On 26 June 2024, the Swiss Federal Council launched a public consultation (Vernehmlassung) on its proposals to amend the Swiss non-financial reporting obligations. The changes aim to align the Swiss requirements with the EU Corporate Sustainability Reporting Directive (CSRD). 

This article provides an overview of and comments on the proposed key changes which include, inter alia, an extension of the scope of the non-financial reporting and a broader range of topics to be covered in the reports, a mandatory external audit of the report, and a requirement to comply with the EU Sustainability Reporting Standards (ESRS) or an equivalent standard determined by the Federal Council. The consultation period ends on 17 October 2024 and companies will have a two-year transitional period to implement the changes after the new rules enter into force.

By Vera Naegeli / Marie-Cristine Kaptan (Reference: CapLaw-2024-60)

1) Introduction

The Swiss rules on non-financial reporting are relatively new; they entered into force on January 1, 2022, and had to be first applied by affected companies for the business year that started in 2023. Hence, we have seen the first round of reports on non-financial matters being published and approved by shareholders earlier this year. While affected companies were setting up their internal non-financial reporting processes and established processes for preparing these reports in compliance with the new Swiss rules, the Federal Council was already in the process of revising them. It almost seems like a false start, where all participants are summoned back to square one and must start over, ensuring that their sustainability reporting complies with yet another set of new regulations. 

However, these developments were triggered by similarly significant changes in the European Union (EU): In December 2022, the CSRD was adopted, it entered into force in January 2023 and had to be implemented by the EU member states by July 2024 (which as of now has only been done by certain EU member states, whereas others are in the legislation and consultation phase or have not even started the implementation into national law). The CSRD includes additional and more comprehensive requirements for sustainability reporting than the Non-Financial Reporting Directive (NFRD) which had been the role model for the current Swiss rules on non-financial reporting. The Federal Council reacted to these developments by commissioning a study to assess the impacts on Swiss companies and the Swiss economy of (i) maintaining the status quo; (ii) comprehensive implementation of the CSRD in Switzerland; or (iii) partially adopting the rules under the CSRD and revising the Swiss Code of Obligations (CO) accordingly. 

Based on the study (which acknowledged that uncertainties remain since some impacts could not be assessed or quantified), the Federal Council concluded that a partial adoption of the CSRD (teilweiser Nachvollzug) was the preferred solution. Therefore, it proposes amendments to Swiss law that should align the Swiss sustainability reporting rules with the requirements under the CSRD to a large extent. Below, we discuss the key changes that will hopefully – if adopted – set the new standard which affected companies can prepare for and adapt to for the longer term.

2) Content of Sustainability Reports

a) General: Some Changes in Terminology for Very Similar Matters

At first sight, it seems as if the reporting requirements had been revised quite a bit. However, the report (that shall going forward be called sustainability report – a welcome change from the current, less descriptive term report on non-financial matters) will, to a large extent, have to cover the same topics as under current law, just under a different terminology: environmental factors, social factors (including employee matters) and human rights, as well as governance (which includes combating corruption). 

The explanatory report of the Federal Council dated 26 June 2024 provides some more clarifications as to which sustainability issues should be addressed in the report:

– Environmental factors, in particular with respect to reaching the net zero greenhouse gas emissions target by 2050 to limit global warming to 1.5°C vis-à-vis pre-industrial levels: This is the only sustainability factor for which the law so specifically states one aspect that must be covered, and includes disclosure of the company’s scope 1, scope 2 and, where appropriate, scope 3 emissions in accordance with the GHG Protocol Corporate Accounting and Reporting Standard, as amended form time to time. However, as under current law, environmental factors also include the company’s use of water and sea resources, circular economy, pollution, biodiversity and ecosystems, as well as a description of how they impact human health and safety, the use of renewable energy systems and the company’s exposure to coal, oil and gas. 

The explanatory report further specifies that generally, the true and fair view principle known in financial reporting also applies to transparency regarding environmental factors, and that all relevant environmental impacts along the entire value chain, from cradle to grave (i.e., from the extraction of raw materials to recycling or disposal), must be disclosed. This raises the bar compared to the current requirements, where companies may have chosen a less rigorous and extensive data collection, analysis and reporting, and could focus on their own operations rather than covering the entire supply chain.

– Social factors, including employee matters, and human rights: Apart from the fact that employee matters are now encompassed within the social factors (which mirrors what many companies already applied, respectively apply, under current law), the reporting requirements will not change under the new proposal.

– Governance factors, including combatting corruption: This is the only new matter that must be addressed in the sustainability report according to the proposal. Aside from a description about how the company combats corruption (which is already a requirement under current law), the report must newly also cover the role of the company’s supreme management and supervisory bodies with respect to sustainability and their members’ relevant expertise and skills, describe if and how their members’ compensation is linked to a sustainability strategy, and the main features of the company’s internal risk management and compliance systems with respect to sustainability reporting. For listed companies, many of these points are already disclosed in either the compensation report or the corporate governance report that must be published (under the CO or SIX regulations), but for other companies, these requirements may create a significant additional burden.

The explanatory report lists further topics that should be disclosed under the umbrella of governance factors which seem somewhat random but are based on art. 29b para. 2 lit. c of the CSRD: (i) the company’s business ethics and corporate culture, including the protection of whistleblowers and animal welfare, (ii) activities and commitments of the company to exerting its political influence, including its lobbying activities, and (iii) the management and quality of relationships with customers, suppliers and communities affected by the company’s activities, including payment practices, especially with respect to late payments to small and medium-sized undertakings. One cannot evade the impression that these disclosure obligations were drafted having the largest companies and major players within the (European, respectively Swiss) economy in mind, without considering whether such requirements are reasonable and provide meaningful insights for all the smaller companies that would be newly captured by the proposed amended law (see also section 4 below). For example, how useful and interesting will it be if a company just barely exceeding a balance sheet total of CHF 25 million and sales revenues of CHF 50 million describes the ways it exerts its – likely limited – political influence? 

b) More Detailed and Stricter Requirements

Under current law, affected companies have significant flexibility as to how they want to report on the non-financial matters (i.e., what information and which level of detail they disclose), and even which matters they cover at all, due to the comply or explain approach which lets companies not report on certain non-financial matters if they explain why the respective matters are not material to them. 

The proposed changes will still leave some room for interpretation, but (i) provide a clearer framework to be followed in terms of what information must be disclosed; (ii) declare the ESRS (or equivalent sustainability reporting standards to be determined by the Federal Council) applicable; and (iii) no longer include the option of comply or explain, which is a significant change of the reporting approach.

The reporting requirements that differ from or were added to the current explicit rules in art. 964b para. 2 CO (in the new art. 964c para. 3 CO) are the following: 

– Description of the company’s time-based sustainability targets: Every company within the scope of the sustainability reporting requirements must set sustainability targets for the entire group with specific deadlines, and report on these targets as well as progress towards achieving those targets. This includes, but is not limited to, targets for reducing greenhouse gas emissions. 

– Governance-related disclosures: These requirements overlap with the information to be provided with respect to governance factors, such as a description of the role of the company’s supreme management and supervisory bodies with respect to sustainability, if and how their members’ compensation is linked to a sustainability strategy, and the main features of the company’s internal risk management and compliance systems with respect to sustainability reporting.

– Description of the material actual and potential negative impacts of sustainability factors related to the company’s business activities and supply chain, including measures to identify and monitor these impacts: In addition to the material risks with respect to the non-financial matters, which must already be disclosed under current law, the new proposal obliges companies to also disclose actual negative impacts of their business activities, as well as risks and negative impacts of the sustainability factors on the company. The risk-based approach continues to apply, i.e., negative impacts must be prioritized in accordance with their severity (including effort and expenses to mitigate) and likelihood of occurrence, and only the material impacts must be included in the report.

A significant additional requirement of the new proposal is that this disclosure will have to cover the entire supply chain, both upstream and downstream, and include not only the company’s direct suppliers, but also their supply chains and the activities of third-party (lower tier) contractors (such as finance providers, companies involved in research and development or waste management). We believe that this will pose serious challenges for companies subject to the reporting requirements; not so much because of the reporting obligation as such, but since it necessitates full transparency of the supply chain, and from what we have seen in our practice so far, many companies are (especially the more complex the supply chains are) not there yet from a data collection perspective. 

– Mandatory application of the ESRS or an equivalent standard: To increase comparability and facilitate the external assurance review of the sustainability reports, companies reporting under Swiss law will have to follow the ESRS, same as companies reporting under the CSRD, or an equivalent standard. The explanatory report defines the term equivalent standard, but this will not be practically relevant, since only equivalent standards explicitly listed by the Federal Council in an ordinance will be eligible as reporting standard. Even though this may require some adaptation initially for companies that are already preparing reports on non-financial matters under current law, this is in our view a sensible proposal as it will lead to greater standardization of sustainability reports across Europe.

c) Clarifications of Already Existing Requirements

The new proposal further aims to clarify certain points that already apply under the current rules, but may have been less explicit or caused some confusion:

– Principle of double materiality: According to the new art. 964c para. 2 CO, the sustainability report should include “disclosures that are required to understand the impact of the company’s activities on sustainability aspects, and to understand the impact of sustainability aspects on the company’s business performance and results of operations”. This is supposed to clarify that the principle of double materiality applies, as it does under current Swiss law and the CSRD, and reinforce the notion that facts must be disclosed if they are material from both perspectives (i.e., inside out and outside in) or only from one perspective. In our view, this language is still prone to misinterpretation and requires consultation of the explanatory report, and it would be preferable to include the clear statement made in the explanatory report directly in the proposed law. 

– Binding shareholder vote: In the first season of annual general meetings at which shareholders voted on the reports on non-financial matters, about half of the companies conducted binding votes, whereas the others positioned the shareholder votes as merely consultative. The new proposal still contains the same language regarding the requirement of a shareholder approval, but the explanatory report eliminates any uncertainties as to its nature: the shareholder vote is binding, a clarification which we welcome and consider to be correct.

3) Mandatory External Audit

According to the new proposal, the sustainability reports will have to be audited by either (i) an audit firm meeting the requirements of art. 6a of the Audit Oversight Act (AOA), or (ii) a conformity assessment body that fulfills the requirements of art. 6b of the AOA (the latter also being a provision newly introduced into the AOA), whereas the criteria that the audit firm respectively the conformity assessment body must fulfill differ depending on whether they perform an audit of a report prepared by a company of public interest (i.e., companies that are already subject to the non-financial reporting requirements under current law) or by another company (i.e., companies that will newly be subject to the sustainability reporting requirements). 

The details of how this audit shall be conducted will be determined by the Federal Council in an ordinance (i.e., whether a reasonable assurance or limited assurance standard shall apply). The proposal further includes some rules that apply to the audit firms and conformity assessment bodies, inter alia with respect to their independence, election, term of office, and confidentiality. The (short form) audit report will be submitted to the general meeting of shareholders together with the sustainability report and must also be published, whereas the long form report to the attention of the board of directors must not be published (same as for the audit reports regarding the financial statements). 

4) Extended Scope of Application

Currently, around 250 companies are subject to the non-financial reporting obligations under Swiss law. According to estimations in the study commissioned by the Federal Council, the scope of application of the new proposal would capture roughly 3,500 companies, which is a remarkable increase. 

In particular, according to the new proposal, the following Swiss companies would be in scope of the Swiss sustainability reporting obligations:

– All companies of public interest (i.e., with securities listed on a Swiss or foreign stock exchange or supervised by the Swiss Financial Market Supervisory Authority (FINMA)), regardless of their size (subject to an exception for very small companies as described below);

– Companies exceeding two of the following thresholds in two successive financial years: (i) balance sheet total of CHF 25 million; (ii) revenues of CHF 50 million; (iii) 250 full-time equivalent employees on annual average. This is regardless of whether or not they are listed or supervised by FINMA;

– Companies that are required to prepare a consolidated financial statement in accordance with art. 963 CO and, together with the companies they control, exceed two of the three thresholds above in two successive financial years.

In addition to the exemptions that exist under current law (a company being included in the Swiss sustainability report of another company or preparing an equivalent report under foreign law), very small companies will also be exempt from these obligations if they – alone or together with the companies they control – do not exceed more than one of the following thresholds over two successive financial years: (i) balance sheet total of CHF 450,000; (ii) revenues of CHF 900,000; (iii) 10 full-time equivalent employees on annual average.

The study commissioned by the Federal Council concluded that the new proposal would lead to significant additional costs, most of which would have to be borne by the affected companies. However, it states that this is at least partly in accordance with the polluter pays principle, given that the report focuses on the negative impacts of companies on sustainability. In addition, the study assumes that most companies which would newly fall within the scope of the Swiss sustainability reporting requirements would anyway publish a sustainability report on a voluntary basis due to the indirect impacts of the CSRD. Even if this is correct (which we believe is questionable), being directly in scope of a statutory reporting obligation with criminal sanctions for the individuals in charge of preparing these reports will require much more comprehensive and sophisticated processes and quality assurance systems than some sort of voluntary or contractually owed (i.e., not necessarily public) reporting. This is amplified due to the elimination of the comply or explain principle, removing the option to not report on a sustainability matter if it is of limited importance to the company, and the extension of the reporting obligations to the entire supply chain. 

5) Concluding Remarks

The general concept to align the Swiss sustainability reporting requirements with the European rules, and to adopt significant changes that occur within European law, is in our view reasonable and ultimately in favor of affected companies due to more streamlined sustainability reporting across jurisdictions over the long run, even if it requires initial efforts to amend the Swiss reporting processes that have already been established. So is the idea to set one uniform reporting standard – the ESRS – to enhance standardization and comparability of the European sustainability reports. The mandatory audit requirement not only ensures that sustainability reporting under Swiss law lives up to a certain quality, it also has a signaling effect and lifts sustainability reporting to a level comparable with financial reporting. Further, a mandatory audit is not only a burden or additional cost, but also provides assurance and security to companies and their management (which is reinforced by the fact that many companies have already voluntarily obtained external assurance for their reports on non-financial matters under current law). 

What we find difficult to get on board with is the significant extension of the scope of application of these sustainability requirements. We believe that the thresholds used to define large companies are too low, and actually capture many smaller and medium-sized companies:

First, it is questionable in our view whether such comprehensive reporting requirements will be too much of a (financial and practical) burden for non-listed smaller and medium-sized companies that may not have the required resources and systems in place. Second, the value (for society at large) of requiring also smaller and medium-sized companies to report on their sustainability practices (including their entire supply chains) is in our view limited: who shall ultimately read all those reports which, given the extensive transparency obligations, will certainly not be short? Smaller and medium-sized companies are typically more closely connected with their shareholders or owners, as well as contractual partners and customers, and purchasing decisions are more likely not to be made based on a lengthy report that may include lots of information which is not even relevant for the company’s business. We therefore fear that the extended scope of application of the new proposal will lead to a shift in resource allocation from productivity (and actual measures to promote sustainability) towards reporting, which counters the ultimate goal of achieving a more sustainable future. 

Vera Naegeli (vera.naegeli@baerkarrer.ch)
Marie-Cristine Kaptan (marie-cristine.kaptan@baerkarrer.ch)