Sustainable Finance: Regulatory Outlook 2021 Sustainable Finance: Regulatory Outlook 2021

2021 will see the introduction of several regulatory initiatives in both Switzerland and Europe focusing on climate risks, the prevention of greenwashing and responsible corporate behavior. Policy makers are predominantly relying on measures that increase transparency for investors, clients and regulators.

The demand for sustainable investment products and services in the financial services industry have been rising in recent years. It therefore comes as no surprise that authorities are becoming increasingly interested in this area, with noticeable effects in the regulatory arena. 2021 will mark the departure from the current “laisser-faire” approach of Swiss authorities to Sustainable Finance. Financial institutions will need to brace themselves for more regulation that has one common goal: to increase transparency for investors, clients and regulators.

On 12 January 2021, the Swiss Government communicated that it now officially supports the Task Force on Climate-related Financial Disclosures (TCFD), thus making clear once more that it is serious about its environmental ambitions. In the context of its financial market strategy, the Swiss Federal Council is currently preparing to turn the recommendations into law. Various projects are already running:
 

• FINMA is planning to amend Circulars 2019/1 ("Disclosure – banks") and 2016/2 (“Disclosure – insurers”) and intends tto require banks and insurance companies in supervisory categories 1 and 2 to disclose information about their climate risks as recommended by the TCFD. The requirements (if adopted as proposed) would already apply to the firm’s 2021 financial year.
• Swiss authorities are currently preparing the mandatory implementation of the TCFD recommendations by Swiss companies in all sectors of the economy. No specific timeline has been communicated. However, the topic will likely play into the upcoming requirements on non-financial reporting introduced by the indirect counterproposal of the responsible business initiative (see below).
• The Swiss Federal Council recommends that financial market players publish methods and strategies for taking account of climate and environmental risks when managing their clients' assets. The State Secretariat for International Finance (SIF) will inform the Swiss Federal Council by the end of 2022 whether and how this recommendation has been followed.
• In Europe, the publication of the revised Non-Financial Reporting Directive (NFRD) is expected for Q1/2021. It will very likely incorporate the TCFD recommendations for climate reporting. The NFRD can also be relevant for Swiss firms that, for example, are listed on European stock exchanges.

For more information on TCFD, read our recent blog on the topic.

The risk of greenwashing has been a concern for both Swiss and European regulators and has been amplified by the increasing popularity of ESG investment products on offer to retail clients.
 

• Already now FINMA has started asking specific questions about investment objectives, policies and approaches of Swiss investment funds claiming to be "sustainable" in the course of their approval process and is looking to standardize the respective disclosure requirements in the fund contract and prospectus. Also, FINMA has announced that it will include this topic in its on site reviews in the area of risk management.
• The SIF, in close cooperation with the Federal Office for the Environment (FOEN), have a mandate to propose to the Swiss Federal Council necessary amendments to financial market legislation to prevent greenwashing. The report is expected by fall 2021. Equally, the Swiss Bankers Association (SBA) is working on industry standards in several areas, such as Disclosure, Classification and Measurability.
• The Swiss Financial Services Market Act (FinSA) will enter into force on 1 January 2022 which raises issues as to how financial service providers should provide investment advice on sustainable investment products in order to be compliant. Our blog on sustainable investing and compliance risks looks at this topic in more depth.
• In Europe, the Sustainable Finance Disclosure Regulation (SFDR) will enter into force in March 2021 and may also impact Swiss financial institutions. Further amendments to MiFID II, UCITS and AIFMD are expected to enter into force in Q1/2022.
  

There are several broader regulatory initiatives which will impact not only financial institutions but Swiss firms in general. Here is a quick round-up:
 

• It was a very close "no" to the responsible business initiative, but firms will find that the indirect counterproposal that will enter into force instead is not to be underestimated. It will introduce mandatory non-financial reporting (including information on environment and climate) as well as (in certain cases) a mandatory human rights due diligence, applicable from 2022 financial years. See our blog on the topic here.
• On 1 July 2020, amendments to the Gender Equality Act entered into force, obliging private and public sector companies with one hundred employees or more to conduct a wage analysis by June 2021. This analysis must be audited by an independent audit firm by 30 June 2022 at the latest and is to be repeated every four years.
• The Federal Act on the Reduction of CO2 Emissions (CO2 Act) was put into place to regulate the reduction of greenhouse gas emissions. Measures include CO2 limits and target values for old buildings and new vehicles, a CO2 tax on fuels and a surcharge on air travel. As the necessary number of signatures were collected for a referendum, the voters will have the last say on this sometime this year.
• Towards mid-2021 the European Commission is expected to publish its revised "Green Deal", with even more ambitious objectives than the first version from 2018. Most likely, the EU’s green finance strategy will also be revised in this context.
  

Much is happening on both the market and regulatory levels to address growing concerns and an increasingly palpable sense of urgency regarding both climate as well as societal challenges. While much is underway in the EU to put in place explicit regulatory duties and definitions, Swiss institutions not operating in the EU are currently faced with much more leeway (and uncertainty) as to how and how far they should integrate sustainability considerations. However, the great number of initiatives demonstrates that sustainable finance is no longer just a niche but represents the way forward to the new normal.

To get a quick idea where your firm currently stands on its sustainability journey, try our 10-minute health check for banks and asset managers.