Advantages and disadvantages of regulations – comparing the European Union and Switzerland based on their efforts on how to tackle greenwashing

The EU - the leader in hard law approaches?

The main two differences between hard law and soft law are the legal obligations and the consequences of non-compliance, which can be derived from the legal value.

As hard law is binding, non-compliance can result in sanctions. Soft law, on the other hand, has due its nature no binding element, therefore, non-compliance does not result in legal sanctions, but can rather cause reputational risk. Soft law is a common instrument in international matters that enables cooperation with flexible adaptation options, whereby mostly common standards are formulated.

Soft law is in many fields appraised for its flexible, bottom-up approach, which may allow relevant actors? to adapt to their diverse circumstances.

Looking at the EU, we have seen in recent years a move to hard law with regards to sustainable finance, especially when drawing a distinction between sustainability risks and impacts in communication with investors. The focus has been on understanding and reporting how an investment product minimises sustainability risks, is aligned with sustainability goals and/or effectively contributes to sustainability goals.

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Switzerland and its role in the EU financial system

Switzerland as a key financial market is interconnected with different markets and is therefore, as well required due to different constellations to comply with the EU regulations.

Looking at the national level in Switzerland, we have seen different efforts that have been less focused on hard law mechanisms, but rather on guidelines recommendations.

Looking at efforts against greenwashing as one of the main topics of the sector, this article will focus specifically on how greenwashing is handled on an EU and Swiss level in a comparative approach. Considering that Switzerland is not an EU member state there is no direct requirement to implement EU law, however, the competitive landscape and its crucial interconnection with different EU and international countries requires Switzerland to react.

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Sustainable finance regulation in the EU and Switzerland - a look at approaches to combating? greenwashing

FINMA and its role for Swiss Sustainable Finance?

The EU has issued with SFDR legal obligations for financial market participants, which requires specially to report on if environmental and social elements are considered in financial products and/or if they are contributing to sustainable goals. The product level disclosure requirements have come into force as of January 1st, 2023, and are therefore, a topic priority on the agenda of financial institutions.

The Swiss Federal Council? has issued a statement and established a dedicated? working group in order to tackle the definition of greenwashing.

Financial products or services should only be advertised as being sustainable if they are compatible with at least one specific sustainability goal or contribute to achieving a sustainability goal. This should ensure that financial products and services that are aimed at reducing ESG risks are labelled as sustainable only if they pursue a sustainable investment goal in addition to a purely financial one. Providers of sustainable products or services should be able to disclose how they intend to achieve the sustainable investment goal they pursue.?

As part of its supervisory function, FINMA seeks, among other things, to protect investors from improper business conduct and to ensure that they are not misled regarding the proclaimed sustainability characteristics of products and financial services. In the supervisory communication it published in November 2021, FINMA broadly explains its expectations regarding preventing greenwashing in the management of sustainability-related collective investment schemes at fund and institution level. Furthermore, it highlights the position of financial service providers offering financial products that refer to sustainability to the potential greenwashing risks in the advisory process.

Currently, Switzerland has no legislative requirements on transparency or compliance with specific sustainability criteria for financial services. In addition, there are no such obligations for financial products, with the exception of funds, for which certain transparency requirements apply. Based, particularly on the prohibition of confusion and deception, FINMA requires increased transparency in fund documentation if this uses the terms "sustainable", "green" or "ESG" , or otherwise refers to sustainability, including about the fund's sustainability goals. It also recommends sustainability reporting for these funds as best practice. Regarding financial services, FINMA does not impose any specific requirements in connection with greenwashing at the point of sale, due to the absence of an adequate legal basis.

?Market-led initiatives the way to go ??

Key players in Switzerland’s developments are Asset Management Association Switzerland (AMAS), Swiss Banking Association (SBA) and Swiss Sustainable Finance (SSF).?

Their recommendations start from training financial advisors, to categorization of investments and self-regulation guidelines for reporting.

Looking at the recommendations prevailing for combating greenwashing, we see among others the recent self-regulation recommendations by AMAS for collective assets.

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Basically, three levels are relevant for the transparency of collective assets related to sustainability as per Art. 7 of the AMAS recommendation:?

a. ? Appropriate organisation at institution level in the management of collective assets (“financial institution level”);

b. ? sustainability-related information at the level of collective assets (“product level”);

c. ? in the investment advisory and asset management process or at the point of sale (“financial services level”).

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?Art. 9 describes that if an institution fulfils the requirements of a comparable foreign regulation relevant to the subject matter of the present self-regulation, the requirements of this self-regulation are also deemed to have been fulfilled.

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Looking at Art. 7 we see under a. and b similarities from SFDR ( entity level and product level disclosures), as well as under c. for the advisory related amendments as per MiFID II sustainability related amendments.

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AMAS refers as well under Art. 9 that the fulfilment of the requirements of a comparable foreign regulation will be considered equal and therefore, as well deemed as fulfilling the self-regulation per AMAS.

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Reflection - Switzerland to follow the rules or not ??

The number of Swiss requirements is increasing and is getting as as well attention. While Swiss requirements clearly aim towards the same goal, they are, however, less intrusive than the EU approaches.

The question which gets relevant is, what the advantages and disadvantages are of less binding recommendations?

There have been large discussions around the product level requirements of SFDR, considering the definitions, measurements and feasibility to comply with the requirements especially, for Art. 9 SFDR products, which require a contribution and therefore, positive impact on the environment or social relevant topics.

Switzerland’s financial market participants are required to comply with SFDR if they serve European clients or are issuing products within the market.

Therefore, there is not much space for Swiss international players to decide if they want to comply or not, if they continue to be active within the same market.

From a Swiss policy perspective, there is a clear necessity to monitor the EU regulations as it affects the Swiss financial market immediately. Considering the Swiss endeavours one can track through the market-led recommendations that SFDR is influencing the Swiss approach.?

The financial market in Switzerland has been advocating in many fields for self-responsibility, less state intervention and for more industry led approaches. The current approach is clearly supporting these perspectives. The question remains if Switzerland will be able to continue with less intrusive approaches or if legislative efforts will be not evitable.

WISF is curious to understand the different opinions in the market.