Finally, a key challenge is the standardization of disclosures across companies. The ESG factors are manifold across industry and partly company-specific. Luckily, there is some development in this area driven by industry organizations and governments.
Could you give as some examples?
In Switzerland, a few months ago the Federal Department of Finance was instructed by the Federal Council to prepare a consultation draft for a future mandatory climate reporting regime. This draft is expected by summer 2022 and would affect large Swiss companies, listed and unlisted, and includes banks and insurance companies with 500 or more employees, more than CHF 40 million in turnover or more than CHF 20 million in total assets.
Furthermore, FINMA, the Swiss Financial Market Supervisory Authority, requires financial institutions to describe the key elements of their governance structure in relation to climate-related financial risks and their process for identifying, assessing and managing climate-related financial risks.
What are the benefits and disadvantages?
While at first glance these are additional regulatory burdens for companies, it also helps to standardize the required disclosure regarding ESG to investors, rating agencies and other stakeholders, thereby creating some efficiencies by making comparisons easier. Of course, such sustainability-related regulations are not just being developed in Switzerland, but in multiple jurisdictions.
Examples are the Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board (FSB), which provides recommendations for climate-related financial disclosure, or the UN Sustainable Stock Exchanges initiative with its mission to provide a global platform for exploring how exchanges can enhance performance on ESG issues and encourage sustainable investment, including the financing of the UN Sustainable Development Goals. All these positive developments help to create standards that are used across jurisdictions.
You mentioned stock exchanges in the ESG context. What would you say is their role?
As an exchange, we’re the market place where issuers and investors come together. Regarding ESG disclosures, we support the inclusion of important and future-oriented ESG related factors in our markets. But while we cannot influence the direction capital flows take and hence what is traded on our market, we can help to create transparency around ESG factors. This can be done by supporting issuers in creating standardized ESG disclosure measures which meet investors’ demand or by increasing the visibility of sustainable investments.