# 6 / 2020

Why trade supports rather than hinders sustainable development

How Swiss business contributes to sustainable development

Switzerland is an export nation. It generates a considerable part of its added value by exporting goods and services, and 40 percent of total value added is exported. Nevertheless, in absolute terms, Switzerland does not occupy a leading position when it comes to international trade in goods and services. The situation looks quite different for foreign direct investment: according to UNCTAD (United Nations Conference on Trade and Development), Switzerland is one of the ten largest economic powers. Correspondingly, the influence that Swiss companies exert on global sustainable development through direct investment is large. There is hardly a multinational company from Switzerland that has not committed itself to an international standard regarding social or environmental sustainability – whether through the Global Compact, the Principles for Responsible Investments, the Equator Principles, the UN Principal Guidelines on Business and Human Rights or the OECD Guidelines for Multinational Enterprises.

Swiss companies export sustainability through standards and products

Switzerland occupies top positions in various sustainability rankings. For example, it ranks second in the Green Economy Index and in Robeco’s sustainability ranking. In addition, several Swiss companies achieve top rankings in the renowned Dow Jones Sustainability Indices, a family of stock indices that consider not only economic, but also environmental and social criteria. Consequently, the high sustainability standards of Swiss companies have a positive impact on the sustainability of their branches abroad, especially when compared to those of other countries.

Swiss companies also contribute to sustainable development in their partner countries by exporting innovative, technologically advanced and high-quality products. For example, drugs developed by Swiss pharmaceutical companies improve healthcare in other countries. At the same time, Swiss industrial companies export resource-efficient machinery abroad, thus making an important contribution to more sustainable local production.

Apart from this, the preferences of consumers are increasingly shifting towards greater sustainability. As a result, Swiss companies are offering an increasingly differentiated range of products and services in response to the growing demand for more sustainable products and production processes. At the same time, Swiss import and export companies already meet a large number of standards and product regulations. Accordingly, sustainability considerations are of great importance for the Swiss economy.

Sustainable Finance: Swiss market is growing rapidly

It is undisputed that the financial industry has a great deal of leverage for positive sustainable development. It is impressive to see how much sustainable asset classes have grown in recent years. The most important financial markets have come together in the Global Sustainable Investment Alliance GSIA (an association of the seven largest member organisations for sustainable investments worldwide). In 2018, they managed sustainable investments of almost USD 31 trillion. This represents an increase of 34 percent compared to 2016. In Switzerland, the market volume for sustainable investments reached CHF 717 billion in 2018. This figure has more than tripled since 2016 (when it stood at CHF 215 billion). The Swiss Bankers Association has produced a position paper on sustainable finance that addresses the most important aspects. 

Swiss direct investment is important for developing countries

With capital stock of almost CHF 1.5 trillion, Swiss companies create over two million jobs outside Switzerland. The economic footprint of Swiss companies in developing countries is equally impressive. The capital stock here amounts to CHF 202 billion, with more than 660,000 related jobs. If this stock is put in relation to the size of the Swiss economy and compared with the global ratio of foreign direct investment to GDP, it is striking that Swiss business is almost four times more involved in these regions than the rest of the world (see figure below). This often includes, for example, a strong commitment to training and the transfer of modern technologies. 

The Center for Corporate Responsibility and Sustainability (CCRS) at the University of Zurich has been investigating the question of the extent to which Swiss direct investments in developing countries are locally anchored and how they contribute to sustainable development. The case studies provide an impressive illustration of the positive contribution made by Swiss companies to sustainable development on the ground.

Swiss direct investments using the example of Nestlé Philippines

The positive effects of Swiss direct investment in developing countries can be illustrated using the example of the Swiss food manufacturer Nestlé, which has a branch in the Philippines. As part of Nestlé Philippines, the Nescafé brand now not only obtains its coffee beans from the Philippines, but also processes and sells most of its end products in the country. In addition, the majority of employees in management positions are Filipinos. Nestlé Philippines is heavily embedded in the local economy and is therefore perceived by most Filipinos as a local company. At the same time, the company is committed to global CSR standards and has developed the NESCAFÉ plan to ensure that local coffee farmers have access to higher-yielding crops and that coffee cultivation remains sustainable. Together with the Rainforest Alliance (RA) and the Common Code for the Coffee Community (4C), Nestlé ensures compliance with internationally recognised sustainability standards. Since the foundation of its first subsidiary 100 years ago, Nestlé has not only created tens of thousands of jobs in the Philippines, but has also enabled a valuable transfer of knowledge to the local private sector. This helped to build a national economic ecosystem around the production, commercialisation and consumption of coffee. Thanks to a comprehensive capacity development program for suppliers and Nestlé Global’s strict social and environmental standards, the company has been able to increase the sustainability of its local suppliers over the past several decades.

Sidebar: International cooperation achieves more than lawsuits

In various countries, and also in the EU, there is a move to broaden corporate responsibility and to increase the possibility of legal action against small and large companies. Specifically, it shall be possible to sue companies at their headquarters for global violations of human rights and environmental protection standards. In November 2020, Switzerland rejected the Responsible Business Initiative (RBI) in a popular vote. If approved, the Swiss government would have been mandated to propose a bill obliging companies not only to conduct vast due diligence in the area of human rights and environmental standards throughout their whole supply chain. It would also have included a new legal liability before Swiss courts and under Swiss law for the Swiss parent company for any violation abroad, even if only economically controlled third parties had been involved. 

Instead, the Swiss Parliament adopted changes to the company law which transpose the "Due Diligence" requirement of the UN guidelines into national law and refer to the standards of the OECD and UN. Particularly the regulation in the EU and the Netherlands served as a blueprint for the new regulatory framework. It refrains, however, from introducing new, unclear and counter effective liability provisions with a reversal of the burden of proof such as the RBI required. While avoiding a regulatory stand-alone approach, the new regulatory framework puts Switzerland in the class of the most progressive countries regarding CSR regulation worldwide. 

The RBI would not have achieved the objective it intended. The liability provisions foreseen by the RBI would have forced Swiss companies with high human rights and environmental risks to review their foreign investments in developing countries or even substantially reduce their business activities there. Human rights and environmental protection efforts in developing countries are particularly endangered if companies from countries with lower social and environmental standards jump into the gap left by Swiss companies. Thus, the possibility of taking legal action against multinational companies for violation of environmental regulations and human rights at their place of business ultimately endangers the successful model of Swiss development cooperation. 

A more effective approach is international cooperation within the framework of the OECD or the UN, that focuses on the continuous improvement of companies’ internal due diligence processes. Legal actions whose court decisions have extraterritorial effect should be avoided at all costs. These could not be enforced by Switzerland. In return, Switzerland would lose its attractiveness as a location for multinational companies and thus many highly qualified jobs.