Greenwashing can occur when investors' expectations regarding the sustainable financial products offered by banks do not match the actual characteristics of these products. Greater transparency (disclosure) and better classification (taxonomy) of sustainable finance activities are essential to bridge this gap, educate end-investors and improve the training of investment advisors.
Actually, implementing a sustainable investment strategy is not as simple as it seems. Investors face two main challenges:
- At the national level, Swiss law imposes overly strict investment rules on pension funds
- At the international level, standardization of rules and definitions is still lacking
Regulation should focus on incentives, not coercion
Regulation and taxation are two ways to create incentives that support the development of new sustainable financial products. Government can signal its support by adopting a favourable legal framework. On the tax side, stamp duty and withholding tax are a major obstacle to the development of sustainable finance, especially for institutional investors. The fact that these investors represent 79% of all sustainable investments in Switzerland (CHF 1.1 trillion at end of 2019) underlines the crucial importance of abolishing these taxes. While the abolition of stamp duty and the reform of withholding tax would have been a step in the right direction, both measures were rejected at the ballot box, in January and September 2022.
The need for common international standards
It can be difficult for investors to identify sustainable investments that meet their requirements. Standardising rules and definitions would make it easier to compare different products in terms of sustainability.
The European Union (EU) adopted a sustainability Action Plan in 2018. To be effective, this plan will have to do three things:
- Standardise rules while minimizing the potential negative effects of over-regulation
- Promote transparency and prevent greenwashing
- Ensure that ESG reporting is not overly burdensome for companies
As part of this process, Switzerland should keep a close eye on regulations being developed by the European Union, still its main trading partner. Rather than reinvent the wheel, the Swiss government should align its regulatory framework as needed with the European one, and refrain from adopting more stringent rules than our neighbours. That would put us at a competitive disadvantage in a high-growth industry, for no good reason.