine Resta is a Senior Assistant and Legal Counsel in the Regulatory & Compliance Financial Services division in Zurich. She started her career in the audit and consulting industry in the financial services sector in 2021. She specializes in assisting asset managers in the FINIA approval process and in AMLA audits. Before and during her studies, Valentine Resta worked for a Swiss law firm as well as a large Swiss and private bank.