Swiss financial regulator in push to tackle greenwashing

The Swiss Financial Market Supervisory Authority (FINMA) released supervisory guidance on preventing and combatting greenwashing earlier this week.

In the document, FINMA pointed out that Switzerland lacks specific regulatory requirements for sustainability related financial products and services. It said: “this increases the risk that investors and clients will be consciously or unconsciously misled about the sustainable characteristics of financial products and services (“greenwashing”).” 

Expanding upon the limitations, a spokesperson for FINMA told RI: “FINMA’s supervisory remit to prevent greenwashing in the area of collective investment schemes is currently limited to cases of deception (cf. Art. 12 CISA). Furthermore, there exist neither statutory definitions nor regulatory guidelines on the use of key terms in the area of sustainability, such as “sustainable”, “green”, “environmentally friendly”, “ESG”, etc. FINMA’s scope of action is thus limited. This also makes it difficult to compare products.”

Hence, FINMA wrote in the guidance that it aims, to the extent that it is empowered to do so, to protect investors and clients from improper business conduct and to ensure that they are not deceived regarding the alleged sustainability of products and financial services. 

In response to the news, Gabriel Webber Ziero, Switzerland-based Head of Policy Outlook at ECOFACT, told RI: “This is a very important and long-awaited document. FINMA as a regulator is trying to push the issue of greenwashing forward within Switzerland.” 

“FINMA considers targeted regulatory measures to be necessary to allow it to combat greenwashing more effectively. As well as regulatory guidelines in the area of product transparency for Swiss collective investment schemes, FINMA deems it necessary to consider a duty to enquire about and take into account client preferences in relation to sustainability at the point of sale”

Indeed, FINMA’s spokesperson told RI that since the beginning of the year, it has conducted numerous desk reviews at fund level, as well as on-site inspections at several asset managers of collective investment schemes.  

“In several cases FINMA took specific measures. These concern, for example, the name of the product or aspects of risk management. FINMA noticed that targeted supervision and asking supervised institutions the relevant questions on the topic of greenwashing already resulted in adjustments being made.” 

Moving forward, the regulator plans to conduct further on-site and desk-based supervisory reviews.

Other financial regulators are also attempting to tackle the problem. Earlier this year, BaFin launched a consultation on proposed guidelines for sustainable funds, in an effort to “protect investors from greenwashing.” 

A spokesperson for the German financial regulator, told RI that it plans to introduce the guidelines before the end of this year. 

And in July, the UK’s Financial Conduct Authority (FCA) set out a series of principles for ESG labelled funds, prompted in part by the number of poor-quality fund applications seen by the regulator.

FINMA’s document in Switzerland says that for the management of sustainability-related collective investment schemes its focus will be sustainability-related information at the fund level and suitable organisational structure  for managing such products.  

In addition, financial service providers who offer sustainability-related financial products will be made aware that the advisory process (at the point of sale) involves greenwashing risks, and tasked to respond to that. 

FINMA also details what it regards as greenwashing or potential greenwashing due to lack of transparency to investors. 

Ziero told RI that an important red flag highlighted by FINMA is the following: “the scheme makes reference to sustainability, but the investment policy allows for a significant proportion of non-sustainable investments.”  

He said: “This is the first time we have such a formulation in the Swiss context, in that if you offer a product as sustainable, a significant part needs to be just that.”

He also cited another greenwashing warning as important. “FINMA says it is risky when an investment makes reference to sustainability by using terms such as “impact” or “zero carbon” without the stated impact or savings being capable of being measured or verified. This was a big issue for the EU when it came to SFDR.” 

Overall, for Ziero, FINMA’s guidance has combined a potential oversight approach that encompasses SFDR, MIFID (on organisational structure and rule of conduct at the point of sale), and even the Renewed EU Strategy (by addressing zero carbon pledges). 

Later this month, FINMA – alongside the State Secretariat for International Finance (SIF) and the Federal Office for the Environment (FOEN) – is expected to feed back to the Federal Council on whether any necessary amendments to financial market legislation to prevent greenwashing is needed.

“Everyone is really waiting for what will come, it's like we’re in conclave waiting for the white fog,” said Ziero. 

FINMA’s spokesperson told RI: “FINMA considers targeted regulatory measures to be necessary to allow it to combat greenwashing more effectively. As well as regulatory guidelines in the area of product transparency (prospectus/KID/fund contracts or investment regulations) and subsequent reporting (alternatively in the semi- and annual report) for Swiss collective investment schemes, FINMA deems it necessary to consider a duty to enquire about and take into account client preferences in relation to sustainability at the point of sale.”  

Their conclusion echoes a report, released earlier this week, by the International Organisation of Securities Commissions (IOSCO), which called on regulators to consider tightening up requirements for product-level sustainability disclosures and setting expectations for asset managers on sustainability-related risks and disclosures to combat greenwashing.    

On how regulation could take shape, Ziero pointed to the already existing Anti-Competition Act, which is applicable to financial products if they are misleading: “The regulator could come out with either a reemphasis that the above law exists and applies to the financial sector, or come up with an amendment that is aligned with the overarching act in the financial context.”

Alternatively, he said, the Unfair Competition Act prohibits the making of incorrect or misleading statements in commercial communication: “The Act has the Swiss Commission for Loyalty (basically a consumer protection agency) involved in it, which is another body that could get involved in this area of greenwashing beyond the financial regulator.”

He concluded: “The financial sector might start thinking ‘shall we just keep an eye on the financial regulator or start talking with the consumer protection agency?’ You have to remember who in Germany brought the case against Deka Bank. It was not BaFin but the consumer protection agency. I think this linkage will become more and more relevant in the future.”