Background
On 26 September 2022, the Asset Management Association Switzerland (AMAS) published a principle-based self-regulation for sustainable asset management, which is mainly applicable to its members (the Sustainability Self-Regulation) and will enter into force on 30 September 2023.
The Sustainability Self-Regulation is binding for AMAS members only. However, non-members can adhere to the Sustainability Self-Regulation on a voluntary basis. In other words, the Sustainability Self-Regulation does not set a minimum standard for the industry recognised by the Swiss Financial Market Supervisory Authority (FINMA) within the meaning of the Financial Market Supervision Act.
Scope of application
The Sustainability Self-Regulation will apply to fund management companies, SICAVs, Swiss Limited Partnerships, SICAFs, asset managers (de minimis or not) as well as other financial institutions, such as banks or securities firms, which manage collective investment vehicles defined as "collective assets" (e.g. funds, pension funds) linked to sustainability. It also applies to producers of sustainability products narrowly defined as fund management companies, SICAVs, Swiss limited partnerships and SICAFs.
The Sustainability Self-Regulation applies exclusively to the administration (i.e. management), investment management and production with respect to collective assets. It does not cover other financial services as defined in the Financial Services Act or the offer of financial instruments.
Substituted compliance
The application of comparable foreign standards will be sufficient to comply with the Sustainability Self-Regulation issued by AMAS. It is also possible to apply the principles set forth in the Sustainability Self-Regulation to a certain portion of the collective assets while in the same time applying foreign comparable standards to another portion of said assets.
The recognition of the possibility to apply foreign standards is of particular relevance in the context of the rather comprehensive European sustainability framework that may apply to Swiss asset managers (at least indirectly) as well as to Swiss products that could be marketed in the EU (subject to the rules of each member state). In practice, this recognition may also avoid unnecessary adjustments with Swiss standards and facilitate the adoption of best practices. Interestingly, the recognition is not limited to EU rules and AMAS is expected to publish recognised foreign comparable standards in the coming months.
Finally, the Sustainability Self-Regulation also allows asset managers to comply with other relevant Swiss self-regulation standards in lieu of the Sustainability Self-Regulation. The latter, however, will apply "by default" if no other standard is elected.
Principles applicable to asset managers
Asset managers must ensure that they have the required infrastructure, sufficient qualified resources (expertise in sustainability at board, executive management and operational levels), and organisational requirements to implement the sustainability requirements set out in the investment policy of the relevant product. Processes relating to governance, reporting, investment and risk management must be duly formalised.
Delegation and sub-delegation
In case of delegation or sub-delegation of investment management, the asset manager must ensure that the relevant delegation agreement takes into account sustainability requirements. The approach followed by AMAS and the content of the relevant delegation agreements (e.g. allocation of competences, reporting, control rights, etc.) are similar to the general approach to be followed by financial institutions for delegation arrangements under the Financial Institutions Act.
Sustainability data
The Reference Document (as defined below) will describe all external providers of sustainability research and/or analysis tools used directly in the investment process. Only professional data providers must be mentioned to the exclusion of publicly available and/or freely available data sources. Sustainability data providers must be selected with care, duly instructed and monitored.
Sustainability policy
The sustainability policy must be included in the investment management contract (generally in a specific annex), or by reference to another document, such as the prospectus or a similar instrument depending on the type of investment vehicle (the Reference Document). This document must indicate the sustainability approach to be followed (e.g. exclusions, impact investing, thematic investing, best-in-class/positive-screening, stewardship, etc.).
In addition, the Reference Document must indicate the minimum threshold for investments that must comply with the sustainability requirements set out in the investment policy, or the minimum threshold for sustainability-relevant investments to be managed according to the said policy. The Reference Document will also include the proportion of non-compliant investments and will provide the corresponding explanations.
The compliance of investment decisions with the sustainability policy must be monitored regularly by an independent control function.
It is worth noting that the asset manager may derogate to the principles set out in the Sustainability Self-Regulation with the express consent of a pension fund. Derogations are allowed not only with respect to principles governing sustainability policy but also regarding sustainability data, delegation/sub-delegation and reporting. This approach will allow tailor-made solutions for the pension fund industry.
Reporting
Investors are informed on the sustainability approaches in a report at least once a year (e.g. as part of the regular reporting or by publication on a website). For impact investing investment strategies, the annual reporting must indicate the extent the stated sustainability objectives have been achieved. In the case of Swiss real estate funds, the sustainability indicators are published in accordance with the "Specialised information on real estate funds" issued by AMAS.
Asset managers are able to delegate their reporting obligation to a third party, such as the fund management company. The location where the sustainability report will be published (e.g. on the asset manager's website) must be disclosed in the fund documentation. Investors must also be able to know where they may request this report. Finally, if the reporting is made available, in whole or in part, by a third party, this must be mentioned in the asset management contract, which will specify where the reporting in question is accessible.
Accountability
The board of the asset manager, respectively that of the producer, is ultimately responsible of the application of the Sustainability Self-Regulation. In case of breach, the asset manager must take appropriate documentation and remediation measures. However, the Sustainability Self-Regulation does not provide for a specific sanction mechanism in case of non-compliance.
Entry into force
The Sustainability Self-Regulation will enter into force on 30 September 2023, unless provisions requiring a change in the fund documentation are subject to FINMA's approval. In the latter case, corresponding amendments must be submitted to FINMA by 30 September 2024. Investment management contracts entered into with pension funds must be updated by the first contractual term/update taking place after 30 September 2024. Reporting obligations must cover the first full year following the fund's approval or update of the fund documentation.
Outlook
Switzerland is continuing to make its regulatory framework applicable to sustainable investment after the Swiss Bankers Association's release of the guidelines for integrating sustainability criteria into investment advice and portfolio management on 28 June 2022. For the time being, the path chosen is clearly that of self-regulation. It remains to be seen whether these initiatives will eventually become a minimum standard for the industry recognised by FINMA or whether Swiss authorities will choose the legislative path. The current approach must, nevertheless, be praised for its flexibility and its incremental character.
For more information on sustainability and ESG regulations in Switzerland, contact your CMS client partner or local CMS expert:
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