Update: Non-Financial Reporting Obligations for Enterprises in Switzerland
(This article states the personal opinion of the author only)
On 29 November, the Swiss people and the cantons voted on the initiative on responsible enterprises (the “Initiative”). Although the majority of the Swiss people voted in favor of the Initiative it was rejected by the cantons. It is likely, that the Swiss parliament’s counterproposal dated 19 June 2020 (the “Counterproposal”), will come into force. However, certain obstacles still have to be taken. The Counterproposal, provides for non-financial reporting obligations on ESG (environmental, social and governance) matters and due diligence duties in connection with conflict minerals (such as, e.g. tin and tungsten) and child labor. The purpose of such reporting obligations is to achieve consistency and comparability of non-financial information.
A. Background and current developments
In 2015, the Initiative was initiated by more than 100 organizations, with the aim to create binding rules for enterprises to protect people and the environment — also for activities abroad. The Initiative went much further than the Counterproposal does and proposed a liability of Swiss companies for their subsidiaries and economically dependent suppliers abroad but in front of a Swiss court. Furthermore, the due diligence in the fields of human rights and environment should be mandatory and it should be applicable to all companies except for low risk SMEs. The Initiative was submitted for voting and rejected on 29 November 2020. On 8 April 2021, the Federal Supreme Court (Bundesgericht) announced, that voting complaints had been rejected. Now, the Federal Council can officially acknowledge the results of the voting (Erwahrungsbeschluss) and the 100 day referendum period can start. On 14 April 2021, the consultation of the implementing provisions for the Counterproposal has started and will last until 14 July 2021.
B. Non-Financial Reporting obligations under the counterproposal
The Counterproposal provides for non-financial reporting obligations on certain ESG matters and for due diligence duties in the fields of conflict minerals as well as child labor.
I. Non-Financial Reporting Obligations
The non-financial reporting obligations set forth by the Counterproposal are quite similar to those on the European level such as those in the directive 2014/95/EU as of 22 October 2014 (“CSR Directive”), however, taking Swiss particularities into consideration.
The Counterproposal applies to companies of public interests (within the meaning of Art. 2 lit. c Audit Supervisory Act (Revisionsaufsichtsgesetz) as of 16 December 2005) with more than 500 FTE on annual average (including controlled companies in Switzerland and abroad) and (i) either a balance sheet total of at least CHF 20 million or (ii) revenues of at least CHF 40 million. Two groups of companies are excluded from the non-financial reporting obligations, namely companies being controlled by a company fulfilling the conditions set forth in the previous sentence or those that are obliged to issue a similar report under foreign law (Art. 964bis Revised Swiss Code of Obligations “rCO”).
2. Purpose and Content of the Report
The report shall account for environmental (in particular CO2-targets), social and employment matters, human rights and the combat against corruption. It shall contain that information necessary to understand the course of the business, the annual report, the situation of the company as well as the consequences of the company’s business on ESG matters. This requires a so called “double materiality”: On the one hand, the report shall provide for the impact of the company’s business to the various stakeholders, but only to the extent, it is necessary to understand the course of the business etc. Therefore, the scope of the non-financial report is reduced compared to that of a typical sustainability report.
The content of the report shall include, but is not limited to:
- a description of the business model;
- a description relating to the concepts for ESG matters;
- a description of the measures taken to implement ESG matters and an assessment of the efficacy of such ESG matters;
- a description of the main risks in connection with ESG matters as well as handling of such risks; decisive risks are (i) risks resulting from the company’s business activity; and (ii) if relevant and proportionate, risks resulting from its business relationships, its products or its services;
- the main performance indicators as regards to ESG matters.
Although the wording “relevant and proportionate” has been adopted from the CSR Directive here, this nevertheless leaves some room for interpretation and will ask the companies to determine the level of relevance. It is important to notice, that also reputational risks shall be included. Additionally, the reporting must comprise both, the positive efforts and omissions as regards to the legally protected rights (geschützten Rechtsgüter).
The non-financial information has not only to be reported for the parent company but also for companies in Switzerland and abroad controlled by the company alone or together with other companies. The term controlled, whereby, is already defined in Art. 963 para. 2 CO. A company is controlled by another, if the company (i) directly or indirectly holds a majority of votes in the highest management body, (ii) directly or indirectly has the right to appoint or remove a majority of the members of the highest management or highest administrative body; or (iii) is able to exercise a controlling influence based on the articles of association, foundation deed, a contract or comparable instruments. Although the respective article does not provide for an explicit reference to Art. 963 para. 2 CO, its wording and the fact, that it will be systematically inserted in the title thirty-two of the Swiss Code of Obligations (accounting and financial reporting) speaks for an application of Art. 963 para. 2 CO here. Furthermore, it is only consistent to have the same consolidated group for both, the annual report and this non-financial report and the non-financial report shows similarities to the management report (Lagebericht) according to Art. 961 no. 3 CO, Art. 961c CO.
If a company already publishes such report in accordance with international or European rules and regulations (such as the OECD guidelines), there is no need to publish a further report. The existing report can be amended accordingly to correctly reflect and comply with the Swiss particularities.
In case the company has no concept on the above mentioned points, this has to be clearly stated in the report. Thus, the non-financial report explicitly follows the comply or explain principle, which is well known for other reporting obligations of a stock corporation (Art. 964ter nCO).
3. Approval, Publication and Storage
The highest administrative body and the body responsible for the approval of the annual financial statements must approve the report. Additionally, it must be signed by the highest administrative body. For a Swiss stock corporation, the board of directors need to sign and approve and the shareholders meeting needs to approve the report.
Other than the financial statements and the compliance of the due diligence duties as regards to minerals and metals (see below), the non-financial report has not to be audited. This is in line with the CSR Directive, however, this is an item that is currently intensively discussed on the European level in connection with the revision of the CSR Directive (see below). Such obligation to audit would have helped to achieve the purpose of consistency and comparability of non-financial information even better.
Once approved, the report must be published electronically and must be accessible for the public for at least 10 years. The report can be written in English or in one of the Swiss national languages.
II. Due Diligence Duties in the field of Conflict Minerals and Child Labour
The Counterproposal further introduces due diligence duties and reporting obligations in the field of conflict materials and child labor. As the non-financial reporting obligations on ESG matters, also these duties are known from and based on European regulations, namely on the regulation (EU) 2017/821.
The addresses of these duties are companies having its registered office, headquarters (Hauptsitz) or main office (Hauptniederlassung) in Switzerland. Such enterprises have to fulfill the due diligence duties alongside the supply chain and report thereon, if they:
- import/transfer to the free market in Switzerland or process metals or minerals containing tin, tantalum, tungsten or gold in Switzerland; or
- offer products or services, for which there is a reasonable suspicion, that child labor was involved in the production.
The Counterproposal authorizes the Federal Council to define exemptions from due diligence duties, namely: (i) annual import thresholds for minerals and metals, (ii) preconditions according to which SMEs and low risk companies do not need to examine, if there is a reasonable suspicion of child labor being involved and (iii) preconditions under which companies are exempted from due diligence duties if they comply with recognized international rules and regulations, such as OECD guidelines.
None of the central terms, such as “conflict and high risk areas”, “reasonable suspicion” and “child labor” is defined in the Counterproposal. This might lead to uncertainty for companies. In case the interpretation of such term is unclear, the regulation (EU) 2017/821 or other guidelines may be consulted. As an example, Art. 2 lit. f regulation (EU) 2017/821 provides for a detailed definition of “conflict and high risk areas”. For the interpretation of the term “reasonable suspicion”, it can be referred to the literature and jurisprudence to Art. 9 Anti-Money Laundering Act as well as the OECD guidelines. “Child labor” is defined in both, the OECD guidelines (Practical actions for companies to identify and address the worst forms of child labor in mineral supply chains, 2017) and in the international core convention (Kernübereinkommen) of the International Labor Organization.
2. Due Diligence Duties
Companies shall implement a management system which determines their supply chain policies regading (i) minerals and metals potentially originating from high risk areas and (ii) products and services produced, for which there is a reasonable suspicion that child labor is involved. The third feature, the management system shall provide for, is a system allowing to trace back the supply chain. The due diligence duties further encompass the identification and evaluation of risks caused by detrimental effects in the companies’ supply chains. The companies shall develop a risk management plan and take measures for minimizing the identified risks. The compliance with the due diligence duties has to be audited by an independent expert. The audit obligation does not comprise the due diligence duties as regards to child labor, which is similar to the European regulation. The reasons for the differences are unclear.
3. Reporting, Publication and Storage
The highest management body is obliged to report annually on the compliance with the due diligence duties in a Swiss national language or in English. Other than the non-financial report, the approval and signature of the report is not required, neither by the highest management body nor the body normally approving the annual report. The report must be published electronically within six months after the end of the business year and must be accessible for at least 10 years. Companies offering products and/or rendering services from companies that have issued such report are exempted from the reporting obligations with respect to those products and/or services.
A non-compliance or breach of the reporting duties will trigger the following penalties: Wilfull reporting of false information or failure to report at all is subject to a penalty of up to CHF 100'000. The same penalty applies, if there is a wilfull breach of the duty on storage and documentation. In case of a negligent breach of the reporting and/or storage obligations, the penalty will be up to CHF 50'000.
Additionally, a liability under stock corporation law (Art. 754 CO) can be discussed, if any of the duties set forth in Counterproposal is breached. Art. 754 para. 1 CO foresees a liability of the board of directors vis-à-vis shareholders and company creditors (Gesellschaftsgläubiger) in case of damages caused by them intentionally or negligently violating their duties. The central question here will be, if there is any damage in case of a non-compliance with the duties set forth in the Counterproposal — at least a proof of such damage will be challenging (if there is a damage at all).
D. Summary and Outlook
The Counterproposal takes into consideration current developments on sustainability reporting and provides attention to the increasing importance of ESG matters. The orientation of the Counterproposal towards other international and European rules and regulations is highly welcomed, as this will make it easier and reduces the work for multinational enterprises that have to company with several regulations of different countries. The Counterproposal, however, is not yet binding. On 14 April 2021, the Federal Council has sent the implementing provisions for consultation which lasts until 14 July 2021. Additionally, the 100 day referendum period will start in due course. There will be a referendum only, if 50'000 valid signatures are collected or 8 cantons together demand the referendum. If this is not the case, the way for the Counterproposal to become binding law should be free. Given the referendum period and the consultation period, it is unlikely that the Counterproposal will come into force in 2021. As the first reports must be published for the financial year following the year the Counterproposal comes into force, the first reports will be published in either 2023 or 2024.
Given the high degree of uncertainty on scope and level of the detail of the reports, as well as a further liability exposure to the members of the board of directors, it is advisable to start early with the implementation of the respective reporting system regarding ESG matters and the management system for the supply chain politics. It will take time until all stakeholders and business partners along the line — where necessary — are involved and until compliance with the new provisions is achieved. The international and European rules and regulations, such as the OECD guidelines, the CSR Directive and the regulation (EU) 2017/821 including the relevant literature might provide guidance in this process.
Currently, a revision of the CSR Directive is discussed on the European level. On 29 July 2020, the EU commission has published a summary of the feedback to the public consultation regarding the amendment of the CSR Directive. According to this report, the participant, inter alia, wish for (i) a better comparability of the information provided in such reports, (ii) an obligation to audit such reports, (iii) an extension of the scope of application to big non-listed enterprises and (iv) an alignment with the specifications of the Taxonomy regulation ((EU) 2020/852) which entered into force on 12 July 2020 (reporting obligation as of 1 January 2022). Even though a draft of the revised CSR Directive should be published in Q1 2021, so far, nothing is available. Furthermore, in the context of its five-yearly strategy review, the Trustees have published a consultation paper on sustainability reporting within in IFRS, to, inter alia, determine if there is a need for global sustainability standards. Such sustainability reporting will be relevant to Swiss enterprises having implemented IFRS reporting standards. Ideally, the rules will be aligned, otherwise, Swiss enterprises will have to adhere to two different set of rules.
Sustainability and ESG matters and their regulation gain more and more importance and are currently a quite dynamic and fast developing field. Rules and regulations thereon will be amended more quickly than 5 years ago. In my opinion, it will important, that the Swiss legislation will keep pace with potential changes on the European and/or IFRS level to avoid diverging standards.