More extensive transparency regulations on sustainability aspects

On June 26, 2024, the Federal Council published the consultation draft[1] for an amendment to the Swiss Code of Obligations (CO) in the area of non-financial reporting (Art. 964a et seq. CO) and the associated provisions in the Auditor Oversight Act and the Criminal Code. According to the Federal Council, the aim of the bill is to align Swiss law with EU law, in particular the CSRD. The reporting obligations that were only introduced on January 1, 2023 - new: transparency on sustainability aspects - are to undergo significant changes, particularly with regard to the scope of application, the scope of reporting and its audit. The main changes are briefly outlined below.

 

Scope of application

All companies should be obliged to report on sustainability aspects in accordance with the new provisions if they either

1. are public interest entities (public companies with listed equity securities and certain companies subject to FINMA supervision) or (previously: and, i.e. unlisted companies are now also included);
2. exceed certain thresholds. The decisive factor is if two of the following values are exceeded in two consecutive financial years:

            a. Total assets of CHF 25 million (previously: CHF 20 million);

            b. Sales revenue of CHF 50 million (previously: CHF 40 million);

            c. 250 full-time equivalents (FTE) on an annual average (previously: 500).

   3. are companies that are required to prepare consolidated financial statements, provided that they and their controlled companies meet the conditions set out in section 2 above. The threshold values must therefore be considered on a consolidated basis.

Companies that are controlled by an obligated company under the CO or companies that prepare an equivalent report under foreign law are excluded from the scope of these obligations. In simple terms, this applies to group subsidiaries whose parent company prepares a corresponding report. Furthermore, micro-entities (including listed companies) which, alone or together with the domestic or foreign companies they control, do not exceed at least two of the following thresholds in two consecutive financial years are not included:

            a. Balance sheet total of CHF 450,000;

            b. Sales revenue of CHF 900'000;

            c. 10 full-time equivalents (FTE) on an annual average.

Exempted companies must state in the notes to the annual financial statements the company with which they are included in the report and publish this report.

Initial assessment: Under current law, the conditions of being a public company and reaching the thresholds must be fulfilled cumulatively; now they apply alternatively. An independent third country regulation analogous to the CSRD is not planned, so that all affected SMEs fall directly under the planned new regulation. It then remains unclear where exempted companies should publish the report in which they are included.

 

Format of reporting

The preliminary draft does not comment on the format of reporting. According to the explanatory report, it may be a separate report or integrated into the management report.

Initial assessment: As the preliminary draft refers to a report and not reporting, it appears questionable whether integration into the management report is permissible, as provided for in the CSRD. The explanatory report affirms this. Both the management report and the report on sustainability aspects would therefore have to be submitted to the AGM for approval. This raises the question of how to deal with the situation if, in the case of an integrated report, the votes to be conducted separately according to the wording are divergent. In contrast, the CSRD does not provide for such a separate approval requirement, i.e. approval of the (integrated) management report is sufficient.

 

Abolition of the comply or explain principle

Newly, a distinction shall be made between sustainability aspects or factors and the specific disclosures on these aspects or factors. However, it is important to note that the comply or explain principle under current law is to be abolished.

Initial assessment: The current comply or explain principle leaves room for a moderate approach to the various disclosure elements and, in our opinion, would have been valuable for a transitional period.

 

Aspects and factors

The report must cover the following aspects of sustainability: Environmental factors, social and human rights aspects (including employee concerns) and governance aspects. With regard to the environmental factors, targets are even postulated in terms of content - which seems not really appropriate for disclosure obligations: Information is required on the CO₂ net-zero target for 2050 (not "obligation") and on limiting global warming to 1.5°C compared to pre-industrial levels.

With regard to the aspects/factors mentioned, the information required to understand the impact of the company's activities on sustainability aspects (impact materiality) and the impact of sustainability aspects on the company's business performance, results and position (financial materiality) must be provided. This takes up the principle of double materiality as understood by the EU and makes it mandatory for all companies concerned. Both effects should be considered independently, i.e. effects that are material in both directions as well as effects that are only material in one direction must be addressed.

Initial assessment: In view of the required disclosures, it is questionable whether one can still speak of "double" materiality. Moreover, the widely used GRI standard does not explicitly apply this concept.

 

Disclosures to be made

In particular, the following disclosures would have to be made, taking a group-wide view, which may even have to include information on the value chain, including information on products and services, business relationships and the supply chain. These disclosures are largely based on the CSRD and include in particular

1.   A description of the business model and strategy;

2.   A description of the time-bound sustainability goals;

3.   A description of the role of the highest governance body with regard to sustainability aspects;

4.   A description of the company's sustainability policy;

5.   Information on any incentive systems linked to sustainability aspects that are offered to members of the highest governance body;

6.   A description of the due diligence applied in relation to the sustainability aspects;

7.   A description of the material actual or potential negative impacts on sustainability aspects or sustainability aspects associated with the company's business activities and its value chain, and a description of the measures taken to identify and monitor these impacts;

8.   A description of the measures taken by the company to prevent, mitigate, remedy or terminate actual or potential negative effects in accordance with item 7 and the success of these measures;

9.   A description of the material risks to which the company is exposed in connection with sustainability aspects and how these risks are managed;

10. the relevant indicators in relation to the disclosures under items 1-9 above.

Initial assessment: Despite the abolition of the comply or explain principle, all of these very extensive disclosures are to be subject to the same threat of punishment as under the previous law, including for negligent misstatements or omissions, and punishable by a fine. This does not weigh lightly, as circumstances outside the company (value chain) and probabilities (potential negative impacts) must also be disclosed and statements extending into the future are also required.

 

Disclosure standard and language

The sustainability reporting must comply with the European Sustainability Reporting Standards (ESRS) or another equivalent standard that may be designated by the Federal Council. The selected standard must be adopted in its entirety for all requirements of this article. The report must be written in a national language or in English.

Initial assessment: As the CSRD is the most comprehensive set of disclosure requirements worldwide, it is currently not possible to identify such an "equivalent" standard; it is also unclear who would decide on "equivalence". It would be desirable if "recognized" standards were accepted in the same way as accounting standards.

 

General audit obligation

As under EU law, the information on sustainability aspects in the report is now to be audited. Certain audit firms or certain conformity assessment bodies are responsible for the audit in accordance with the new provisions in the Auditor Oversight Act. According to the proposal, it is left open who selects the auditor. The Federal Council is to regulate the depth of the audit (so-called assurance): (a) examination of whether there are facts from which it can be concluded that the information on sustainability aspects in the report is incomplete or incorrect (negative/limited assurance) or (b) examination of whether the information on sustainability aspects in the report is complete and correct (positive/reasonable assurance).

Initial assessment: The introduction of the audit obligation should be phased in, in particular it should not apply to companies that (a) are not subject to the CSRD and (b) whose shareholders opt out or (c) should only be required for unlisted companies if the shareholders so decide (opting in).

 

Format, authorization and publication

The report should be published in a uniform electronic format that complies with an internationally used standard and remain publicly accessible for at least ten years.

Initial assessment: This is a novelty, as companies (including a large number of SMEs and privately held companies) that previously did not have to publish an annual report (beyond the shareholders) are now also confronted with a publication obligation. As before (and in contrast to the CSRD), the report must be approved by the annual general meeting - it remains unclear whether it is consultative or binding. The explanatory report appear to assume a binding effect.

 

Conclusion and outlook

The consultation draft essentially has three effects with far-reaching consequences for the resources (expenditure and external costs) of Swiss companies; it is also assumed that the EU is the only foreign country relevant for Swiss companies:

1. Significant extension of the scope of application, including to SMEs, by lowering the thresholds and eliminating the requirement for a stock exchange listing.
2. Significant expansion of the required minimum content through alignment with CSRD and elimination of the comply or explain principle.
3. Introduction of a comprehensive audit obligation.

According to the preliminary draft, Swiss companies that have not previously been affected by reporting on non-financial matters but exceed two of the aforementioned thresholds (balance sheet total of CHF 25 million; sales revenue of CHF 50 million; 250 full-time employees on an annual average) - possibly on the basis of consolidated financial statements - would also be obliged to prepare a report on sustainability aspects, have it audited, publish it and submit it for approval. This means that even those companies that have not previously been required to publish a report would have to publish one. According to the explanatory report, a regulatory impact assessment has shown that this proposal would oblige around 3,500 companies to report. The estimated total annual costs would amount to CHF 620 million. Should the consultation draft be implemented at some point, companies would have two years from the date of entry into force to implement it.

The preliminary draft is now undergoing consultation until October 17, 2024. If the bill is approved by Parliament after the draft and message have been finalized, it will be subject to an optional referendum.

Our Sustainability & ESG Desk will be glad to answer any questions you may have on this topic. https://kellerhals-carrard.ch/de/expertise/taetigkeitsgebiete/sustainablity-and-esg-desk

[1] Consisting of media release, explanatory report and preliminary draft.