Sustainable Finance

Governments, businesses and institutional investors are placing increasing emphasis on Environmental, Social and Governance (ESG) initiatives. It is clear the financial service sector has a key role to play to advance these initiatives. Regulations aimed at improving taxonomy, clarity on disclosures and benchmarking will mean an increasing shift towards investments that meet sustainability criteria, not just economic objectives.

Political initiatives such as the European Union’s Green Deal or Switzerland’s Responsible Business Initiative (RBI) illustrate that the need to act has been understood by society and political bodies globally. Switzerland’s Federal Council published an assessment including recommendations on sustainability in the financial sector in Switzerland in its report in June 2020.

The financial system and its stakeholders are critical when it comes to the necessary capital allocation to companies that focus on long-term sustainable value creation. Industry 4.0 can offer the necessary tools to help companies contribute to a more sustainable society.

Since 2014, several directives were issued at the European level to achieve a common approach to environmental and sustainability objectives. These include the Directive on Disclosure of Non-Financial and Diversity Information (NFRD), the Action Plan for Sustainable Growth, Sustainability Taxonomy Regulation and the Regulation on Sustainable Finance Disclosures. The graph below details the goals of these directives.

A number of the directives, including the NFRD, are currently under consideration for further revision by the end of 2020 or early 2021. The European Commission launched a public consultation in April 2020 on a Renewed Sustainable Finance Strategy (RSFS) and many of the points under consideration are relevant to disclosure issues. These disclosure obligations will set a new transparency standard for financial products marketed as green or sustainable. They can help to promote market discipline, stimulate competition and product innovation, and ultimately combat so-called `greenwashing,’ in which products are misleadingly portrayed as environmentally friendly.

The Swiss situation

Swiss financial institutions must already comply with a number of EU regulations to be granted market access for their ESG products. Swiss market intermediaries who provide financial services to an EU-domiciled client, or want to distribute financial products in the EU, also have to comply with these standards.

In 2016, the Responsible Business Initiative (RBI, or Konzernverantwortungsinitiative in German) was put forward to introduce a legally binding framework to protect human rights and the environment regardless of where a Swiss-domiciled company, or its subsidiaries, operates. On 29 November 2020 the Swiss population will vote on this initiative, and regardless of the outcome, there will be increased reporting and disclosure requirements for companies in Switzerland. The parliamentary counter proposal, which will automatically enter into force if the initiative does not succeed, equally includes a range of additional reporting requirements in the area of sustainability, conflict minerals and child labour.

In June 2020 the Swiss Federal Council published an assessment including recommendations in order to promote Switzerland as a sustainable finance destination. The Swiss government is currently reviewing various aspects and potential initiatives going forward. In connection to these, the Swiss Financial Market Supervisory Authority (FINMA) is currently working on a proposal on how to include climate risk reporting into the overall disclosure requirements of banks and insurance companies.  

Switzerland is also advocating that sustainable finance issues be considered in the relevant international financial market bodies, such as the Financial Stability Board (FSB) and the G20.

Navigating the complexities of the regulatory landscape

Over half of the approximately 400 policy and regulatory measures on green and sustainable finance currently in place require some sort of disclosure. The increasingly complex landscape of current and future initiatives and their relevant disclosure obligations will reshape how the financial services industry assesses and communicates sustainability-related risks and opportunities. Companies need to consider how they are or will be affected by current and upcoming legislative changes at both a national and regional level.

Although there are sustainability guidelines for the financial sector, it will be difficult for companies and investors to have a consistent approach without legally binding standards and internationally recognised benchmarks. Given the lead times needed to set detailed EU standards and targets, this gives Switzerland the opportunity to be the first to introduce clear guidelines and regulation, as argued in our Power Up Switzerland report. The benefit of this would be twofold, establishing Switzerland as a leader in sustainable finance and helping the country to maintain its international competitiveness.

Ideally, companies and investors will focus not just on climate risk but also other sustainable development goals, such as non-financial disclosure regulations related to slavery and human trafficking. Companies should consider not just regulatory requirements but also reputational and long-term strategic considerations.  According to the Swiss Sustainable Investment Market Study 2020, Chf1.2 trillion of assets have already been invested in Switzerland in financial products considering ESG aspects, a 62 per cent increase on a year prior. This further demonstrates that this trend is here to stay and will become even more critical in the operational and investment decisions of companies in the years ahead.

Data-driven and digitally savvy

Companies boosting their sustainability credentials need to integrate them holistically into their internal risk landscape and control processes. This is relevant not only for banks, but also pension funds and insurance companies, which often are the largest institutional investors.

In order to make better investment decisions, more reliable data is desperately needed. In order to be able to provide this information, companies will benefit from the use of digital technologies such as data analytics, AI and machine learning. Finance functions will need professionals with sufficient knowledge of sustainability and related laws and legislation, as well as data-modelling capabilities to address reporting requirements and scenarios related to non-financial data.

Deloitte understands the challenges companies face complying with current and evolving regulations and requirements. When assisting our clients on their journey we see that a holistic approach to sustainable finance, including the consideration of opportunities offered by modern technologies and adopting  strategies that allow for an integrated approach across the entire business operations and investment portfolio are essential to succeed.

Contacts

Marcel Meyer, Partner - Financial Services

Phone: +41 58 279 7356
Email

Marcel leads Deloitte Switzerland’s Sustainability services, Investment Management practice and is a member of the Board of Directors. He has 20 years of experience auditing and advising domestic and international clients primarily in the financial services industry, but also in real estate, trading and technology. As head of Sustainability services, he helps clients integrate sustainability in their strategy and operations focusing in particular on climate change and sustainable finance. He also provides independent assurance on sustainability reports and compliance with necessary regulatory requirements.