With the entry into force of the reporting obligations on non-financial matters, Swiss listed and/or FINMA-regulated companies will become subject to a comprehensive reporting and disclosure framework on environmental and social matters. The rules on non-financial reporting include in particular detailed disclosure requirements on climate-related matters, all in line with international standards and recommendations. The new set of Swiss disclosure and reporting rules follows trends and similar legislative initiatives in other jurisdictions, most notably in Europe. For this reason, it is important for Swiss companies to understand how ESG-related reporting and disclosure rules in several jurisdictions may be of relevance and where the relevant rules provide for possibilities of substituted compliance in order to avoid duplication of work.

By Patrick Schärli (Reference: CapLaw-2023-13)

1) Reporting on Non-Financial Matters: Key Piece of Swiss ESG Reporting Framework

With the new obligations to comprehensively report on non-financial matters, the reporting and disclosure framework for large Swiss public and/or FINMA-regulated companies (so-called “public interest companies“) now covers a wide range of ESG-related topics, with the rules on non-financial reporting being a key piece of the overall Swiss corporate ESG reporting framework. The non-financial reporting obligations are complemented by additional disclosure and/or reporting rules that may also apply to public interest companies (and certain other Swiss companies). These other rules include: “say on pay” legislation (including the obligation to report on compensation matters) applicable to Swiss listed companies, supply chain due diligence and related reporting obligations (with respect to child labor and conflict metals and minerals), transparency rules for commodities companies, and gender representation quotas for Swiss listed companies.

a) Who needs to prepare a report on non-financial matters?

The Swiss rules only require so-called “public interest companies” to prepare a report on non-financial matters. For a company to qualify as a “public interest company” it must first either be listed on a stock exchange or be regulated by the Swiss Financial Markets Supervisory Authority FINMA (e.g. as a bank, securities firm, or asset manager). Additionally, a listed or regulated company will have to meet certain size thresholds: a company is only considered a “public interest company” if it (i) employs at least 500 full time equivalents (FTE), and (ii) either generates annual turnover (sales) of at least CHF 40 million or has total assets of at least CHF 20 million. Thus, the mere fact that a company may be listed and/or regulated by FINMA is by itself not sufficient for such company to be considered a “public interest company”. In particular, the FTE threshold may not be reached by all of the potential “public interest companies”.

If a company meets all of the above criteria and thus qualifies as a “public interest company”, it will generally have to prepare a report on non-financial matters for the first time with respect to its 2023 financial year. These reports will then have to be published ahead of the 2024 AGM season (see paragraph 1.c) below with respect to approval requirements). If a Swiss “public interest company” is controlled by another in-scope company (for example, a Swiss bank that has a listed parent company) or if it is subject to equivalent reporting obligations under foreign law, it will not have to prepare its own separate report on non-financial matters.

From the above, it becomes clear that larger private companies (provided they are not subject to FINMA regulation) are currently not in scope of the non-financial reporting obligations (this is / will be different in other jurisdictions, most notably in the EU; see paragraph 3. below). This is important to keep in mind when preparing a company for a going public transaction: investors in public companies will be used to the type of comprehensive ESG disclosure they receive from listed companies and it is expected (and in fact, already observable) that investors in IPOs and similar going public transaction expect to receive more and more ESG-related disclosures. Moreover, newly listed companies find themselves rather quickly after the first trading day already in the preparation phase for their first full year reporting, which will include then also a report on non-financial matters. For these reasons, the IPO-readiness work will in the future also have to include ESG-reporting readiness (such as defining of ESG strategy and targets or the taking of a greenhouse gas inventory). Similar considerations may also apply in pre-IPO funding rounds if a company, for example, wishes to attract funding from green / sustainable funds or similar type of investors.

b) What needs to be included in the report?

The relevant provisions of the Code of Obligations do not go into great amounts of detail in terms of what needs to be included in the report, but state in a rather general matter that the report should in particular address CO₂ targets, social and labor matters, human rights and anti-corruption measures. These matters need to be addressed across the following five areas: 

– Business model: The report has to include a description of the business model of the reporting company.

– Concepts: The reporting company has to describe the concepts it applies with respect to ESG matters. In addition, the report has to include a description of the due diligence procedures applied by the company in relation to ESG matters.

– Measures: The report then has to describe the measures taken by the reporting company with respect to ESG matters (e.g. what initiatives it has implemented) and such measures need to be assessed in terms of their efficacy.

– Risks: As regards risks, the reporting company has to describe its material ESG-related risks and mitigation measures taken in respect of such material risks. ESG-related risks may result from the company’s business activities directly or indirectly from its business relationships, products or services.

– KPIs: Finally, the report has to present the ESG-related key performance indicators (KPIs) that are considered relevant from the reporting company and its business.

While the Swiss rules do not directly prescribe how reporting companies have to structure and prepare their report (with the exception of climate-related disclosure, see paragraph 2. below), the Swiss rules at least hint to the use of international standards and reporting frameworks. When using such standards or reporting frameworks, the report will have to identify the relevant set of rules and the reporting company will have to verify that such standards or reporting frameworks indeed cover all of the Swiss reporting requirements.

The Swiss reporting rules do not follow a “one size fits all” approach as to content of the report; rather, companies must include the information and disclosure that is relevant for understanding the company’s business, condition and how these non-financial matters affect the company. This is further underscored by the fact that the Swiss reporting requirements currently operate on a “comply or explain” basis, and thus, it is possible that some companies may choose not to report on all of the various topics if they feel that a specific topic or matter is of limited relevance for their specific business. In doing so, companies will also be looking to their industry peers and expectations from investors in their industry and it is thus to be expected that certain industry-specific standards or views will develop over time; for example, scope 3 emissions (i.e. indirect up- or down-stream emissions) may be of particular relevance in certain industries and as a consequence, reporting on such type of emissions will likely be more comprehensive for companies operating in such industries.

In addition to the reporting rules set out in the Code of Obligations, a number of Swiss listed companies have already today committed to prepare a sustainability report in accordance with recognized international standards. These “opt-ins” are made vis-à-vis the SIX Swiss Exchange and pursuant to the listing rules (and related directives) of the SIX Swiss Exchange. To date approximately 50 companies have declared such an “opt-in” with almost all of them reporting pursuant to the standards of the Global Reporting Initiative (GRI) (a complete list of public companies having declared an “opt-in” as well as the chosen reporting standard is available online at: <https://www.six-group.com/en/products-services/the-swiss-stock-exchange/market-data/shares/sustainability-reporting.html>). These types of sustainability report typically cover a wide range of topics that are also required to be reported on under the new non-financial reporting obligations of the Swiss Code of Obligations. At first glance, one might question whether the sustainability “opt-in” regime of the SIX Swiss Exchange should remain in place given that almost all of the Swiss listed companies will in the future have to report on these type of sustainability matters as a result of the new rules on non-financial matters reporting. That said, the commitment of these listed companies to report in accordance with a recognized international standard will remain important to ensure comprehensive and comparable reporting, allowing investors to track and compare the progress of public companies in their pursuit of sustainability goals and initiatives.

c) Who needs to approve the report?

The report on non-financial matters has to be approved by the board of directors of the relevant “public interest company” and subsequently, the report has to be submitted to the annual shareholders meeting for approval. Accordingly, these reports will have to be finalized and made available together with the other materials for the shareholders meetings (e.g. annual report, compensation report) at least 20 days ahead of the annual shareholders meeting. The report on non-financial matters will also have to be made available in electronic form to the broader public and remain accessible for at least 10 years.

Under the current Swiss rules on non-financial reporting, an audit of the report on non-financial matters is not required. Given developments in other relevant jurisdictions (see paragraph 3. below), it remains to be seen if an audit requirement may be added to the Swiss rules as part of future harmonization and/or adaption of international standards and developments on ESG reports.

2) Climate-related Disclosure

The Swiss legislator and the executive branch consider transparency by large companies on the climate impact of their operations as a key element for the functioning of markets and for climate sustainability in the financial sector. For this reason, the general reporting obligations on non-financial matters of the Swiss Code of Obligations are supplemented with the ordinance on climate-related disclosure (Climate Ordinance), which provides for more detailed reporting requirements as regards climate-related matters. It does so by way of the following three principles:

– International standards: The Climate Disclosure builds on the principles of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), thereby making the TCFD standards the guiding principles for climate-related disclosures by Swiss companies.

– Comply or explain: Fully TCFD-compliant disclosure satisfies the Swiss reporting requirements with respect to climate-related matters. That said, the Climate Ordinance does not strictly mandate that all disclosure is to be made in line with the TCFD standards. If a company decides not to (or only partially) follow the TCFD it has to explain (or more accurately, justify) such decision by showing how it nonetheless meets the Swiss reporting requirements. 

– Transparency and accessibility: The climate-related disclosure has to be published in electronic form on the reporting company’s website (both in a human-readable format and in a machine-readable electronic format).

The Climate Ordinance requires that the TCFD recommendations (including any sector-specific guidance) are observed by Swiss companies across all relevant areas, namely:

Of all these different areas, the KPIs and targets on climate related-matters are typically of a particular focus for shareholders and other investors. As regards these key figures and targets, a distinction between backward-looking KPIs and forward-looking targets can be made: KPIs and similar backward-looking measures will have to include quantitative data on CO₂ emissions as well as emissions of any other relevant greenhouse gases. Moreover, such backward looking measures should cover both scope 1 (direct emissions) and scope 2 (indirect emissions from electricity and other forms of powers) emissions, and in addition, where relevant and material, scope 3 emissions (all other indirect emissions). With respect to forward-looking targets, CO₂ (and other greenhouse gases) should include at least scope 1 and 2 emissions (although there is a trend to also include scope 3 emissions, in particular where these scope 3 emissions are material for a specific industry). Moreover, targets should be prepared for the short (5 years), medium (15 years) and long term (30 years). To ensure comparability, the report will also have to disclose, where feasible and appropriate, the underlying assumptions and methodology for the preparation of the KPIs and targets.

The supplemental reporting requirements of the Climate Disclosures will enter into force on 1 January 2024 and will apply for the first time for the 2024 reporting year. The requirement for the preparation and publication of the report in a machine-readable format will only enter into force on 1 January 2025 and apply for the first time for the 2025 reporting year.

3) Developments outside of Switzerland and Relevance for Swiss Companies

ESG is a key topic in numerous jurisdictions across the globe and regulatory developments outside of Switzerland may also affect Swiss companies, many of which are operating globally with subsidiaries in many different countries. Most notably, the European Union is pursuing an ambitious agenda towards climate neutrality and with its “green deal”, the EU aims for Europe to become the first climate-neutral continent. As part of this overall green agenda, the European authorities have also enacted wide-ranging new legislation and regulation relating to ESG disclosure. Most recently, the European Corporate Sustainability Reporting Directive (CSRD) has entered into force. The CSRD substantially amends the previously existing European Non-Financial Reporting Directive (NFRD) both in respect of scope and also reporting requirements.

In terms of expanded reporting requirements, the most notable changes are: (i) the CSRD abolishes the current “comply or explain” approach of the NFRD, (ii) the introduction of a so-called “double materiality” standard, i.e. companies will have to report on how ESG issues might create financial risks for the company (financial materiality), and also how the company’s business impacts people and the environment (impact materiality); (iii) expanded KPI and targets requirements, including alignment with EU taxonomy, (iv) further standardization of ESG reporting with new European Sustainability Reporting Standards, and (v) an external assurance requirement (i.e. audit).

In terms of scope, the CSRD no longer applies only to those companies already covered by the NFRD (similar to the Swiss rules, these are so-called “public interest companies”), but will also include large private companies (reporting for the first time in 2026 with respect to the 2025 financial year), listed small and medium sized enterprises (reporting for the first time in 2027 with respect to the 2026 financial year), and lastly any undertaking with a non-EU parent that has EU-wide sales in excess of EUR 150 million (reporting for the first time in 2029 with respect to the 2028 financial year).

The developments in the European Union are of relevance for Swiss companies for two reasons: Swiss companies may find themselves (or at least some of their European subsidiaries) falling within the scope of the CSRD (or parts thereof), and in addition, the Swiss legislator may in the future further align the Swiss rules to the European standards. Swiss companies could thus in the future be in a position where they have to comply with both Swiss and European standards. In these instances, the question arises as to whether they have to produce several different types of reports or if they can produce one unified report on non-financial matters. From a Swiss perspective, it is possible that companies prepare their report on the basis of European or other international regulations or standards if such non-Swiss regulations address all of the Swiss requirements and further provided that the non-financial matters report clearly states the regulations and/or standards that have been used as the basis for preparation.

4) Conclusion

With the new reporting obligations on non-financial matters, Swiss listed and/or FINMA regulated companies will in the future be required to comprehensively report on environmental, social and other non-financial matters. The new reporting requirements, which apply for the first time with respect to the 2023 financial year, supplement the already existing, governance-focused reporting obligations (compensation report, corporate governance report) applicable to Swiss listed companies.

In terms of content of the report, there is a clear trend towards more quantitative data and clear KPIs; investors (and regulators) no longer accept purely qualitative statements and declarations of intent on ESG-related topics. Accordingly, recent amendments to or developments on ESG-related disclosure regimes focus in particular on measurable KPIs and targets.

Finally, the ESG reporting obligations are expected to continue evolving in light of developments in other major jurisdictions as well as recommendations and soft law issued by international standard-setting organizations. In particular, the recent developments in the European Union broadening the scope of non-financial reporting obligations are expected to influence future legislative developments in Switzerland.

Patrick Schärli (patrick.schaerli@lenzstaehelin.com)