Regulatory initiatives to boost sustainable finance and transition to clean energy

Introduction
Sustainable finance
Regulatory initiatives for clean energy

Introduction

In June 2020 the Federal Council adopted a report and guidelines on sustainability in the financial sector with the aim of making Switzerland a leading country with respect to sustainable finance, while simultaneously maintaining and improving its competitiveness as a financial centre. In particular, by the end of 2020, the Federal Council intends to finish an in-depth analysis of, among other things, the following regulatory tools:

• increase environmental and climate information for financial products and companies and make them available to the market participants;
• increase the quality of information by measuring the achievement of sustainability goals; and
• require financial institutions to identify climate-related financial risks for corresponding risk pricing.

As such, there is a developing trend of financial institutions and products coming to the regulatory forefront in terms of energy sustainability.

Sustainable finance

The report and the corresponding guidelines examine 13 measures for sustainability in the financial sector in detail, some of which are also being discussed in the European Union. The measures primarily concern transparency, investment activities and risks.

Following a voluntary self-assessment by the entire Swiss financial market, the federal authorities concluded that further efforts are needed in order for the financial sector to play its part in achieving Switzerland's climate targets, despite numerous financial institutions now holding stakes in companies that are developing clean energies and e-mobility.

From a legal and regulatory perspective, as opposed to recent developments in the European Union, there are no specific provisions in Switzerland requiring financial institutions to consider climate risks or impacts or environmental, social and governance factors in their decision making. However, climate risks may have to be (indirectly) covered:

• by general risk considerations;
• by self-regulatory regimes applicable to financial institutions (eg, the SIX regulations, which enable institutions to opt in to issuing a sustainability report); or
• as part of an institution's duty of care and loyalty for the risk assessment and education of its clients.

Further, the Swiss Financial Market Supervisory Authority recently opened consultation proceedings on amendments to certain circulars, which deal with climate transparency obligations.

Regulatory initiatives for clean energy

For the reasons discussed above, there is a developing trend of financial institutions and products coming to the regulatory forefront in terms of energy sustainability. As such, financial institutions should expect financial instruments such as green or sustainability-linked bonds or loans to become increasingly important. Such instruments either dedicate the use of proceeds to sustainable projects or link the credit margin to the borrower's sustainable performance .

From a borrower's perspective, these regulatory initiatives, among other things, facilitate the transition to clean energy by lowering capital costs. They achieve this by improving the risk-return profile of clean energy, which creates incentives to channel funds into companies and state bodies that actively foster a net-zero emissions economy. Accordingly, clean-tech companies and energy suppliers focusing on renewables may eventually expect better and cheaper access to capital for funding their green energy projects if financial institutions face more demand and regulatory pressure to shift their portfolios away from emission-intensive sectors or companies.

For example, a study conducted by the Federal Office for the Environment found that the sampled shares and equity funds supported a global climate scenario of 4 to 6 degrees Celsius. However, by applying indices that map reduced emissions, such indirect effects of emissions could be reduced by two-thirds while holding the risk profile and demand for investments at a similar level.

Another recent study commissioned by the Federal Office for the Environment analysed in more detail the climate-related effectiveness of measures implemented by financial institutions. With respect to secondary capital markets, the study found that capital raised for green energy projects via so-called 'green project bonds' may effectively influence the transition, and direct investments are particularly useful for funding innovative start-ups that support a net-zero emissions economy.

For more information please contact Marcel Meinhardt or Patrick Sattler at Lenz & Staehelin by telephone (+41 58 450 80 00) or email (marcel.meinhardt@lenzstaehelin.com or patrick.sattler@lenzstaehelin.com). The Lenz & Staehelin website can be accessed at www.lenzstaehelin.com.