Sustainable Finance in Switzerland

Isabelle Romy co-leads the Sustainability & ESG Desk of Kellerhals Carrard and is a professor of law at EPFL and the University of Fribourg. Together with a team of 30 legal experts from Kellerhals Carrard, she recently published a book entitled «Sustainable Finance in Switzerland – Adoption of a New Paradigm through Regulatory Change and Innovation» (Orell Füssli 2024), which serves as a guide through the complex regulatory framework of sustainable finance.

What is sustainable finance and what are its goals and main challenges for Switzerland?

In recent years, the role of financial markets has emerged as a key driver in the transition to a more sustainable economy. While there is no universally accepted definition of sustainable finance, the term refers to financial activities or services that integrate environmental, social and governance (ESG) criteria into business or investment decisions. Sustainable finance seeks to redirect financial flows towards sustainable initiatives, manage risks associated with environmental and social factors, and foster innovation in financial products and services, such as sustainability loans and bonds.

Switzerland faces several challenges in this area, including insufficient data on sustainability risks and impacts, the need for standardized metrics and methodologies, and the prevention of greenwashing. Greenwashing refers to misleading practices that falsely claim environmental benefits, which can undermine investor confidence and market integrity.

To address these challenges, Switzerland emphasizes market-based solutions, transparency, and self-regulation. The country is also working to align with international standards to improve its sustainable finance practices and prevent greenwashing, ensuring accurate and comprehensive ESG data for informed financial decision-making.

How does Switzerland's regulatory approach to sustainable finance compare to that of the EU?

Switzerland's regulatory approach to sustainable finance differs significantly from that of the EU in several key aspects. Switzerland emphasizes market-based solutions and the subsidiarity of government action, focusing on self-regulation by the financial industry rather than extensive government intervention. Transparency and the provision of meaningful sustainability data across all sectors of the economy are prioritized, with self-regulatory guidelines and recommendations developed by industry associations such as the Swiss Bankers Association (SBA) and the Asset Management Association Switzerland (AMAS). Efforts are being made to prevent greenwashing through guidelines and self-regulation, with the Federal Council monitoring the need for further regulatory measures. Switzerland also aims to align its regulations with international standards, such as the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), while maintaining flexibility in its regulatory framework.

In contrast, the EU has taken a more proactive stance with significant market intervention to promote sustainable finance. This includes comprehensive regulations and directives mandating the integration of ESG factors into financial activities. The EU has implemented binding regulations such as the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy Regulation and the Corporate Sustainability Reporting Directive (CSRD), which set clear standards and requirements for sustainability reporting, disclosure, and investment practices. The EU approach focuses on creating a common understanding of sustainable activities and ensuring consistency in ESG reporting standards across member states, including detailed technical screening criteria and mandatory disclosure requirements. Specific rules have been put in place to combat greenwashing and to ensure that financial products marketed as sustainable meet strict criteria and are subject to regular reporting and verification.

In summary, the EU approach to sustainable finance is characterized by proactive regulation and standardization, while Switzerland focuses on market-based solutions, self-regulation, and alignment with international standards. Both aim to prevent greenwashing, but the EU has more stringent and enforceable measures compared to Switzerland's reliance on self-regulation and monitoring.

EU regulation affects Switzerland and its economic actors through extraterritorial reach or unilateral adaptation of the Swiss legal framework.

In recent years there has been a surge in sustainable investing (SI). One of the terms often heard in connection with SI is «investor impact». Could you explain this term and provide a few examples of how sustainability criteria can be incorporated into financial products?

Investor impact refers to the influence that investors have on the companies they invest in, affecting social and environmental parameters. This concept is increasingly seen as a mechanism for achieving societal goals such as the UN Sustainable Development Goals (SDGs).

Incorporating sustainability criteria into financial products can be done in several ways. Best-in-class or positive screening involves comparing a company's or issuer's environmental, social, and governance (ESG) performance with its peers based on a sustainability rating. Companies or issuers with a rating above a defined threshold are considered investable. For example, an investment fund might only include the top 30% of companies in each sector based on their ESG performance.

Climate-alignment refers to aligning a portfolio's greenhouse gas emissions with global climate goals. An example is a green bond fund that invests in projects aimed at reducing carbon emissions and promoting renewable energy.

ESG engagement involves shareholders engaging with company management to encourage better ESG practices. This includes communicating with senior management and boards of companies and filing or co-filing shareholder proposals. For instance, an asset manager might actively engage with a company to improve its labor practices and reduce its carbon footprint.

ESG integration is the explicit inclusion of ESG risks and opportunities into traditional financial analysis and investment decisions based on a systematic process and appropriate research sources. A mutual fund that integrates ESG factors into its stock selection process, considering both financial performance and ESG criteria, is an example.

Exclusions involve excluding companies, countries, or other issuers based on activities considered not investable. Exclusion criteria can refer to product categories (e.g., weapons, tobacco), activities (e.g., animal testing), or business practices (e.g., severe violation of human rights, corruption). An ethical investment fund might exclude companies involved in fossil fuels, tobacco, and weapons manufacturing.

Impact investing refers to investments intended to generate a measurable, beneficial social and environmental impact alongside a financial return. Impact investments target a range of returns from below-market to above-market rates. An example is a venture capital fund that invests in start-ups developing clean energy technologies or providing access to education in underserved communities.

Norms-based screening involves screening investments against minimum standards of business practice based on national or international standards and norms such as the ILO conventions, the OECD Guidelines for Multinational Enterprises, the UN Global Compact, or the UN Guiding Principles on Business and Human Rights. An investment fund might exclude companies not adhering to the UN Global Compact principles.

Sustainable thematic investment, or thematic investing, involves investing in businesses contributing to sustainable solutions, both in environmental or social topics. A thematic fund might focus on renewable energy, energy efficiency, clean technology, or healthcare solutions.

ESG voting involves investors addressing concerns of ESG issues by actively exercising their voting rights based on ESG principles or an ESG policy. For example, a pension fund might vote in favor of shareholder resolutions promoting greater transparency in corporate environmental practices.

These approaches help investors align their portfolios with their values and contribute to positive social and environmental outcomes while seeking financial returns.

In your book you mention that ESG litigation risks are increasing everywhere, also in Switzerland. So far there have been some prominent cases from the non-financial sector, such as the lawsuit against the Swiss agrochemical company Syngenta and the case against the cement company Holcim. How can financial institutions mitigate ESG litigation risks?

Financial institutions can mitigate ESG litigation risks through several key steps:

First, they should focus on disclosure and transparency by ensuring accurate and truthful reporting of ESG performance and providing regular updates on sustainability initiatives. This builds trust and prevents greenwashing allegations.

Improving ESG performance involves setting clear, measurable goals aligned with the institution's mission, adopting best practices, and regularly monitoring and evaluating progress.

A robust ESG compliance program is essential. This includes developing comprehensive policies, raising awareness among employees, and conducting internal audits to ensure adherence to ESG standards.

Engaging with stakeholders is crucial. Institutions should actively communicate with investors, customers, employees, and communities to understand their ESG concerns and incorporate their feedback into decision-making processes.

Effective risk management requires identifying and assessing potential ESG risks and developing strategies to mitigate them. This might involve changes in business practices, investments in sustainable technologies, or improvements in governance structures.

Legal preparedness is also important. Institutions should conduct legal reviews of ESG disclosures, develop litigation strategies, and engage with legal counsel specializing in ESG issues.

Third-party verification can add credibility to ESG claims. External audits and independent reviews ensure objectivity and transparency in ESG performance.

Finally, continuous improvement is vital. Staying informed about evolving ESG regulations and best practices helps institutions remain compliant and proactive in addressing ESG issues. Adapting and evolving ESG strategies to meet changing stakeholder expectations and regulatory requirements is key to long-term success.

By implementing these measures, financial institutions can effectively mitigate ESG litigation risks, enhance their ESG performance, and build trust with stakeholders.

Our final question relates to your teaching experience as a law professor and the training of lawyers in Switzerland. Switzerland has ratified numerous international treaties that embody the principle of sustainable development and has incorporated this principle into domestic law. Given the complexity of the legal framework surrounding sustainable finance, one would assume that the law departments at Swiss universities offer courses in this area. Has the topic of sustainable finance found its way into the law curriculum at the University of Fribourg and the EPFL?

Many universities around the world are recognizing the importance of sustainable finance and integrating it into their curricula. This includes offering specialized courses, seminars and research opportunities focused on ESG criteria, sustainable development, and the legal aspects of sustainable finance. Law schools, in particular, are increasingly addressing these issues to prepare students for the evolving regulatory landscape and the growing demand for expertise in this area. 

Sustainability in general and sustainable finance in particular are also gaining momentum in Switzerland. At the University of Fribourg, I teach a master's course on «Economy, Governance and Climate»; EPFL offers more specialized courses directly related to sustainable finance, such as the course «Sustainable and Entrepreneurial Finance», which covers the role of finance in the transition to a sustainable low-carbon economy, or the master's course «Nature Finance», which explores the many financial instruments that can be used to support the protection and regeneration of natural assets.

Thank you very much for this interview, Prof. Romy.