The Federal Council wants to prevent the deception of investors regarding the sustainable characteristics of financial products and services. These must be compatible with or help to achieve at least one sustainability goal.
The Federal Council has specified its position on greenwashing in the financial market in a position paper. Financial products or services should only be offered as sustainable if they are compatible with at least one specific sustainability goal or contribute to achieving a sustainability goal. This is intended to ensure that financial products and services that are intended to reduce any ESG risks are only designated as sustainable if they pursue a sustainable investment objective in addition to a purely financial one.
Providers are under obligation
The Federal Council is of the opinion that for the market to function, there needs to be a clear, general understanding of when a financial product or service can be offered as sustainable. Providers of sustainable products or services should therefore explain how they intend to achieve the desired sustainable investment objective. In addition, providers should periodically report on the selected sustainable investment objectives and compliance with the transparency requirements should be verifiable by an independent third party. Finally, investors should be able to assert their rights through legal action.
Implementation measures are being examined
A working group headed by the Federal Department of Finance (FDF) is to examine how best to implement the Federal Council's position on greenwashing prevention. In addition to the FDF, the Federal Department of the Environment, Transport, Energy and Communications (DETEC), the Federal Department of Economic Affairs, Education and Research (EAER), the Swiss Financial Market Supervisory Authority (FINMA), the industry and non-governmental organizations are to be represented in the working group. The FDF will propose the next steps to the Federal Council based on the work by the end of September 2023.
The precursor for stricter standards is the EU
The European Securities and Markets Authority (ESMA) is also working on quantifiable guidelines for ESG and sustainable investing. It is determined to set stricter standards for the designation of sustainable products. Therefore, the EU's greenwashing framework is continuously updated with the Disclosure Regulation (Regulation on sustainability-related disclosure requirements in the financial services sector, SFDR, applicable since March 2021).
Currently, ESMA is working on quantifiable guidelines for ESG and sustainable investing that would force fund managers to rethink the design and marketing of an ESG fund class known as Article 8. According to estimates by Morningstar, a U.S. financial information and analytics firm, only 18% of the €4 trillion Article 8 funds currently meet ESMA's newly considered criteria, Institutional Money reports.
Sustainability of Article 8 funds to be improved
So-called Article 9 funds must, according to SFDR, aim for an ESG target, such as a reduction of emissions. Article 8 products, on the other hand, are characterized by the fact that they promote ESG features. Fund designations are now also where ESMA's latest initiative comes in. The authority is proposing that an Article 8 fund that includes ESG-related designations in its name must in future hold at least 80% of its investments in areas that match its own strategy description. The requirements will be stricter for funds whose names include 'sustainable' or variants and combinations of that word. For them, half of this 80% must also meet the EU definition of sustainable assets.
Downgrading to Article 6 is looming
In order to remain compliant with the rules, many investment managers have now downgraded many Article 9 funds, i.e., those that carried the top rating for sustainable funds, to Article 8 funds. However, because of the newly proposed rules, many Article 8 funds could now be downgraded to Article 6. However, losing the Article 8 label would mean losing the right to market a product as ESG or sustainable in the first place.
It remains to be seen how the Swiss financial and supervisory authorities will react to this.
