Sustainable funds: greater transparency and increasing requirements
Sustainable investments are still on the rise: The number of sustainable mutual funds on offer in Switzerland has nearly doubled in the past 12 months. Stricter legal regulations in the EU and increasing transparency requirements are presenting a challenge for the providers of such funds. The most recent study on sustainable investments by the Lucerne University of Applied Sciences and Arts shows that financial market players are struggling to implement these changes.
The number of sustainable Swiss mutual funds rose from 1,289 in the previous year to 1,858 funds in the current year, a remarkable 44 per cent increase (Figure 1). The assets invested in those funds (Figure 2) also rose by 23 per cent (or CHF 181 billion) to CHF 956 billion. Nevertheless, only one in five funds is advertised as sustainable, meaning that 80 per cent are still conventional in nature. One surprising insight is that the “sustainable” funds reported capital inflows of CHF 141 billion, whereas the considerably larger conventional fund market saw an outflow of investors’ funds.
Figure 1: Development of sustainable mutual funds in Switzerland since 2016 (number of funds, as of 30 June; click to enlarge).
According to the study, this trend is likely to persist due to the current surge of regulations in the EU combined with self-regulatory initiatives in Switzerland. “The Swiss market is seeing an enormous shift toward sustainable investments,” says Manfred Stüttgen, co-author of the study and professor at the Lucerne University of Applied Sciences and Arts. “In the EU, legal requirements will establish sustainable investments as the de facto standard.”
Figure 2: The assets of sustainable funds compared to those of conventional mutual funds (in CHF bn, as of 30 June; click to enlarge).
EU laws call for more extensive disclosure obligations and the documentation of sustainability preferences
More stringent EU regulations are setting the tone for what can be considered sustainable going forward: Providers of sustainable funds must satisfy much higher disclosure requirements starting in January 2023. One of these is that an investment’s principal adverse impacts on the environment and society must be reported in detail in future. These adverse impacts are to be measured against a long list of indicators. A lack of sufficient data and unanswered questions regarding the methods to be used, however, makes calculating them no easy task for fund providers, with many still unable to present comprehensive reports on the requisite key indicators (Figure 3). Added to that is the fact that the interplay between this and other EU laws, such as the EU taxonomy for sustainable activities and MiFID II, is complex and occasionally contradictory: Financial market players are now required to bring the products they sell in line with their clients’ sustainability preferences. “EU regulations establish transparency with respect to sustainable investments but still leave many implementation-related questions unanswered,” says Brian Mattmann, co-author of the study, when summing up the situation. The vast majority of the Swiss financial market is also directly or indirectly impacted by either regulations in the eurozone or their counterpart in Switzerland: the self-regulation initiatives of leading Swiss banks and asset management associations.
Figure 3: Share of sustainability funds that disclose companies’ adverse impacts (as at 31 August 2022, n=1,858; click to enlarge).
Trend toward growing transparency and a more binding nature
The increasingly strict requirements for sustainable funds are also raising the demands on providers in Switzerland, which currently number 250 (Figure 4). This is visible, for example, in the fact that two thirds of all sustainable funds already combine at least four sustainable investment strategies in order to comprehensively live up to their sustainability promise; that is twice as many as three years ago. One third of all sustainability funds on the Swiss market also carries a sustainability label awarded by a third party. The Federal Council just recently launched “Swiss Climate Scores”, an initiative that focuses specifically on key climate indicators in the investment sector. While these scores are not comparable to an independent label, they should still be able to improve the climate transparency of financial investments. “Sustainable funds are much more transparent than they were just three years ago. Anybody that positions themselves as sustainable in today’s world is entering into a much more binding commitment,” says Brian Mattmann.
Figure 4: The 50 largest of the 250 providers of sustainable mutual funds in Switzerland (in CHF m, as at 30 June 2022 and 2021, respectively; in brackets behind the provider: change in ranking vs mid-2021, in brackets to the right: asset growth in per cent vs mid-2021; click to enlarge).
IFZ Sustainable Investments Study 2022
The IFZ Sustainable Investments Study from the Lucerne University of Applied Sciences and Arts is published once a year and examines sustainable investment funds that are licensed for public distribution in Switzerland. This year’s special focus is on sustainable funds within the regulatory context. The results of the study will be presented at this year’s Sustainable Investments Day, which will be held on 10 November 2022 in Zurich.
Please click HERE for more information about the study and the conference (in German).
The 302-page study entitled “IFZ Sustainable Investments Study 2022. Sustainable Funds in the Regulatory Context” can be ordered as a booklet for CHF 190 at email@example.com.
A digital version of the study is available for download HERE (in German).