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ESG reporting and due diligence obligations introduced in Switzerland

David Oser and Margrit Marti of Homburger discuss how Switzerland’s ESG reporting and due diligence obligations, expected to enter into force on January 1 2022, will impact Swiss companies

Swiss legislation expected to enter into effect in 2022 will impose new non-financial reporting obligations for certain large Swiss companies in environmental, social, employee, human rights and anti-corruption matters similar to the EU Non-Financial Reporting Directive.

Further, certain Swiss companies will be subject to new supply chain related due diligence obligations in connection with conflict minerals and child labour.

Background

On October 10 2016, a group of interested parties submitted the popular initiative ‘For responsible businesses – to protect people and the environment’, known as the Responsible Business Initiative, to the Swiss Federal Council.

The Responsible Business Initiative requested that Swiss companies respect internationally recognised human rights and international environmental standards in Switzerland and abroad by imposing due diligence obligations with respect to all subsidiaries and business relationships and by introducing a new liability regime for damage caused by subsidiaries.

In response, the Swiss Parliament adopted an indirect counter proposal on June 19 2020 introducing:

  • Reporting obligations with respect to certain environmental, social and governance (ESG) matters for Swiss companies of public interest; and
  • Due diligence and related reporting obligations in connection with conflict minerals and child labour.

On November 29 2020, the Responsible Business Initiative was rejected by public vote; as a result, the indirect counter proposal will be entering into effect soon.

New non-financial reporting obligations

Pursuant to Article 964bis et seq. of the Swiss Code of Obligations (CO), large Swiss companies of public interest must annually prepare and publish a separate report on certain non-financial matters and submit such report for approval to the general meeting of shareholders.

The new provisions are largely based on the EU Directive 2014/95/EU, known as the Non-Financial Reporting Directive (NFRD).

Scope

The obligation to issue a report on non-financial matters applies to Swiss companies of public interest, which as a group together with their controlled companies in Switzerland and abroad meet both of the following requirements over two consecutive financial years:

  • The group has at least 500 full-time employees (FTEs) on an annual average; and
  • The group exceeds either total assets of CHF20 million (approximately $21.8 million) or revenues of CHF40 million per year.

The term ‘companies of public interest’ covers (a) publicly traded companies, i.e. companies (i) whose equity securities are listed on a stock exchange; (ii) that have bonds outstanding; or (iii) that contribute at least 20% of assets or revenues to the consolidated accounts of a company under (i) or (ii), and (b) regulated entities supervised by the Swiss Financial Market Supervisory Authority FINMA, such as banks, insurance companies, securities firms, trading venues, and collective investment schemes and their fund management companies, asset manager of collective assets, custodian banks and representatives of foreign collective investment schemes.

For the purposes of non-financial reporting obligations, a legal entity controls another if it (i) directly or indirectly holds a majority of votes in the highest governing body (for Swiss corporations, the general meeting of shareholders); (ii) directly or indirectly has the right to appoint or remove the majority of the members of the supreme management or administrative body (for Swiss corporations, the board of directors); or (iii) is able to exercise a controlling influence based on the articles of association, the foundation deed, an agreement or comparable instruments (Article 963(2) CO).

Qualifying companies are exempt from the reporting obligation if they are controlled by a parent company that is required to issue (i) a report on non-financial matters under Article 964bis CO; or (ii) an equivalent report under foreign law (e.g. if the parent company with registered office in an EU member state has to report in accordance with the NFRD).

Annual reporting on non-financial matters

The report on non-financial matters must contain information necessary to understand the group’s business development, performance, position and impact of its activity on environmental, social, employee, human rights and anti-corruption matters.


“Swiss legislation expected to enter into effect in 2022 will impose new non-financial reporting obligations”


These non-financial matters are considered the minimum standard and reporting companies may provide further information and cover additional topics on a voluntary basis.

Like the NFRD, the Swiss provisions are based on the principle of double materiality, i.e. the report must describe the impact of the group’s activities on the different stakeholders (environmental and social materiality), but only to the extent necessary for an understanding of the development, performance and position of the group (financial materiality).

According to a non-exhaustive list, the report on non-financial matters has to include a description of the following matters:

  • The business model, i.e. how the group generates value through its products or services;
  • The policies pursued with respect to the non-financial matters, including the due diligence applied to assess the group’s risks and related measures;
  • The measures taken (or to be taken) to implement such policies, including if relevant and appropriate measures to identify, prevent and mitigate negative effects related to the group’s supply chain, and an assessment as regards the effectiveness of such measures, including the means used to review compliance with such policies and the results of such review;
  • The main risks in connection with the non-financial matters, including reputational risks, resulting from the group’s own operations and, where relevant and appropriate, from its business relationships, products or services; and
  • The main key performance indicators for the business with respect to non-financial matters.

In accordance with the principle of ‘comply or explain’, a reporting company may elect not to report in relation to matters with respect to which the group does not pursue policies if the report provides a clear and reasoned explanation therefor, e.g. if due to its activities the group has no or only very minor risks related to certain non-financial matters. Like the annual financial statements, the report must be prepared in one of Switzerland’s official languages (German, French, Italian or Romansh) or in English.

Further, the report may be based on national, European or international reporting standards, such as the OECD Guidelines for Multinational Enterprises, the standards of the Global Reporting Initiative (GRI), the UN Principles for Responsible Investment (PRI), the UN Global Compact, the ISO 26000 Social Responsibility or the Sustainability Accounting Standards Board (SASB). Any such standard applied must be disclosed in the report and if such standard does not cover all requirements under Article 964bis et seq. of the CO, a supplemental report must be prepared.

Approval and publication

The report on non-financial matters has to be approved and signed by the supreme management or administrative body, i.e. the board of directors, who is responsible for the substantive review of the report.

Further, the report is subject to approval by the general meeting of shareholders, but does not need to be audited. The board of directors has to publish the report electronically and ensure that it remains publicly available for at least 10 years.

New due diligence obligations in connection with conflict minerals and child labour

Under Article 964quinquies et seq. of the CO, Swiss companies are required to comply with special due diligence and related reporting obligations with respect to their supply chain if their business involves (i) the handling of conflict minerals or (ii) the risk of using child labour.

The new rules related to conflict minerals follow the blueprint of the EU ‘Conflict Minerals’ Regulation (EU) 2017/821 and the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (OECD Guidance). For the child labour related provisions, the Child Labour Due Diligence Act of The Netherlands was used as guidance.

From April 14 2021 until July 14 2021, the Swiss Federal Council conducted the public consultation procedure on the Ordinance on Due Diligence Obligations and Transparency regarding Minerals and Metals from Conflict Areas and Child Labour (Due Diligence Ordinance), which contains implementing provisions for these new rules, in particular with respect to exemptions.

Scope

In general, companies with place of incorporation or head office in Switzerland that (i) import or process minerals or metals containing tin, tantalum, tungsten or gold from conflict or high-risk areas; or (ii) offer products or services where there are reasonable grounds to suspect that they were produced or provided using child labour, are subject to the special due diligence obligations described below. The Due Diligence Ordinance provides for a number of exemptions from the scope of application:

  • Conflict minerals: The Due Diligence Ordinance determines certain annual import and processing quantities for minerals and metals, up to which companies are exempt from the due diligence obligations. Further, recycled and scrap metals do not fall within the scope of these provisions, provided that this is properly documented.
  • Child labour: Small and medium-sized enterprises (SME), i.e. companies that together with their controlled companies fall below any two of (i) total assets of CHF20 million, (ii) revenues of CHF40 million; and (ii) 250 FTEs on annual average, do not have to verify whether there is reasonable suspicion of child labour. If reaching these thresholds, a company must assess the risk of child labour associated with the countries of origin of its products and services. In case of low risks according to the UNICEF Children’s Rights in the Workplace Index, no further examination is required. If medium or high risks exist, the company must determine whether there is reasonable suspicion for child labour with respect to a specific product or service.

In addition, companies are exempt from the due diligence obligations if they comply with certain internationally recognised and equivalent regulatory frameworks.

Due diligence and reporting obligations

Article 964sexies of the CO provides for special due diligence and reporting obligations based on a five-stage procedure:

1. A management system has to be implemented by defining the company’s supply chain policy, including communication thereof to suppliers and the public, and a system to trace back the supply chain.

2. The company has to identify and assess actual and potential risks of adverse impacts in its supply chain, taking into account the probability of occurrence and the extent of harmful effects.

3. Based on the risks identified, a written risk management plan has to be established that provides for specific measures to remove, prevent or mitigate such risks in the supply chain (including important milestones), following the OECD Guidance and the ILO-IOE Child Labour Guidance Tool, as applicable.

4. A company importing or processing minerals or metals must also engage an independent third party, i.e. a qualified audit expert, to carry out audits regarding compliance with these due diligence obligations.

5. The company has to issue an annual report on compliance with these obligations, which may be included in the report on non-financial matters, if applicable. The report must be published electronically within six months after the end of the financial year and remain publicly available for at least 10 years.

Fines for violation

Non-compliance with the reporting obligations set out above is subject to criminal liability under the Swiss Criminal Code. Anyone who makes false statements in, or fails to provide, a required report will be fined with up to CHF50,000 in case of negligence and up to CHF100,000 in case of intent.

Entry into effect

On April 27 2021, the Swiss Federal Council published these new transparency rules officially triggering the referendum period of 100 days applicable to Swiss laws, which expires on August 5 2021.

If no referendum is requested, the new ESG reporting and due diligence obligations are expected to enter into effect on January 1 2022. The new rules will then need to be observed for the first time with respect to the financial year commencing one year after the entry into effect, i.e. if not further delayed, for the financial year 2023 with the first report on non-financial matters to be published in 2024.

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David Oser
Partner
Homburger
T: +41 43 222 1570
E: david.oser@homburger.ch

David Oser is a partner in Homburger’s corporate and M&A practice team. His practice focuses on domestic and international mergers and acquisitions (both public and private M&A), capital markets, corporate governance and general corporate law matters.

David is the co-author of the leading treatise on the Swiss Ordinance against Excessive Compensation. He leads Homburger’s regional focus group on Japan.

David was admitted to the Bar in 1998 (Basel, Switzerland) and 2001 (New York) and received his master’s degree (LLM) from Columbia Law School in 2000.


Margrit Marti
Associate
Homburger
T: +41 43 222 1367
E: margrit.marti@homburger.ch

Margrit Marti is an associate in Homburger’s corporate and M&A practice team. Her practice focuses on domestic and international M&A (both public and private M&A), private equity and venture capital.

Margrit also advises in matters on corporate law, securities regulation and capital markets.

Margrit completed her law degree at the University of St Gallen in 2009. She was admitted to the Bar in 2011 (Zurich, Switzerland) and received her master’s degree (LLM) from the University of California, Berkeley in 2015.

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