Swiss self-regulation for sustainable asset management: takeaways at the time of its entry into force
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 (Sustainability Self-Regulation). This Sustainability Self-Regulation entered into force on 30 September 2023 and the following is a recap of the takeaways on this regulation that takes into account the AMAS FAQ of December 2022. Additional details on the Sustainability Self-Regulation can also be found in the 4 October 2022 CMS Law-Now article on Swiss self-regulation on transparency and the disclosure for sustainability-related collective investment vehicles.
Notion of "sustainability"
The Sustainability Self-Regulation applies to fund management companies, SICAVs, Swiss Limited Partnerships, SICAFs, asset managers (de minimis or not) and other financial institutions, such as banks and securities firms, which manage collective investment vehicles defined as "collective assets" (e.g. funds, pension funds) linked to sustainability. The Sustainability Self-Regulation, however, does not apply to other financial services as defined in the Financial Services Act.
The notion of "sustainability" is thus central to the application of the Sustainability Self-Regulation. A mere reference made only to single elements or approaches of sustainability, such as exclusions or ESG integration only, is not considered a sufficient reference to sustainability. The same would be true if a sustainability report is published for a non-sustainable portfolio in which it is clear that the portfolio’s management does not follow a sustainable approach.
Under the Sustainability Self-Regulation, a portfolio is linked to sustainability if the portfolio is described or positioned as sustainable according to ESG aspects based on the traditional typology of sustainable investment approaches: namely, (i) Exclusions, (ii) Best in class/positive screening, (iii) ESG integration, (iv) Thematic investments, (v) Impact investing, (vi) Stewardship (active ownership), and (vii) Climate-alignment. According to the AMAS, these investment approaches are essentially based on the AMAS and SSF document "How to Avoid the Greenwashing Trap: Recommendations on Transparency and Minimum Requirements for Sustainable Investment Approaches and Products" issued in December 2021.
Given the scope of this notion, a link to sustainability would generally require a combined investment approach regarding the management of the collective assets. Absent such a combination, one could challenge the application of the Sustainability Self-Regulation. In particular, the AMAS has clarified that a collective investment scheme cannot be classified as sustainable if the "ESG integration" approach alone is applied, and if reference is made to the application of ESG integration only, it must be clearly stated that the relevant collective investment scheme is not sustainable or is not managed sustainably. The same would be true of a sustainable policy focusing exclusively on the Exclusion approach.
Sustainability Self-Regulation and greenwashing
It is important to note that the non-application of the Sustainability Self-Regulation does not mean that a reference, even isolated to a particular approach or a generic reference to sustainability or ESG, cannot be constitutive of a greenwashing risk to the extent this reference is misleading, confusing or simply does not reflect the nature of the assets or the management.
The AMAS has clarified that in the absence of any reference to sustainability, the Self-Regulation forbids the presentation or positioning of the investments as "sustainable", including by using terms such as "green", "ecological" or "ESG".
Substituted compliance
The application of comparable foreign standards will be sufficient to comply with the Sustainability Self-Regulation issued by the 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 these assets.
At this stage, the AMAS has already confirmed that EU SFDR will be considered a comparable foreign standard if applied by Swiss managers. In other words, the voluntary compliance of a Swiss manager with EU SFDR will sufficiently represent compliance with the principles set out in the Sustainability Self-Regulation.
Sustainability policy
Access to the policy
The sustainability policy indicating the investment approach followed (e.g. exclusions, impact investing, thematic investing, etc.) shall be made available to the investors. If the sustainability policy is only contained in internal guidelines, this will not be sufficient given that investors do not generally have access to such internal guidelines. The AMAS is of the view, however, that it is also possible to refer to a website or similar tool if such a medium allows access to such policy.
Proportion of sustainable investments
The asset management agreement (directly or via an annex) must set out the minimum proportion of investments that are required to meet the sustainability requirements defined in the investment policy including the minimum threshold of investments that are to be managed with reference to sustainability in accordance with the investment policy. According to the Sustainability Self-Regulation, the percentage of investments not covered by the sustainability requirements must be stated and explained.
The compliance with the minimum threshold is determined based on the time at which the investment decision is made, or the time of the index adjustments in the case of portfolios of collective assets that replicate a sustainability index. According to the AMAS, the way in which the corresponding requirements are formulated in the relevant sustainability policy is decisive in this respect. For instance, regarding real estate funds, the defined investment policy applies to the entire portfolio and, as such, not every property need meet certain efficiency criteria at the time of its acquisition. On the contrary, what is decisive is that the objectives set out in the investment policy are met at the level of the overall portfolio.
Reporting
Investors are informed on the sustainability approaches in a report at least once a year. For impact investing 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 the AMAS. In addition, the AMAS has specified that a collective investment scheme for which only the ESG integration approach is applied may also publish a sustainability report if it is clearly stated that such an investment vehicle is not managed sustainably. As a reminder, this reporting obligation can be delegated to a third party.
Entry into force
The Sustainability Self-Regulation enters into force on 30 September 2023, except for provisions requiring a change in the fund documentation that 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 or update taking place after 30 September 2024.
Outlook
The entry into force of the Sustainability Self-Regulation is a further step in reshaping Swiss regulatory framework to integrate sustainable concept, principles and rules. The forthcoming months will be decisive in choosing between self-regulation, hard regulatory provisions or a combination of both approaches. In any instance, the AMAS is continuing its promotion of solutions and initiatives for a proper sustainable framework applicable to the Swiss asset management industry, such as the forthcoming Swiss Stewardship Code co-developed with Swiss Sustainable Finance SSF or the promotion of the already existing Swiss Climate Scores.
For more information on sustainability and ESG regulations in Switzerland, contact your CMS client partner or local CMS expert:
Dr Vaïk Müller, Partner
Co-Head of Banking & Finance Practice Geneva
