In the following, the new regulations are presented and the impact on Swiss real estate is discussed.
Background
Following the rejection of the Corporate Responsibility Initiative on 29 November 2020, Switzerland enacted an amendment to the Code of Obligations with effect from 1 January 2022 through the indirect counter-proposal of the Parliament. Reporting obligations for large companies on non-financial matters were introduced.
In January 2021, Switzerland also became an official supporter of the Task Force on Climate-related Financial Disclosures (TCFD), a private initiative on "climate reporting" by companies. It is thus to be expected that both the circle of obligated parties and the content of the reporting obligations will be expanded in the future. Switzerland is mostly adapting its legislation to international trends. It is primarily oriented towards the EU. The "EU Supply Chain Act" is likely to reignite discussions about additional tightening in Switzerland.
Switzerland is adhering to internationally recognised standards for non-financial disclosures in the corporate and investment sectors. This way, it avoids developing its own extensive standards, as the EU has done with the Disclosure and Taxonomy Regulations and their supplementary legal acts. Since the Corporate Responsibility Initiative and the vote on the CO² Act failed, an EU-like regulatory frenzy would certainly not be appropriate. As a result, the Swiss regulations are structured in a more comprehensible way in terms of regulation but are not far removed in terms of content. The pressure to adapt to EU regulations is growing, especially since Swiss groups of companies with subsidiaries in the European market already must comply with EU regulations. It is therefore to be expected that the speed and scope of regulatory provisions on ESG reporting will also increase sharply in Switzerland, both for trading companies and on the financial market. Even for companies that are not currently subject to the existing and planned disclosure requirements, the question is not "if" but "when" they will be subject to an ESG reporting obligation.
Following the failed referendum of 13 June 2021 on the CO² Act, on 17 December 2021 the Federal Council opened the consultation on a revised CO² Act for the period of 2025 to 2030. The bill follows on from the current CO² Act, which expires in 2024. Considering the results of the referendum, the Federal Council would like to support the population in reducing CO² emissions in everyday life through effective incentives as well as targeted promotion and investments. Specifically, this involves climate-friendly heating systems, E-mobility and district heating networks. The CO² tax on fossil fuels such as oil and gas remains at CHF 120 per ton of CO². To halve Switzerland's net emissions by 2030, the Federal Council also wants to fund climate protection projects abroad.
Who is primarily affected?
The new rules are reflected in Art. 964a ff. of the Swiss Code of Obligations (CO). The reporting obligation applies to listed or regulated companies domiciled in Switzerland with an annual average of at least 500 full-time positions and a balance sheet total of CHF 20 million or sales revenue of CHF 40 million. In addition, there are transparency obligations for commodity companies as well as conflict materials and child labour.
The Financial Services Act (FINSA) does not yet contain any specific ESG requirements. However, the Banking Supervisory Authority (FINMA) is now explicitly integrating climate-related financial risks into its supervisory activities in line with the emerging recommendations of international standard setters (TCFD). Furthermore, FINMA obliges the largest Swiss financial institutions (categories 1 and 2) to report annually and publicly on their climate-related financial risks since 2022. The Sustainable Switzerland initiative (SBTi) supports and advises Swiss companies on sustainability reporting in accordance with international standards. The Swiss Stock Exchange (SIX) launched ESG indices for the broad Swiss bond and equity market for the first time in 2021. However, these are less geared towards identifying ESG pioneers than towards excluding companies that do not comply with minimum ESG standards. Swiss Re began developing a "climate-neutral" strategy as early as 2007. Insurance contracts with climate-damaging energy companies (oil, gas and coal) that expire will not be renewed. By 2040, Swiss Re will have withdrawn from the insurance business with coal companies. This makes it a global pioneer.
In August 2021, Greenpeace Switzerland published a report on climate mystery shopping at Swiss banks. 43 advisory interviews were conducted by 33 testers at 19 banks to check whether and to what extent sustainability aspects are included in investment advice. Even after the testers had explicitly expressed their wish for a "Paris-compliant" investment, in some cases no such investment was recommended at all and in other cases only inadequately. Overall, there is simply a lack of "climate-friendly" investments. Only the selection of individual shares has so far made it possible to make a "Paris-compliant" investment. Greenpeace also complains about the lack of training and sensitivity of investment advisors regarding ESG issues.
The Federal Council's report of November 2021 - How can Switzerland align financial flows in a climate-friendly way? - contains a comprehensive study on possible future regulatory measures. The proposals range from industry agreements between financial institutions and standard setting to binding specific targets by the legislator. Disclosure requirements, taxonomy (classification), customer preferences and investment promotion are also examined. Subject to an overall assessment, taking into consideration conflicting objectives and the costs for the real economy, the report favours in particular:
- Comprehensive disclosure obligations, both towards clients and towards the banking supervisory authority (FINMA)
- Classification of financial products and advisory mandates according to climate impact or a comprehensive, dynamic taxonomy that also covers climate damaging activities (cf. EU taxonomy)
- Measures to explicitly take client preferences into account, particularly by adapting the Financial Services Act (FINSA) to the EU MiFID II Directive
Taking all this into account a lot is likely to change in the next few years. An amendment of the FINSA is very likely to follow.
On the topic of financial markets (which is closely linked to many real estate related products) the Swiss Stock Exchange (SIX) provides for an opting-in for sustainability reporting in Art. 9 of its Directive on Corporate Governance (DCG). An issuer can notify SIX that it is preparing a sustainability report in accordance with international standards. SIX accepts four standards: GRI, SASB, UNGC and EPRA Sustainability BPR. The report is published annually on the company's website and linked from a register by the SIX. More than 30 companies are linked there, all of which use the GRI standard. Credit Suisse Group AG also reports in accordance with the SASB standard. However, the new disclosure obligations under the Code of Obligations (TCFD standard) and the EU Taxonomy/Disclosure Regulation are likely to make this opting-in less important because these obligations are more comprehensive and specific and apply generally.
Why and how does this affect real estate?
According to the Swiss Federal Office for the Environment, buildings cause almost a quarter of all greenhouse gas emissions in Switzerland. Therefore, improving the environmental footprint of real estate has a significant contribution to achieving climate targets. Real estate investors are aware of this fact and are therefore prepared to make their contribution to achieving the national CO2 reduction target of net zero greenhouse gas emissions by 2050. In all major investment planning, the reduction of CO2 emissions and energy consumption in portfolio properties has become increasingly important.
As outlined above, the ESG responsibilities are directly applicable to the vast majority of the financial market who in its turn is active in the financing of Swiss real estate.
The leading Swiss financial and real estate fund institutions have been developing real estate sustainability strategies for well over ten years.
What was considered new ten years ago is now actively practiced and firmly integrated into everyday business as a guiding principle by real estate financing institutes. Most players have developed and implemented various sustainability measures.
Given the current changes in legislation it is not surprising that sustainable real estate is becoming increasingly popular in Switzerland. Sustainable real estate is an approach to building and operating buildings that minimizes the impact on the environment while also ensuring that the building is functional, efficient, and comfortable for its occupants.
Also, the Swiss Bankers Association ("SBA") was an early adapter of the ESG topic. As early in 2018 it announced that sustainable finance was one of its strategic key pillars and published its first ESG position paper.
The SBA has issued two guidelines stipulating minimum requirements for integrating sustainability criteria into investment and mortgage advice.
On the one hand, the new guidelines govern the inclusion of sustainability preferences and risks in investment advice and portfolio management. On the other hand, they encourage mortgage providers giving advice to clients to consider long-term value retention, and consequently the energy efficiency of the building to be financed. The new guidelines are binding on SBA members. Non-members can adopt the guidelines on a voluntary basis (and this is likely to be considered a “best practice” standard). Both guidelines came into force on 1 January 2023, with various transition periods granted for the necessary preparations to be made.
With the new guidelines, the SBA strengthens Switzerland’s position as a premier hub for sustainable finance and makes an effective contribution towards the transition to a sustainable economy. The new guidelines target the information given to clients during the advisory process.
In future, clients (of Swiss banks) will be asked about their ESG preferences, and then offered appropriate products and services. The SBA guidelines also set out obligations for the provision of information, documentation and accountability when establishing the client’s ESG preferences. Member banks are also obliged to include ESG topics in the training and professional development of their client advisors. By offering professional and transparent advice on sustainable investments, financial service providers play an important role in preventing greenwashing.
Swiss Sustainable Finance (SSF) is producing practical support tools to facilitate the implementation of the new SBA guidelines. These will support financial service providers, including those beyond the banking sector, in the integration of sustainability aspects when advising private clients.
According to a press release of June 2022 by SBA the purpose of the new “Guidelines for mortgage providers on the promotion of energy efficiency” (by SBA) is to encourage mortgage providers to consider long-term value retention, and consequently the energy efficiency of the building, when offering clients advice on financing a property. The intention is to make clients aware of the importance of energy efficiency upgrades. The initial focus is on advice to private individuals seeking finance for single-family and holiday homes. This advice should also include information about expected upgrade requirements for the property in future, as well as details of independent specialist agencies able to offer specific guidance. SBA members also undertake to provide appropriate and regular training for their client advisors regarding long-term value retention and improvement of energy efficiency.
The new ESG duties in detail
The duty requires companies (including large real estate companies) to account for environmental issues, in particular CO² targets, social issues, labor issues, respect for human rights and the fight against corruption. Companies are now required to prepare an annual report in a national language or in English on their business model, outlining the concepts and due diligence applied as well as existing risks regarding sustainability issues.
In more detail the ESG report must cover the following topics:
- the company’s business model;
- the main ESG risks resulting from the company’s own operations and, where relevant and proportionate, its business relationships, products or services;
- the policies pursued to address these ESG risks, including due diligence applied;
- the outcome of those policies; and
- non-financial key performance indicators applied regarding the company’s response to ESG risks.
The report must be approved and signed by the management or administrative body and the shareholders. It shall be published electronically and shall remain accessible for at least ten years. However, unlike the company’s financial statements and some other corporate governance reports, the ESG report must not be audited.
Commodity companies must also publicly report on payments (in the broadest sense) to government agencies amounting to at least CHF 100,000 per financial year. Companies that transfer conflict materials (tin, tantalum, tungsten or gold) from conflict or high-risk areas into free circulation in Switzerland or process them in Switzerland are subject to special due diligence obligations (management system to conceptual harmful effects and reporting obligations). The same applies in the event of a justified suspicion of child labor in the supply chain.
Implementation of the “new” ESG duties
The reporting obligations can only be fulfilled meaningfully based on ongoing and comprehensive risk management. Only data that is collected can also be reported. In this respect, there is an indirect obligation to collect data. First, it must be researched which subject areas are relevant for the company. The law is broadly defined in Art. 964b of the Swiss Code of Obligations (CO).
The main task is to identify any risks that may arise, for example, from the region of activity, the type of activity, from customary certifications and standards and directly from legal systems. These must then be sorted according to their extent, scope and irreversibility, and evaluated according to their probability of occurrence and severity. Subsequently, strategies and possible changes are to be conceptualised, implemented and continuously reviewed in order to resolve the risks. These strategies are in turn incorporated into the follow-up report.
The report must then present the assessment process and its results, in addition to a general description of the business model and the presentation of concepts and measures planned and taken to mitigate the risks. As an internal measure, the establishment of codes of conduct and control mechanisms (reporting) as well as a human rights strategy are recommended. All this information can be stored and managed centrally within the company in an ESG charter. Externally, certain standards and reporting obligations of the contractual partners should (possibly in the future "must") already be insisted on in contract negotiations. Here it is advisable to work with model forms.
Opportunities and risks for the real estate market
Sustainable real estate is an approach considering the entire lifecycle of a building, from design and construction to operation and end-of-life. It involves using sustainable materials, energy-efficient systems, and renewable energy sources to reduce the building's environmental footprint.
A corporate structure aligned with ESG sustainability criteria is advantageous in competition for several reasons. The long-term structural and monitored orientation leads to more resilience to disruptive events. The early recognition of future trends is possible through this set-up. A company positioned in this way is technologically and economically a decisive step ahead. Financial advantages arise. Restructuring can be planned with a steady hand and thus be designed comprehensively and effectively. The content of the now obligatory sustainability reports will shape the public image of a company and thus have a direct influence on customer and business relations. In debt financing, public perception also has an influence on the terms of financing.
ESG will increasingly become a topic of discussion at general meetings. Managing directors and board members should prepare themselves for this. The way in which sustainability issues are presented to shareholders can be crucial here, whether through mere informational hearings, planning mandates or real alignment decisions.
For the real estate business with properties in the utilization phase, environmental topics clearly outweigh social and governance issues as the industry’s impact on the environment is of an immense scale.
Real estate due diligences therefore mainly focus on environmental topics such as the usage of renewable energy, the existence of an environmental policy (and a responsible team), its compliance with national and international regulations and the monitoring systems and regular disclosure of ESG reports. Additional topics of interest are the age of the buildings, the status of modernisation, the recyclability of building materials and the properties life cycle management based on useable BIM (Building Information Modeling) data.
In connection with real estate project development the list of ESG relevant topics is to be extended to measures of the environmental impact of the construction phase itself (apart from the use of BIM for example drilling machines are responsible for large parts of fine dust and noise pollution).
On social aspects of ESG one needs to include workers’ health and safety, such as the exposure to hazardous chemicals or events (floods, fire, etc.), the existence of emergency response plans, trainings, and compliance checks. Not only for the project development business governance aspects should include anti-bribery, anti-corruption, and anti-money-laundry policies and monitoring systems.
Gian Marchet Kasper
Attorney at Law; LL.M.;Partner
[email protected]