11.2 Key Parameters for a Definition

11.2.1 Key Parameters of FINMA’s Greenwashing Prevention Practice for Funds

Currently, the only specific government regulation in Switzerland addressing greenwashing is found in the Swiss Financial Market Supervisory Authority’s (FINMA) practice for approving and supervising collective investment schemes. This practice is based, among other things, on the prohibition of deception in relation to collective investment schemes (Art. 12 of the Collective Investment Schemes Act). The key parameters of FINMA’s fund supervision practice also serve as a reference point for other areas.

FINMA takes into account any reference to sustainability. Such a reference is always deemed to exist if “investors or clients might get the impression that sustainability is an essential characteristic of the financial product”. This is the case when terms like “green”, “environmentally friendly”, or “ESG” are used, for example. FINMA leaves the definition of sustainability open in view of the variety of definitions. 

In relation to greenwashing, FINMA refers to the “risk that investors and clients will be consciously or unconsciously misled about the sustainable characteristics of financial products and services.”¹ In other words, greenwashing does not have to be deliberate. 

If a sustainability context in the aforementioned sense, FINMA considers the following cases in particular to be indicative of greenwashing:²

• In reality, no sustainable strategy is actually being pursued.

• A stated sustainability approach (e.g., best-in-class, integration of ESG criteria, stewardship) is not implemented.

• Some activities are inconsistent with the stated sustainability approach.

• The strategy only excludes sustainability risks. This corresponds to the self-regulation of the Asset Management Association Switzerland (AMAS), under which the application of purely exclusionary criteria and the mere integration of ESG considerations cannot be regarded as sustainable per se.³

• Terms like “impact” or “zero carbon” are used “without the stated impact or savings being capable of being measured or verified.” In most cases, FINMA currently takes the view that statements like “net zero” or “impact with active ownership” are not measurable.

• There may be a strategy and this strategy may be implemented, but “investors are not able to gain an impression of how sustainability is taken into account due to the lack of detail or transparency.” FINMA also mentions inadequate retrospective reporting on implementation in this context. 

Where collective investment schemes include a reference to sustainability, FINMA imposes certain requirements: 

• Disclosure: the documentation should enable investors to make an informed investment decision;

• organization: integration of the strategy into the processes, definition of sustainability strategy by the board of directors, guarantee of specialist expertise at all levels of the organization, data management, risk management; and

• marketing as well as advice at the point of sale.⁴

• In this way, the Financial Market Supervisory Authority is establishing a standard for greenwashing prevention. The self-regulation of the Swiss Bankers Association (“SBA”) regarding collective investment schemes also refers to FINMA’s practices aimed at preventing greenwashing for other financial instruments.⁵

   

11.2.2 The Federal Council’s Key Parameters for Greenwashing Regulation 

The Swiss Federal Council has defined the following requirements for future regulation of greenwashing in the financial sector and for corresponding self-regulation:⁶

For the Federal Council, “Greenwashing occurs in the financial sector when, for example, a financial instrument or service is portrayed as having sustainable characteristics or pursuing sustainability goals and this portrayal does not adequately reflect reality.” Accordingly, the mere “appearance” of sustainability is sufficient. What matters is that the appearance differs from the actual business practices. With the words “for example”, the Federal Council reserves the right to define the term “greenwashing” even more broadly.

Financial products or services portrayed as sustainable must either align with one or more sustainability goals, specifically the 17 Sustainable Development Goals (“SDG”) in the UN 2030 Agenda for Sustainable Development (e.g., by investing in companies with transition plans that are aligned with the Paris Agreement) or contribute to achieving one or more such sustainability goals (e.g., by means of impact investment or active ownership).

As in the FINMA practice and the AMAS self-regulation, an approach that is aimed solely at reducing ESG risks for the investment or optimizing financial performance may not be described as sustainable.

The Federal Council also stipulates: 

• an obligation to provide a detailed description of the sustainability approaches used, their implementation and the key performance indicators for measuring them; 

• periodic reporting using relevant indicators (the Federal Council recommends the climate label Swiss Climate Scores for funds);

• verification by independent third parties; and 

• the legally binding nature and enforceability of the obligations.

In contrast to European regulation, the Swiss Federal Council does not rely on an authoritative definition of what qualifies as sustainable but instead favors principles-based regulation. However, the Federal Council postponed the announced regulation against greenwashing in favor of an industry-led self-regulation proposal, delaying it until August 2024.⁷ Considering the ongoing regulatory efforts of AMAS⁸, SBA⁹, and the Swiss Insurance Association in the meantime, as well as developments in EU regulation, the Federal Council ultimately decided against sovereign regulation.¹⁰ It continues to regard the principles of its “position” as a benchmark for self-regulation

11.2.3 Key Parameters of the EU Greenwashing Regulations

The Swiss approaches do not exist in a vacuum. They are being developed against a backdrop of extensive EU regulations that are also important for Swiss companies engaging in cross-border activities. 

Specific regulations aimed at combating greenwashing are the Sustainable Finance Disclosure Regulation (EU) 2019/2088 (“SFDR”) for funds, the Taxonomy Regulation (EU) 2020/852 (“EU Taxonomy”), which defines sustainability for the purposes of the SFDR and the Corporate Sustainability Reporting Directive (EU) 2022/2464 (“CSRD”), and the revised Regulatory Technical Standard (“RTS”) on the Markets in Financial Instruments Directive MiFID II.¹¹ The following key parameters for the definition of greenwashing can be derived from these regulations:

EU Taxonomy defines greenwashing as “the practice of gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when in fact basic environmental standards have not been met.”¹²With this definition, it creates a link to the combating of unfair competition and judges general environmental claims according to “basic” environmental standards.

When they use the term “marketing”, the RTS on the SFDR (in relation to funds) and the revised RTS on MiFID II 13 (in relation to financial instruments in general)¹³ mean in particular the “recommendation” of a financial product. They expand the definition to include other sustainability standards in addition to environmental ones.¹⁴

The EU Sustainable Finance Strategy also includes marketing with “unsubstantiated sustainability claims” with regard to products, activities, and policies under the term “greenwashing.”¹⁵ The practice of qualifying unverifiable sustainability claims as greenwashing has been adopted by FINMA from the EU Regulation.

The EC SFDR Q&A further includes: “conveying a false impression, or providing misleading information about how a financial product is performing in terms of ESG sustainability.”¹⁶The definition is thus expanded to include the mere impression of sustainability, which was adopted by the Federal Council. It also encompasses retrospective reporting on performance and goes further than the EU Taxonomy Regulation, taking the broad field of international ESG standards as a benchmark. 

An investment instrument may only be marketed as sustainable if it invests in a sustainable economic activity for the purpose of achieving an environmental objective (“dark green”, Art. 2(17) and Art. 9 SFDR). An economic activity is classified as sustainable if it contributes to a defined environmental or social sustainability objective and does not significantly harm any of the other sustainability objectives. The economic activity must also follow good governance practices (including compliance with tax regulations).¹⁷ Furthermore, it must implement minimum social safeguards in accordance with the OECD Guidelines for Multinational Enterprises, the ILO Declaration, and the UN International Bill of Human Rights in order to adhere to the principle of doing no significant harm.¹⁸ In contrast to the Federal Council’s approach, a purely environmental sustainability claim that does not consider corporate governance and social sustainability at all or harms another sustainability objective may not be described as sustainable.

If an investment or economic activity is marketed not based on its overall sustainability but, rather, on specific environmentally or socially sustainable features alongside other characteristics (“light green”), it must be disclosed how these sustainable features are met and it must be ensured that the companies being invested in follow good governance practices (Art. 8 SFDR). If the Federal Council’s definition of sustainability does not make reference to good governance practices, it is also incompatible with the EU approach.

The mere avoidance of sustainability risks in the investment may not be described as sustainable. There is now consensus on this point in Switzerland, too.

The EU Taxonomy Regulation and numerous delegated regulations/RTSs define in detail which economic activities may be described as environmentally sustainable. This marks the key difference from the Swiss regulatory approach, which instead aims for principles-based regulation and ultimately relies on self-regulation.

Finally, there is also a draft regulation on sustainability claims and greenwashing outside the financial sector (the Green Claims Directive) and a proposal for an EU Ecolabel for financial instruments.