Newsletter 5/2022: Non-financial reporting in Switzerland: “Gouverner c’est prévoir”

WHAT IS THIS ALL ABOUT?

On 29 November 2020, the “Responsible Business Initiative” (RBI) was rejected.

Thus the Parliament’s indirect counterproposal came into effect; which provides for new provisions in the Swiss Code of Obligations as well as implementing provisions.

In force since 1.1.2022, these are intended to achieve transparency in non-financial matters (so called “non-financial reporting”) and require increased due diligence and reporting obligations in connection with conflict minerals and child labour.

WHO DOES IT AFFECT?

Public interest companies are required to carry out annual non-financial reporting. These include:

• Publicly traded companies: listed companies and companies with outstanding bonds, for which a prospectus must be published;

as well as

• certain supervised institutions supervised by the Financial Market Supervisory Authority: Insurance companies and banks as well as all persons that are required, under the financial market acts, to be licensed, recognised, approved or registered by the Financial Market Supervisory Authority, and collective investment schemes;

provided that (cumulative requirement)

• they have at least 500 full-time employees on an annual average and (i) a balance sheet total exceeding CHF 20 million or (ii) revenues exceeding CHF 40 million. These conditions must be met for two consecutive financial years; whereby the company is assessed together with the domestic and foreign companies it controls.

Companies are exempt from this obligation if they are controlled by another company that is required to report on non-financial matters under Swiss law, or if the particular company itself or its parent companies are required to prepare an equivalent report under foreign law. At least when it comes to environmental issues, this will indeed be the case very soon, since the United States SEC is also considering the introduction of corresponding provisions regarding transparency as of 1 January 2023. The EU and its member states intend to introduce provisions that are, in part, more strict, however, it is unlikely that these will have taken effect as early as 1 January 2023.

FROM WHEN DOES THIS APPLY?

While the increased due diligence and reporting obligations in connection with conflict minerals and child labour have already entered into force, as of 1 January 2022, the new transparency rules will only start to apply to a company financial year beginning on or after 1 January 2023.

Hence, the first reports for the reporting period commencing as of 1 January 2023 will need to be prepared at the start of 2024, and these reports will need to be submitted at the Annual General Meeting 2024 for approval.

Many companies that already publish sustainability reports do so during the year. However, in view of the new requirement for the non-financial reporting to be submitted at the Annual General Meeting, and the fact that this typically takes place during the spring months (March-May), every company must consider whether the reporting period should be set to coincide with the financial reporting (Resolution by the Board of Directors) and hence whether integrated reporting should be enabled; in such cases, practical transitional issues will arise (e.g. “extended” or shortened reporting periods in 2022). If, for example, the different reporting periods are maintained for reasons of capacity utilisation, the period between preparation and submission for approval is correspondingly far apart.

This issue will also need to be addressed by the Board of Directors during 2022.

WHAT IS THE SUBJECT MATTER OF THE REPORTING?

The reporting obligation covers environmental matters, particularly CO₂-targets, social and labour matters, respect for human rights and anti-corruption – often referred to collectively as “ESG” (Environmental, Social and Corporate Governance). These reporting obligations largely reflect EU law.

The report should contain the information, including risk assessments, that is necessary to gain an understanding of the development and performance of the business, the position of the company, as well as the impact of its activities on these matters. Here, too, "substance over form" should apply: Informative tables or statistics (e.g. in connection with employee diversity) are more effective than a lengthy continuous text. Supply chains and dependencies (or potential second sources) can be presented on a geographic map and the audits or contractual compliance obligations can be concisely described. Not only, but also for CO₂ emissions, the targets should be made measurable. The commitment and service a company dedicates to the society should not be forgotten, be it through associations or through social projects.

WHAT ARE THE IMPLICATIONS FOR CORPORATE GOVERNANCE?

The Board of Directors approves and signs the report on non-financial matters and submits it at the Annual General Meeting (or the body responsible for approving the annual financial statements) for approval.

An external audit is not a legal requirement at the present time. However, it is recommended that one or more committees deal with the reporting in addition to the Board of Directors: the audit committee and the committee responsible for sustainability issues. The sequence and the concept as such should be determined by the full Board of Directors in the 2022 company year; as well as whether part of the non-financial reporting should be audited externally on a voluntary basis. Furthermore, the board of directors must in future ensure that the report is published electronically immediately after approval and remains publicly accessible for at least ten years.

It is to be expected that sustainability issues will also be given greater weight in the revised Swiss Code of Best Practices for Corporate Governance. Lastly, there is the possibility of criminal sanctions in cases of non-compliance: Anyone who makes false statements in, or fails to provide a required non-financial report will be fined, and this may be accompanied by an entry in the criminal register. All natural persons who are responsible for reporting and storage, but especially the members of the board of directors, can be guilty of this violation.

 

May 2022, Beat Brechbühl, Ines Pöschel, Jean-Luc Chenaux, Edgar Philippin, Massimiliano Maestretti, Lorenza Ferro