The EU’s Sustainable Finance Disclosure Regulation (SFDR), is increasingly putting the Swiss financial center under pressure to take further action in the area of sustainable investment. Yet, the country’s international entwinement prohibits Switzerland from going it alone.
With the opening of the UN Climate Change Conference COP27 in Sharm el-Sheikh, Egypt on Monday, the transition to a greener economy is once again in the international spotlight.
Europe’s latest development from its climate agenda for the financial industry was a requirement put in place since August, obliging financial advisors to ask their private and institutional clients about their sustainability preferences.
Clients can define their sustainability preferences via the EU taxonomy, which incorporates some environmental, social and governance (ESG) criteria, Principal Adverse Impact (PAI) exclusions as well as SFDR categorization.
Shades of Green
The EU’s Sustainable Finance Disclosure Regulation (SFDR), which aims to increase transparency on how financial institutions integrate sustainability risks and opportunities into their investment decisions and recommendations, divides financial products into the following categories as laid down in Articles 6, 8 and 9:
(Article 6) investments that do not promote their environmental social or governance (ESG) characteristics, (Article 8) Investments where ESG characteristics are promoted, and (Article 9) investments that set measurable ESG targets.
In banking jargon, funds allocated under Articles 8 and 9 are referred to as «light green» and «dark green» funds, respectively.
The industry has struggled to adapt to the ESG framework. Partly because the focus has been one-sided, resting on the E (for environmental), while pushing the S (for social) and G (for governance) components aside. And also because the framework has constantly been adapted in its almost one-and-a-half years of existence.
Time is Ticking
Despite these teething problems, ESG funds now account for about half of all fund assets domiciled in the EU, or about $3.8 trillion, according to estimates by Morningstar.
Furthermore, regulation cast its shadow ahead when well over 600 funds were upgraded from Article 6 to Article 8 by asset managers in the second quarter of 2022, before mandatory client surveys were introduced.
While Europe’s growing interest in ESG investment products has not gone unnoticed in Switzerland, Christian Katz, CEO of Swiss financial services provider Helveteq, said that the Swiss financial center, which relies more on self-regulation than the EU, is lagging behind.
This is the reason why Helveteq has taken the reins into its own hands, becoming the first Swiss securitization platform to issue ESG investment products that can be traded on the stock exchange.
In the EU’s Footsteps
Katz pointed out that a dithering Switzerland could one day find that it has missed the boat. The Swiss financial center is too intertwined internationally to ignore regulatory trends abroad, he said.
Christian Katz, Helveteq CEO (Image: Helveteq)
After the EU forced the industry to ask clients about their sustainability preferences, Swiss-based Europeans have been left with no option but to comply since August.
Seeing as financial service providers in Switzerland will only be able to serve clients in an ESG-compliant manner, for Katz it makes sense for Switzerland to aim for a pragmatic ESG implementation that follows EU rules.
This should not only include funds but as many investment products as possible, including exchange-traded products (ETPs), he said.
The message seems to have reached the sell side. According to a survey by the Association of Swiss Asset Management and Asset Management Banks (VAV), more than half of asset managers in Switzerland are determined to offer more sustainable, «light green» and «dark green» investment products in the future.
In addition to this, there is a growing sense of urgency to move forward with the transition to a climate-friendly economy, now that many banks have signed up to ambitious international UN climate targets, Katz said.
On the demand side, sustainable investing has also entered the minds of professional investors in particular. According to the latest Schroders Global Investor Study, which surveyed more than 23,000 investment professionals from 33 locations around the world, 80 percent in Switzerland believe that sustainable investing is the key to achieving long-term returns. However, greenwashing is also a problem for 84 percent of respondents in Switzerland.
With a new directive that comes into force on January 1, 2023, the Swiss Bankers Association (SBA) has closed an important gap compared to the EU in the context of self-regulation.
Unlike in the EU, the requirements are much more pragmatic. Bank customers are introduced to the sustainability topic in a guided conversation in which ESG preferences are assessed. The ESG preferences are transferred to products and investment strategies according to a uniform classification system.
Self-regulation has also been in place at the Asset Management Association Switzerland (AMAS) since the beginning of October, which is understood as complementary to the SBA’s guideline.
Meanwhile, 23 Swiss and Liechtenstein private and asset management banks back the «Progress Report» on sustainable finance.
With these initiatives, the industry is trying to pre-empt regulation by Swiss authorities. The tension is increasing, however, because the State Secretariat for International Finance wants to issue a statement by the end of the year with a particular focus on greenwashing in the financial sector.
Despite strong criticism of vague ESG concepts or overstated green commitments: As a highly interconnected financial center, Switzerland cannot stand aside as the ESG trend gains momentum internationally, Katz said.
In view of the Corona pandemic and the Ukraine war, the ESG debate can also be a catalyst for financial service providers and investors to better assess their dependence on fossil fuels and country risks to be able to avoid them in the future.