Sustainable Finance Regulation – Financial Market Participants: Comparative Analysis for Switzerland

Over the past years, financial market participants have seen increased regulatory pressure on sustainability-related topics. Whether in Europe, North America or Asia, regulators have started implementing regulations to fulfil three main objectives:

1. improve transparency on the sustainability characteristics of financial products;
2. promote classification systems for financial products based on their sustainability characteristics;
3. require the integration of clients’ ESG preferences in advisory services.

The following analysis considers these three objectives, how they are being fulfilled in Switzerland and in foreign jurisdictions, and how regulators can improve the status-quo in Switzerland.

First, regulation can improve transparency on the sustainability characteristics of financial products. Higher transparency can mitigate greenwashing risk and standardisation of dis- closed information can enhance comparability across products. In Switzerland, most sustainability requirements around financial actors and products are not hard state law, but rather market-based and voluntary guidelines. The Federal Council has recently been more proactive, enhancing the existing industry self-regulations. It has also mandated the Federal Department of Finance to propose disclosure requirements for sustainable financial products and services and is pushing for sectoral agreements for net-zero targets.

Despite Switzerland’s regulatory dynamics and tradition, there is still a margin for improving the Swiss framework on sustainability-related disclosures of financial market participants in light of regulatory developments in the EU and the US. Recommendations to the Swiss regulators include: (1) considering the interoperability of disclosure frameworks across jurisdictions, e.g., through substituted compliance; (2) ensuring that financial market participants can access data on investee companies for their reporting obligations; and (3) focusing on transparency for decision-useful information by establishing disclosure requirements (a) at the product and provider level, (b) with science-based metrics, (c) considering engagement policy, and (d) on the potential of investee companies to improve their sustainability performance.

Second, regulation can promote classification systems for financial products based on their sustainability characteristics. Clarity around the product characteristics and objectives help ensure that end-investors buy products that fit their needs. It also improves the trust in the market. While foreign regulators such as the EU, the US, the UK and China have started proposing rules for classifying and labelling products, namely funds and bonds, Switzerland plays a waiting game and adopts a market-based approach.

For funds’ classification, the upcoming proposal from the Federal Department of Finance (fall 2023) should include a more precise definition of sustainable financial products and services. Considering international developments, recommendations for this proposal include: (1) setting a definition with minimum environmental and social standards; and (2) proposing a classification system for products with an impact and a transition objective, by adopting an already existing framework or creating its own based on name rules, i.e. the use of sustainability terms such as “green” in fund names, or labels.

For green-bond classification, Switzerland should not necessarily develop new Swiss criteria for eligible green-bond activities, as done in certain foreign jurisdictions. It should rather encourage following the market-based approach applied in the issuance of the Swiss Green Sovereign Bonds and promote green-bond certifications.

Third, regulation can require the integration of sustainability preferences of clients in advisory services. Requiring information on clients’ sustainability preferences helps ensure that advisers act in the best interest of their clients, by offering products that meet clients’ sustainability preferences along with their financial ones. In Switzerland, advisers do not have explicit requirements for inquiring clients’ sustainability preferences. However, industry associations, such as the Swiss Bankers Association, have developed self-regulation relating to ESG integration in the advisory process.