On 3 November 2021, Switzerland's Financial Market Authority (FINMA) released its Guidance 05/2021 on preventing and combating greenwashing, which highlights the authority's commitment to ensuring protection of investors and clients and mitigating legal and reputational risks stemming from cross-border activities in connection with alleged sustainability of products and financial services.
This communication is part of FINMA's broader action plan to inform fund management companies of its expectations for the contents of fund documents regarding sustainability-related Swiss funds (first information provided early 2021) and conducting initial on-site sustainability reviews.
The release of the Guidance follows on the 2 November 2021 publication of the recommendations of the International Organisation of Securities Commissions (IOSCO) on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management at the international level. The conjunction of these regulatory initiatives clearly demonstrates the determination of supervisory authorities across borders to combat greenwashing with undertakings, based on their general competences and as part of their respective mandates with the goal of protecting investors and clients and mitigating cross-border risks related to alleged sustainability of products and financial services.
In the current issue of Law-Now, we provide practical insights on FINMA's Guidance.
According to FINMA, in the absence of a uniform definition, the term "sustainability" broadly encompasses terms such as "green", "environmentally friendly, "sustainable", or "ESG" (environmental, social and corporate governance), which are frequently used in connection with sustainability-related products. This broad interpretation of the notion of "sustainability" may also capture other terms and expressions not expressly mentioned in the Guidance when these terms or expressions refer to the notion of sustainability. The Guidance applies regardless of the support format (e.g. electronic, videos) or the communications type (i.e. product documentation or advertising) for as long as investors or clients perceive sustainability as an essential feature of the financial product or service offered.
While FINMA's broad definition of "sustainability" does not explicitly refer to the term "impact investing", the notion of it is apparently covered by the definition as well, given that the list of terms provided in the Guidance is not exhaustive. One of the scenarios in the list of situations that FINMA defines as greenwashing or implying potential greenwashing risks specifically cites the term "impact" (see below "Sustainability-related information for Swiss funds").
The Guidance is built on three key pillars:
sustainability-related information for Swiss collective investment schemes (funds);
organisational structure of institutions that manage sustainability-related funds; and
rules of conduct at the point of sale for sustainability-related products.
Sustainability-related information for Swiss funds
The Guidance describes several scenarios, ranging from the obvious to the more subtle, perceived by FINMA either as greenwashing (i.e. deception) or posing a potential greenwashing risk resulting from the lack of transparency for investors, specifically when a fund or fund documentation refers to sustainability while:
no sustainable investment strategy or policy is actually pursued;
the investment strategy or policy is deemed sustainable only due to widespread exclusionary criteria with no specific sustainability component provided to go beyond these exclusionary criteria;
the investment policy allows for a significant proportion of non-sustainable investments, which are not in line or are even inconsistent with the adopted sustainability approach;
the fund documents do not provide or provide only general information about the corresponding investment strategy or policy or the selection of permitted investments, including the ways in which sustainability considerations are integrated into the investment decision process.
Other examples given by FINMA include instances when:
the fund refers to sustainability and discloses in the investment strategy or policy information about the adopted approach, such as the best-in class approach, stewardship, etc., without effectively implementing the approach;
the fund refers to sustainability by using terms such as "impact" or "zero carbon" without providing the necessary tools or means for measuring or verifying the levels of the stated impact or carbon savings.
As a cardinal rule, FINMA states that a sufficient level of information can be ensured if there is the utmost transparency in sustainability reporting. Institutions are advised to ensure an adequate level of clarity in reporting, keeping in mind that, in practice, excessive transparency "may kill transparency". General principles applicable to the formatting of regulatory communications (e.g. key information documents) may serve as guidelines for this.
Organisational structure of institutions managing sustainability-related funds
FINMA expects that institutions in charge of managing funds be properly organised in accordance with the general regulatory principles set forth in the Financial Institutions Act (FinIA) and the Collective Investment Schemes Act. These requirements are in particular applicable to managers both of Swiss and non-Swiss funds. FINMA takes into account the following elements to determine whether or not an institution is adequately organised:
the body (or bodies) in charge of governance, supervision and control must adopt and specify the relevant strategy related to "sustainability";
the investment-decision process must integrate and follow sustainability-related considerations and be subject to an independent monitoring of risk (i.e. the sustainability risks must be captured by the risk management process, alongside the traditional investment risks);
the specialist expertise and knowledge must be adequately distributed among the institutions in charge of governance, supervision, control and operational functions;
the external sustainability-related data and analyses, tools and ratings must be selected and utilised based on the adequate assessment and monitoring of data providers; the corresponding information must be validated by the financial institution.
The organisational principles that FINMA uses are not surprising and reflect the supervisory authority's standard expectations each time it assesses whether a supervised institution is adequately organised regarding the products and services offered.
While these principles focus on investment fund managers, the reference in the Guidance to a general provision of FinIA (art 9 FinIA) makes the principles applicable to other regulated institutions as well (e.g. portfolio managers and other institutions subject to authorisation under FinIA, including those who benefit from the cascade authorisation system or système d'autorisation en cascade; Bewilligungskaskade).
Rules of conduct at the point of sale
According to FINMA, the Financial Services Act does not currently include specific rules for combating greenwashing, such as those dealing with investor sustainability-specific preferences. However, interactions at the point of sale may be of particular relevance in the case of potential civil liability claims arising from an advisory process for financial services provided to clients.
This issue can be partially addressed by complying with the "Guideline for the integration of ESG considerations into the advisory process for private clients" published by the Swiss Bankers Association in June 2020. This Guideline's primary focus, however, is on the advisory process related to private clients, namely discretionary and advisory relationships (excluding execution-only interactions), and that the principles it contains are not meant to create additional regulatory requirements.
The Guidance and the actions taken by FINMA show market participants that the Swiss supervisory authority is willing to align itself with international developments aimed at preventing and fighting greenwashing. The Guidance also highlights the fact that FINMA has no intention of remaining passive while Swiss authorities decide how to amend Swiss financial market regulations in order to preserve the exportability of Swiss financial products and protect investor interests. If the Guidance provides useful information on a regulatory trend, it does not provide insights on other aspects of greenwashing, such as potential civil claims based on the Unfair Competition Act or on the general principles applicable under Swiss contract law (this is understandable given that the Guidance is a regulatory communication).
For more information on sustainability and ESG regulations in Switzerland, contact your CMS client partner or local CMS expert: