The impact of the Covid-19 pandemic has been widespread and global. So too in relation to the financial sector, where the pandemic has highlighted the impact of catastrophic events on investment returns and contributed to the growing focus on sustainable investing. As noted in a 2020 PWC report, “with US$110tn in assets under management, and growing, the AWM [asset and wealth management] industry has the power to literally change the world from an ESG [environmental, social and governance] perspective”. Indeed, global ESG assets could exceed $53tn by 2025, which would represent over one third of $140.5tn in projected total assets under management globally. It is therefore no surprise that a number of financial regulators have been turning their focus towards greening the financial system. In this blog series, we aim to provide an overview of certain legislative and regulatory developments intended to encourage the transition to a low-carbon, fair and sustainable economy. The series will cover the following jurisdictions before concluding in a review and comparison of the current position in Switzerland: the European Union, the United Kingdom, the United States of America and Singapore. These jurisdictions have been selected due to their global influence and/or leading regional approaches as well as their relevance for the cross-border activity of many Swiss financial institutions and services. Given Switzerland’s ambition to become a leading location for sustainable financial services (see also the position paper of the SBA in this regard), the authors of this series consider it relevant to set out the current status quo across the selected jurisdictions to enable reflection upon Switzerland’s current ranking, potential lessons to be learned from approaches of other regulators, and the need for a degree of international consistency and harmonisation. We begin with the European Union (EU), which has proclaimed itself as becoming “a global leader in setting standards for sustainable finance”. Indeed, “sustainable finance” appears to have outgrown its status as a mere buzzword in the EU, taking a permanent seat among daily industry updates. Back in March 2018, the European Commission published its Action Plan on Financing Sustainable Growth, which sets out a comprehensive strategy to integrate sustainability into the financial system. A Renewed Sustainable Finance Strategy is expected to be published in 2021 and to include proposals building on the 2018 Action Plan and identifying further areas for reform. Additionally, the European Green Deal Investment Plan published in January 2020 intends to mobilize at least EUR 1 trillion in private and public sustainable investments over the next decade. Considering the pivotal role of the financial industry in addressing global environmental and social challenges, the EU’s ambitions are certainly welcome. The EU agenda includes a wide-reaching regulatory overhaul for the financial sector, among which the following are particularly noteworthy:

• The Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation: Adopted in November 2019 and June 2020, respectively, the SFDR imposes mandatory sustainability disclosure obligations for asset managers and other financial market participants, while the Taxonomy Regulation establishes a unified EU classification system of environmentally sustainable economic activities and supplements the disclosure requirements of the SFDR. Given the current focus and certain controversies surrounding these two pieces of legislation, they will be set out and discussed in more detail in Part 2 of this blog series.
• The EU Low Carbon Benchmark Regulation: Adopted in December 2020, this regulation introduces two new benchmark classifications – the EU Climate Transition Benchmarks (EU CTB) and the EU Paris-Aligned Benchmarks (EU PAB) – to help investors compare the carbon footprint of their investments. While the criteria for both new benchmarks focus on decarbonisation, the thresholds differ as EU PABs are aligned to the 2016 Paris Agreement temperature goals. The regulation also lays out ESG disclosure requirements applicable to all investment benchmarks (except for currency and interest rate indices) of administrators registered or offering benchmarks in the EU. The ESG disclosure rules for benchmark statements and methodologies are specified in two complementary delegated regulations (2020/1817 and 2020/1816), which also prescribe minimum standards for EU CTBs and EU PABs.
• (Proposal) The Corporate Sustainability Reporting Directive (CSRD): As part of a Sustainable Finance Package published in April 2021, the European Commission adopted a proposal for the CSRD, which would amend existing reporting requirements under the EU Non-Financial Reporting Directive (NFRD) for in-scope companies. In addition to extending the NFRD to all large EU companies (i.e. companies which on their balance sheet exceed at least two of the following: (a) EUR 20mil Total Assets, (b) EUR 40mil net Turnover and (c) on average 250 employees during the financial year) and, as of 1 January 2026, to all companies listed on EU regulated markets (except micro-enterprises), the CSRD would introduce mandatory sustainability reporting. This would include disclosing information on a company’s impact on sustainability matters as well as the impact of such matters on the company’s financial performance (“double materiality”). Reporting is foreseen to be against (not yet published) EU sustainability standards that would be based on international standards as well as the recent EU legislation set out in the bullets above. The proposal will now undergo the usual EU review process of the Council of Member States and the European Parliament.
• The European Commission’s Sustainable Finance Package of April 2021 also included amendments to six EU Delegated Acts on fiduciary duties, investment and insurance advice to ensure that certain financial firms, including fund managers, investment firms and insurance undertakings/distributors, must include sustainability in their procedures and investment advice to clients.

There is no doubt that the EU is serious about translating its ambitions into reality. Its journey is also far from finished, with further legislative proposals (including for an EU Green Bond Standard and an Ecolabel for retail financial products to highlight products that provide a positive ecological impact) anticipated later this year. However, as Part 2 of this series will endeavour to show, there are a number of outstanding uncertainties and pivotal concerns that may raise questions around the intentions and efficacy of some of these measures. Next up: Part 2 – the EU SFDR and the Taxonomy Regulation.