The Swiss federal government intends to adapt its requirements in the area of non-financial reporting (sustainability reporting, also known as “ESG” [Environmental, Social, and Governance] or “CSR” [Corporate Social Responsibility]) to the new – in some cases stricter – requirements of the EU. Since the beginning of 2023, companies in EU member states have been subject to stricter sustainability reporting requirements. For this reason, the Federal Council is also planning to tighten the corresponding obligations in Switzerland and thus harmonise with EU requirements. “International harmonisation” is therefore also the Swiss government’s motto here.
However, the question arises as to why a tightening of the existing requirements is necessary and what additional effort must be made in practice by the companies concerned.
- Existing legal basis
The provisions of Art. 964a – 964c CO already oblige certain Swiss companies to submit an annual report on non-financial matters. Since the beginning of 2022, large Swiss companies have been required to report on the risks in the areas of the environment, social issues, employee issues, human rights and combating corruption and the measures taken against them in their business activities. According to Art. 964b of the Swiss Code of Obligations, the purpose of such a report is to transparently highlight the risks in the areas mentioned and the measures taken to counter them. With this regulation, Switzerland has laid the foundation for internationally harmonised legislation since the beginning of 2022.
- Why do we need stricter rules in Switzerland?
Despite the existing statutory sustainability reporting obligation, the Federal Council has strong arguments in favour of further tightening or extending the regulations in Switzerland. For example, EU law in the area of sustainable business management is subject to constant further development. Climate change, which can no longer be denied, an ever louder call for more sustainable corporate practices, which is reflected in changes in user and consumer behaviour, and rapid technological progress have shown that non-financial reporting is becoming increasingly important. Companies are no longer measured solely by their financial results, but in many cases also by the impact of their business activities. The topic of “sustainability” has therefore become increasingly important in recent years. The fact that numerous Swiss companies maintain a healthy economic network with companies from European countries, are often already active in EU countries themselves or benefit from the market potential of the EU, means that a large number of small and medium-sized enterprises (SMEs) and large corporations are directly or indirectly affected by the EU-wide regulations. This conclusion can also be drawn in particular from the regulatory impact assessment (RIA) commissioned by the Federal Council and carried out on 19 February 2024 on the implementation of the EU Directive on corporate sustainability reporting (2024).
- Planned changes
At the Federal Council meeting on 26 June 2024, a corresponding consultation on the new provisions on reporting obligations for companies was opened.
Status today:
So far, only companies that:
- Were public interest entities within the meaning of the Auditor Oversight Act (AOA);
- pursuant to Art. 964a para. 1 no. 2 CO, together with the domestic or foreign companies controlled by them, had an annual average of at least 500 full-time employees in two consecutive financial years; and
- in accordance with Art. 964a para. 1 no. 3 lit. a – b CO, together with the domestic or foreign companies controlled by them, have exceeded at least one of the following figures in two consecutive financial years:
- Balance sheet total of CHF 20 million
- Sales revenue of CHF 40 million
Planned innovations:
According to the planned amendments to Art. 964a para. 2 lit- a-c of the draft ordinance OR, all companies that exceed certain economic thresholds are now covered. The decisive factor is that two of three thresholds must alternatively be met within two consecutive financial years:
- 250 full-time employees;
- Balance sheet total of CHF 25 million;
- Sales revenue of CHF 50 million
This means that companies with fewer than 250 full-time employees are also included if they fulfil the other two criteria.
The terms “environmental factors”, “social aspects”, “human rights aspects” and “governance aspects” are now used and specified in the planned legislation. The new Swiss regulations still do not contain a separate third country regulation like the EU Directive. Exceptions apply (analogous to EU law) for controlled companies, in particular if a controlling company prepares an equivalent report on sustainability aspects in accordance with foreign law, as well as for micro-enterprises (no more than 10 full-time employees, total assets of CHF 450,000.00 and sales revenue of CHF 900,000.00). It should be noted here that the lower thresholds for the obligation to prepare consolidated financial statements in accordance with Art. 963a para. 1 lit. 1 a) and b) CO (CHF 20 million balance sheet total, CHF 40 million sales revenue) do not also apply to the new sustainability reporting. This means that a company may have to prepare consolidated financial statements but not submit a sustainability report.
The reporting can be reviewed by an external auditing company or a conformity assessment body.
The political processes are currently underway (public consultation until 17 October 2024), so it is not yet possible to predict when the changes will actually come into force. However, it can be assumed that this will happen soon. The companies affected are to be granted a period of two years from the date of entry into force to implement the new regulations.
- Impact of the new due diligence obligations on Swiss companies
The new requirements will directly oblige around 3,500 additional Swiss companies to publish sustainability reports. The Federal Council assumes that 3,000 to 14,000 companies are already indirectly affected by the existing reporting obligations. According to the new planned requirements, up to 50,000 Swiss companies will be indirectly affected in future. The costs of implementing the new requirements for the directly affected Swiss companies cannot be clearly quantified at present. However, according to the regulatory impact assessment (RIA) carried out on 19 February 2024, it is assumed that the costs can be estimated at around CHF 620 million per year, half of which will be incurred for the external audit. This is mainly due to the fact that companies will incur additional regulatory costs: they will have to set up new systems, hire additional staff and expect increased costs for the annual audit; many affected companies will also (have to) call in external consultants. All of these measures will have a recurring annual impact. The aforementioned sum does not include indirect costs such as compliance risks resulting from false statements in the sustainability report or incomplete reporting (see point 5 below). For indirectly affected companies, additional costs of around CHF 13 -61 million per year are assumed. The implementation costs must be borne by the companies concerned.
In contrast to companies subject to reporting requirements in the EU, the affected Swiss companies are granted the right to decide whether they wish to base their reporting on the EU standard or another equivalent standard.
- Consequences of incorrect or no sustainability reporting
With regard to reporting by the auditors, sustainability reporting refers to the requirements for audit reports, Art. 728b CO. Comprehensive reporting to the Board of Directors (BoD) as the highest management or administrative body and summarised reporting to the Annual General Meeting (AGM) are therefore required. According to the new regulations, the sustainability report audited by the auditors must therefore be approved by both the BoD and the AGM and, in the latter case, by the AGM within 6 months of the end of the financial year (Art. 964cter para. 2 of the draft ordinance CO). Accordingly, the report must be listed as an agenda item in the minutes of the shareholders’ meeting. The sustainability report itself must be kept for 10 years.
It should also be noted that the sustainability report must be truthful. Information provided in the report must be verifiable and based on facts. This is supplemented in particular by the amended criminal provisions, according to which false statements or the omission of sustainability reporting as well as breaches of the obligation to retain information can be penalised with a fine of up to CHF 100,000. In case of doubt, the BoD is liable for such a fine. Whether and to what extent such an offence can be covered by a corporate liability policy must be examined on a case-by-case basis. However, it can be assumed that companies will also incur additional costs in this case.
- The federal government is accommodating to the companies affected
The Federal Council is fully aware of the potential increase in (sometimes considerable) business costs for Swiss companies as a result of the stricter legal requirements. It has commissioned an external study to assess the specific impact of the EU changes on Swiss companies by autumn 2024 (postulate 23.4062). Once the study is available, further details regarding the structure of reporting and any support measures (aids) will be determined.
- Our assessment
In most cases, the implementation of new legal regulations is accompanied by financial expenses for those affected. Depending on the business model, the new ESG reporting will require companies to invest in sustainable materials and technologies, plan for additional costs for audits (internal and external), organise training courses for employees and create additional compliance positions, etc.
In view of the significant number of Swiss companies that will be affected by the new, stricter regulations, the Federal Council’s intention to harmonise with the EU requirements seems entirely understandable. It also seems right that Switzerland should harmonise itself with the applicable international standards in this important point, so that uniform requirements apply to companies of the same size (“a level playing field for all”). Although Switzerland is not a member state of the EU, it benefits considerably from the opportunities offered by international economic networking. However, it is also important that the needs of the affected Swiss companies are taken seriously and adequately considered in the consultation process, especially as the tightening of the rules will cause considerable additional expense – at least in the initial years. For this reason alone, the fact that the effects of the planned changes are to be carefully examined by the external study is to be welcomed.
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