What future for responsible investment ?

By signing the Paris Agreement in 2015, 196 countries – including Switzerland – committed to halving their greenhouse gas emissions by 2030. This commitment reflects their desire to channel financial flows towards more sustainable, low-carbon development while enhancing the resilience of companies and states in the face of the challenges of climate change. But what has happened since then ? How does this ambition translate into reality and into regulation ? And most importantly, what are the consequences of this momentum for investment ?

photo of city

For many years now, responsible investment has played a significant role in the financial sector. Evaluating economic actors based on non-financial criteria such as their environmental and societal impact, as well as the quality of their governance (ESG), has become a prerequisite. The stated objective is, of course, to encourage the sustainability policy supported by all signatories of the Paris Agreement, but also to strengthen risk management. However, to date, no standard or norm has been universally accepted for evaluating the sustainability performance of organizations and companies. This sometimes leads to interesting results, such as Tesla scoring 40/100 in the S&P Global ESG Score compared to Philip Morris International’s 85/100. Bringing some order to the methods appears necessary, if only to prevent companies from claiming sustainability while acting otherwise. Regulations and legislation can play a crucial role here, at least in setting milestones.

In Europe, several initiatives have been implemented to frame the European Union’s (EU) sustainable regulatory strategy, such as the “Green Deal for Europe”. These initiatives aim to achieve a transition to a carbon-neutral economy by 2050. They are also tools to promote the reduction of greenhouse gas emissions while fostering a sustainable economy.

This regulatory process also involves better protection for investors. In response, the European Union introduced the Markets in Financial Instruments Directive (MiFID II) in 2018, aimed at improving the transparency of financial markets. This directive includes provisions to integrate clients’ sustainability preferences into the investment advisory process, thus obliging financial advisors to consider their ESG sensitivity when recommending a security, an investment vehicle, or a product.

In 2021, several other changes also affected the markets. Firstly, with the establishment of a new taxonomy within the EU, whose framework identifies “economically sustainable” activities, and secondly, with the publication of the Sustainable Finance Disclosure Regulation (SFDR), which requires fund managers and financial advisors active in the EU to explain how they integrate ESG criteria into their investment processes. Not to forget the Non-Financial Reporting Directive (NFRD) – soon to be replaced by the Corporate Sustainability Reporting Directive (CSRD) – which obliges large companies operating in the EU to disclose information on how they manage sustainability issues and ESG risks.

In the United States, regulation regarding sustainable investments and ESG criteria is still in development, but not as advanced as in Europe. Currently, the Securities and Exchange Commission (SEC) focuses on ESG investment transparency, but this requirement applies only to funds using an ESG label or considering ESG factors in their investment process.

Large companies with a global carbon footprint are also urged to integrate International Sustainability Standards Board (ISSB) norms, Taskforce on Nature-Related Financial Disclosures (TNFD) requirements, and Glasgow Financial Alliance for Net Zero (GFANZ) expectations into their operations.

photo of city

Switzerland, although not an EU member, closely monitors the evolution of European regulations. Having established a “Long-Term Climate Strategy”, the Confederation has already begun adapting its regulatory framework while seeking to maintain its competitiveness in the international market.

In this context, various draft laws regarding sustainable investments are under discussion, although, as usual, Swiss lawmakers leave decision-making to self-regulation. This method, involving close collaboration with financial actors, including supervisory bodies and financial associations, also known as “soft law”, allows the avoidance of overly restrictive and immediate provisions on the market. It thus provides the sector with valuable time to adapt and act effectively.

With the entry into force on the 1st of January 2024 of the Ordinance on Due Diligence and Transparency in relation to Minerals and Metals from Conflict-Affected Areas and Child Labour (DDTrO) , Swiss authorities have introduced a new instrument that aligns with objectives similar to those of the European framework imposed by the CSRD. Indeed, this ordinance requires large companies established in Switzerland – with at least 500 employees, a balance sheet equal to or exceeding CHF 20 million, or a turnover exceeding CHF 40 million – to publicly report on certain impacts. However, it is less stringent than the CSRD applied in Europe. These regulatory differences entail new duties for Swiss companies, which, if they operate in one or more EU countries, are also subject to the CSRD. In this context, they are obliged to provide new information and may need to draft two reports: one from the perspective of the CSRD and the other from the perspective of Swiss law. They may even be subject to sanctions in both jurisdictions for non-compliance with directives or if the information provided is incorrect.

In light of what has been said, it is clearer why investing responsibly is so important. Financing change is one of our main levers to positively and sustainably advance our actions in favor of the environment, climate, and society. Many companies are redoubling their efforts in this direction to prepare for the future, but the regulatory differential between regions and countries illustrates the gap that remains to be bridged so that all economic actors pull in the same direction, respecting the same rules, and applying the same standards.

In Switzerland, self-regulation is at work. It seems to be the most effective way to comply with the market while offering some flexibility. However, juggling between the extraterritoriality of European regulation and Swiss law creates unnecessary duplications and additional costs for companies.

Given the ongoing uncertainty surrounding the very notion of responsible investment and the regulations governing it, investors may prioritize trustworthy and quality companies. Or even be only interested in companies whose activities are compatible with their long-term investment approach. However, this should not lead us to fall into the opposite extreme: by excluding anything that does not fit into the “sustainability” category. Indeed, the role of the investor is also to enable companies to progress and facilitate their transition to a better future, not only for them but also for nature and the world around them.

people using escalator during daytim

Guillaume León

Client Relationship Officer


You may also like